Things appear to be getting better in the Chinese luxury electric vehicle market. Li Auto, which is the largest of the emerging EV players in China, delivered 51,000 vehicles for July 2024, an increase of 49.4% versus last year. There are a couple of factors that likely drove Li’s growth. Firstly, the company is seeing stronger demand for its new lower-priced Li L6 model for which it has ramped up production. The vehicle, which was launched in April and is priced at about RMB 250,000 (about $34,500) sold over 20,000 units in July. Li also lowered prices for several of its models a few months ago and this has also likely helped its overall volumes. However, the company’s other electric vehicle models including the Li L7, Li L8, and Li L9 are likely to have seen growth rates cool off a bit and this could impact its average selling prices to an extent.
LI stock has suffered a sharp decline of 35% from levels of $30 in early January 2021 to around $20 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. Li has been impacted by a couple of factors. In May, the U.S. imposed tariffs of 100% on Chinese EV imports. Moreover, the European Union has also raised import duties on Chinese EVs in June. This could hurt Li’s international expansion plans. Moreover, China’s economy has also been cooling off, with GDP rising by a lower-than-expected 4.7% for the second quarter, with consumer spending also easing.
The decline in LI stock has been far from consistent. Returns for the stock were 11% in 2021, -36% in 2022, and 83% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that LI underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the mega-cap stars GOOG, MSFT, and AAPL.
In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could LI face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a recovery?
Despite concerns about the economy and weakness in the global EV market, the Chinese EV space is still showing promise. A few months ago, China introduced new incentives of RMB 10,000 (approximately $1,410) for consumers who replace their gasoline cars with electric and low-emission vehicles and there have been reports that this subsidy could be doubled to 20,000 yuan ($2,800) per vehicle. There has also been a trend of premiumization in the Chinese EV market, with cars costing upward of $30,000 accounting for a growing mix of sales, at the expense of lower-end EVs. This could play in Li Auto’s favor, as it competes primarily in the premium end of the electric vehicle market. China has been cutting interest rates to prop up the economy. Li’s focus on EVs with a gasoline-powered range-extending generator that can recharge batteries on the go should also help the company differentiate itself in an increasingly crowded market. Now, Li stock trades at about $18 per share, about 14x consensus 2024 earnings and 10x 2025 earnings, which is not very expensive considering that the company’s revenues are projected to grow by over 15% this year and by over 35% next year. See our analysis of Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for a detailed look at how Li stock compares with its rivals Nio and Xpeng.
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