December Results Affirm Why Li Auto Is One of the Best EV Plays

After a tough 2022, the company looks set to have a great 2023

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Jan 05, 2023
Summary
  • Li Auto gave the markets a lot to talk about after reporting stellar December 2022 results.
  • Despite macroeconomic headwinds, the Chinese EV maker has managed to navigate the current crisis quite well.
  • With China opening up again, supply chain issues will improve and the company can build on its volume expansion.
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Li Auto Inc. (LI, Financial) reported excellent deliveries for December and the entirety of 2022 on Saturday, with an increase of 50.7% and 47.2%, respectively, compared to the previous year. These increasing numbers demonstrate the company is quickly becoming a leader in China's new energy vehicle market, having already achieved over 250,000 cumulative deliveries. Its ground-breaking technological advances have not gone unnoticed by those looking to enter this ever-growing market, so it is safe to say that Li Auto is a name worth keeping an eye on.

In 2022, Li Auto, alongside other electric vehicles makers, found themselves wanting. The general bearishness of the market led to a cooling off in sentiment, which continued throughout the year.

It has not helped either that Li Auto experienced an erosion of margins in 2022. Coupled with negative market sentiment, the stock was down by double digits last year. However, consistent growth and a bright outlook mean the stock could be a good value pick for those investing in EV companies.

Consistent growth despite a tepid domestic environment

Chinese production and the sale of EVs were rapidly increasing before the onset of the Covid-19 pandemic. China held first place in EV sales globally when tallying up numbers worldwide. However, due to shutdowns as a result of the virus, production has seen a significant decline. This highlights the need for other countries to join in the EV revolution so that worldwide production does not suffer a major disruption by any single factor. Amidst all this, one thing is clear: there is still growth potential for electric vehicles around the world if proper measures are taken to ensure smooth production flow.

However, another aspect that hurt sentiment was the company’s third-quarter earnings. Li Auto's results missed consensus estimates for sales numbers despite a 20% increase in revenue year over year. With an overall loss of $231.3 million, its gross margin was almost cut in half to 12.7%. This is causing concern among investors as it marks the lowest gross margin the company has seen in two years. However, this might just be a quarter-specific event.

The sudden drop in gross margin and the blame placed on a "provision" related to its first model, Li One, have raised many eyebrows. The vehicle, formerly the spotlight of the EV maker, is now in its sunset stages as new SUVs Li L8 and Li L7 were recently released in September. To make way for these two models, Li One is being sold off with big discounts and incentives, which account for the company's decreased margins. Although clearing out inventory was inevitable, it has not been without pain.

Despite these challenges, Li Auto reported an impressive 166% year-over-year jump in its Li One SUV sales in June. This number grew even more, to 176% sequentially, reflecting China's gradual increase in production activity. Though full production had yet to be resumed as of June 1, this rebound marked an impressive feat for one of the frontrunning EV startups, especially when compared with competitors XPeng (XPEV, Financial) and Nio (NIO, Financial). Neither company could outrun Li Auto in terms of deliveries during the same period. These figures confirm that despite the pandemic's disruption and somewhat of a slowdown in EV adoption in China, Li Auto is still proving to be a leader in the industry.

It seems reasonable to anticipate that Li Auto's margins will return to a more normalized level in the fourth quarter. This expectation is driven by the fact the company was hit with extraordinary costs and expenses during its third quarter. Despite those charges, Li Auto's financial performance remained strong, as demonstrated by its solid year-over-year customer growth.

China is easing its policies

During the pandemic, China implemented some of the strictest lockdowns in the world. While these intense efforts have paid off for the country, bringing its numbers to a low, it also severely impacted its industrial sector. Several districts with key industrial bases, such as financial hub Shanghai, were forced to close businesses and suspend operations for months. Automakers have been hit particularly hard by the suspensions, with several big companies delaying product launches and seeing significant drops in sales. This raises concerns that the economic recovery attempts may be lengthy and costly as many businesses and their employees endure an extended period of disruption and instability.

The Chinese government's recent updates have been good news for investors. Now that factories in Shanghai have resumed operations, one of the related issues has been removed from the picture. Having these industrial businesses return to normal is a great sign that the economy is recovering.

China remains a formidable force in the EV sector, having hogged the limelight over the past decade. Against this backdrop, Li Auto managed to deliver great numbers for December, proving just how far China has come regarding EV adoption and innovation and how well-entrenched companies can benefit. Additionally, many government initiatives have been launched to increase accessibility by introducing favorable regulations as well as subsidies and tax breaks.

Takeaway

With impressive growth and the prospect of improved margins in 2023, Li may be a diamond in the rough when compared to struggling American EV manufacturers.

This hidden gem will not get much attention from investors until interest rates decrease and risk-takers start craving speculative stocks again. But value investors will likely remain interested because the stock is very cheap right now.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure