Li Auto looks good as large SUV market leader

CCB International expects Li Auto to retain its competitive advantage in the large SUV segment through 2026, with a positive long-term outlook on the company

By CCB International

Li Auto Inc.’s (LI.US; 2015.HK) interim results released last Thursday show its business improved in the second quarter, even though its overall results remained mixed. In the quarter, its vehicle sales increased 8.4% to 30.32 billion yuan ($4.26 billion), and total revenue reached 31.68 billion yuan, up 10.6% year-on-year and up by an even higher 24% quarter-on-quarter, but slightly missing Bloomberg’s estimates.

During the period, the company sold 108,000 electric vehicles (EV), within its guidance range of 105,000 to 110,000 units. Its aggregate gross margin was 19.5%, supported by steady growth of its aftermarket business with a gross margin of 37%, compared with 18.7% for its vehicle business.

The company’s operating profit in the second quarter reached 468 million yuan, a marked improvement from its operating loss of 585 million yuan in the first quarter. It owed the turnaround to increased economies of scale it achieved during the quarter, which fully offset R&D, sales and general and administrative expenses related to its Mega all-electric multi-utility vehicle. The company’s second-quarter non-GAAP adjusted net profit rose 17.8% to 1.5 billion yuan from 1.3 billion yuan in the first quarter, but was slightly behind the 1.59 billion yuan forecast by Bloomberg.

Li Auto’s management forecast third-quarter sales of 145,000 to 155,000 units, a significant improvement over the second quarter and in line with market expectations, keeping the company on track to reach its annual sales goal of 500,000 units and expected gross margin of 19% to 20% in 2024-2025 for its new vehicle business. The higher proportion of its mid-to-large SUV model L6 in its sales mix may cause the company to incur a higher sales, general and administrative expense-to-operating-revenue ratio when it offers discounts.

New model delay

We also expect accelerating deliveries of the L6, which is catching on in China, to help Li Auto regain momentum in the second half of this year. Its decision to delay the roll-out of more EV models originally scheduled for the first half of 2025 is also a wise move for the company, one of the few Chinese new energy vehicle (NEV) manufacturers that is still making profits.

As China’s macroeconomic environment remains weak, increasing EV output, especially high-end EVs, tends to lead to heavier operating losses, based on the experience of other Chinese brands. Considering the L6’s excellent performance in the second quarter and with support from the government’s vehicle trade-in program, the model is expected to outmaneuver other competitors in the 200,000 yuan to 250,000 yuan SUV segment.

Therefore, we expect the company to maintain its competitive advantages in the large-family SUV segment from 2024 to 2026, and have an optimistic long-term outlook. We believe that Li Auto is the most competitive company in the high-end NEV market in China.

In light of heightened competition, we have lowered our sales forecasts for the company in 2025 and 2026 by 6% and 8%, or by 40,000 and 60,000 units, respectively. And we have cut our adjusted profit forecasts for the next two years by 43% and 46% to 9 billion yuan and 10.9 billion yuan, respectively, given China’s macroeconomic weakness and intense competition.

Still, we maintain an “outperform” rating on Li Auto’s U.S.-listed stock with a target price of $26.30, based on our positive views of its product positioning. That corresponds to forward price-to-earnings (P/E) ratio estimates of 23, 21 and 17 times, respectively, for the three years between 2024 and 2026.

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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