Li Auto Surges Ahead: Navigating China's EV Landscape with Impressive Margins and Delivery Growth

Li Auto (LI), the Beijing-based New Energy Vehicle (NEV) company, has faced its fair share of challenges in 2024, but the tides are turning in its favor. After a disappointing launch of its first all-electric vehicle, the Li Mega, and a downturn in Q1 deliveries, the company has bounced back with a vengeance, showcasing impressive delivery growth and industry-leading margins.

Unlocking the Potential of China's EV Market

Embracing the Extended Range Electric Vehicle (EREV) Advantage

Li Auto's focus on the production of Extended Range Electric Vehicles (EREVs) has set it apart from the competition. These hybrid vehicles, which combine battery technology with traditional combustion engines, offer impressive claimed ranges, supporting the company's optimistic outlook. For instance, the Li L6 can reportedly support a CLTC range of 1,390 kilometers, showcasing the brand's technological prowess.

Navigating the Challenges of the Li Mega Launch

The stock's performance in 2024 was initially hampered by the disappointing launch of the Li Mega, the company's first 100% battery electric vehicle (BEV). Deliveries of the Li Mega fell short of expectations in Q1, causing a temporary setback. However, the company has since bounced back, with deliveries picking up significantly in Q2 and Q3. Through early September, Li Auto has delivered an impressive 288,103 vehicles, a nearly 40% increase from 2023.

Capitalizing on China's Stimulus Measures

The recent announcement of economic stimulus measures by the Chinese government has provided a much-needed boost to Li Auto's prospects. The interest rate cuts and reduced reserve requirements for banks are expected to increase consumer spending power and confidence, directly benefiting Li Auto's sales. Additionally, measures targeting the property market may indirectly improve overall economic sentiment, further aiding the company's growth.

Delivering Impressive Growth and Margins

Despite the initial challenges, Li Auto's delivery growth remains a standout in the industry. In July, the company set a new monthly record, delivering 51,000 cars. This impressive recovery has been driven by the strong performance of the company's least expensive model, the L6, with deliveries exceeding 20,000 units for three consecutive months in August.Li Auto's management has provided a positive outlook, guiding for deliveries of between 145,000 and 155,000 vehicles in Q3, representing growth of 38% to 47.5%. This trajectory stands in stark contrast to the expected 14% and 13% delivery growth for peers Nio (NIO) and Xpeng (XPEV), respectively, in the same period.Moreover, Li Auto is leading the pack when it comes to vehicle margins among Chinese EV start-ups. In Q2, the company reported an impressive 18.7% margin, significantly outperforming competitors like NIO and XPeng, as well as more established players like Tesla (TSLA) and BYD (BYDDF). While there was a slight quarter-over-quarter decline, Li Auto still maintains a substantial lead in this crucial metric.

Undervalued and Well-Positioned for Success

Despite the impressive performance, Li Auto stock remains undervalued compared to its peers. The company's forward price-to-earnings (P/E) ratio of 21.5x is a small premium to BYD's 19.8x, and substantially lower than Tesla's 108x P/E. When compared to the yet-to-be-profitable companies in the industry, Li Auto's forward EV-to-sales ratio of 0.65x is significantly lower than Nio's 1.45x, Rivian's (RIVN) 2.03x, and Xpeng's 1.63x.Furthermore, Li Auto boasts a strong cash position, with a net cash position of $11.25 billion, which is much stronger than its peers, including BYD. This financial strength, combined with the company's industry-leading margins and robust delivery outlook, makes Li Auto a standout investment in the competitive NEV market.