Li Auto Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Li Auto Inc. is a Chinese electric vehicle manufacturer, primarily focusing on premium smart electric SUVs, catering to family users.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Li Auto Inc. is a Chinese electric vehicle manufacturer that designs, develops, manufactures and sells premium smart electric SUVs. It positions itself as a pioneer in creating a family-oriented experience in new energy vehicles. The company was founded in 2015 and has since become a key player in the Chinese electric vehicle market.

Revenue Distribution: The company primarily generates its revenues from the sale of its electric vehicles, which are designed for the high-end family market segment. Li Auto operates in China, which is the world’s largest market for EVs and a fast-growing market. By focusing on SUVs they can leverage the growing demand for larger vehicles with improved range and technology in China.

Industry Trends and Competitive Landscape: The Chinese EV market is highly competitive, featuring a mix of established players and newer entrants. Key trends in the industry include increasing consumer adoption of EVs, strong government support and incentives for EVs, rapid technological advancements in battery tech and autonomous driving, as well as the growing importance of connectivity and in-car software. The competitive landscape is characterized by both domestic players and international manufacturers, each vying for market share. Li Auto has primarily targeted a different market segment with its premium SUVs than many of their competitors which have focused on smaller vehicles or sedans.

There’s a strong policy push from the Chinese government towards EVs, which is likely to increase the market share of EVs in the near future. This can be seen by the fact that China is the world’s largest EV market.

  • Key Competitors:
    • Nio and Xpeng: Also Chinese electric vehicle start-ups. Competes more directly with them on the premium EV front.
    • BYD: Another large Chinese EV company. A competitor but has a more diverse lineup of vehicles, and has focused on a different market segment than Li.
    • Tesla: The international leader in EVs, and a major competitor across various segments, however, they have not focused on premium SUVs for families like Li has.

  • Competitive Landscape: Li’s unique position in the premium SUV market segment in China gives it a strategic advantage and a unique market niche as most competitors are targeting other segments. However, the competition in this area is also increasing gradually.

  • Technological Differentiation: Li’s vehicles are known for their extended-range electric vehicle (EREV) technology and their smart features. The company also focuses heavily on software integration and autonomous driving features. The company also is known for focusing on safety features.

Financial Performance: Looking at recent financials, Li Auto’s performance has been relatively strong with continued growth in vehicle deliveries. They have been able to maintain high gross margins. Cash balances remain very healthy, indicating that the company is financially stable.

  • Revenues: Li Auto has shown growth in revenues, driven mainly by vehicle sales, with deliveries increasing over the last several quarters. Although they have had growth, the growth rate itself has been volatile.
  • Cost of Sales: The cost of sales have seen increases, due to higher production costs of the vehicles. The price increases by the company have partially offset these increases in COGS.
  • Operating Expenses: Their expenses in selling, general and administrative, and research and development have also steadily increased.
  • Margins: The gross margins remain pretty strong, although they have shown volatility in previous years.
  • Earnings: Despite strong revenue growth, they are only recently having any operating profit and positive net income, largely due to high investment in R&D and other areas.
  • Free Cash Flows: They are still burning free cash due to investments into growth and manufacturing operations and the company intends to maintain negative free cash flows in the near future.
  • Debt: The debt has steadily increased for the company, as they have been issuing more and more debt for their expansion efforts. The company has started to issue more convertible debt to reduce debt burden.
  • Cash Holdings: The cash and equivalents have increased steadily, though the burn rate is pretty high, they still have a considerable amount of cash on hand.
  • Share Repurchases and Dividends: No such plans have been seen or initiated by the company.

Recent Concerns/Controversies:

  • There have been concerns about competition from other companies in the Chinese market, as well as government regulatory risks. Also, there have been significant price volatilities due to the volatile earnings. However, Li’s management has repeatedly emphasized the importance of long-term strategy and product differentiation to mitigate these risks.
  • The company has also been criticised for using “non-GAAP” profitability metrics that portray the company in a better light. The most common issue is to use adjusted metrics which removes stock based compensation and other significant expenses. The management claims that this shows the true underlying business which is more accurate and shows the underlying earnings power, however, it does not show a full and complete picture.
  • The company has not had a high rating by ESG indexes due to some supply chain issues, working conditions and high amount of pollution in China.

Moat Assessment:

  • Intangible Assets (Brand & Customer Loyalty): Li Auto has a developing brand presence in the premium SUV market in China, as well as a loyal customer base. However, this is still not enough to completely differentiate itself from competitors and allow it pricing power. Rating: 2/5
  • Switching Costs: Li’s vehicles offer unique features and software integration that could create high switching costs for existing customers. However, as it is still an emerging company with growing and changing features, it is too early to determine this. Rating: 2/5
  • Network Effects: A strong network effect is not very strong in play, hence Li’s moat is not a network based moat and the company doesn’t gain an inherent advantage. Rating: 1/5
  • Cost Advantages: There is a lack of evidence indicating any significant cost advantages for the company. Rating: 1/5

Overall, Li Auto has some potential in the future to develop a moat. They do have some brand value, customer switching costs but they lack the other categories. A low moat rating of 2/5 is appropriate for the company.

Risks to the Moat and Business Resilience:

  • Intense competition: The EV market in China is highly competitive, with both established and new players constantly entering the market. This may threaten Li’s ability to continue its growth and capture a major portion of the market, as well as exert a downward pressure on margins.
  • Technological advancements: rapid technological changes in the EV industry can result in older models becoming obsolete. Li has to innovate and have great R&D to maintain its competitive advantage in this industry.
  • Regulatory Risks: Changes in Chinese government regulations and policy with respect to EVs or international trade could have a negative impact on Li Auto.
    • The China cybersecurity law and new data privacy laws have created many obstacles for growth and expansion as they are impacting a great deal of how businesses have to operate.
  • Macroeconomic risks: China has been facing various economic uncertainties which may affect consumer demand and reduce purchase power. Economic volatility or a global recession could affect investor and consumer sentiment towards the company.
  • Supply chain vulnerabilities: Li primarily manufactures vehicles, and is thus, susceptible to global supply chain challenges. The chip shortage, battery raw material shortages, and logistics can cause production and sales interruptions.

Despite those headwinds, Li’s focus on family-oriented, premium EVs might position the company well to succeed in the long run. However, it is too early to say, as the risks are also significant. They have the potential to have high growth rates and strong profitability. Also, as Li Auto is not a pure play EV company since it relies on gasoline as its main source of power, this can leave it more exposed in case any better EV technology or infrastructure is developed in China, and it’s customers prefer a fully electric option. However, until fully electric vehicles are commonplace, this will provide an advantage with high range.

Understandability: 3/5 While Li Auto’s business model of selling EVs is relatively straightforward, it is a complex industry with a lot of technological advancements that may not always be apparent. Its revenue and financial drivers are understandable, but a deeper look into China’s governmental policies, as well as the company’s supply chain gives it a more difficult understanding for many. As such, I give it a 3/5 for understandability.

Balance Sheet Health: 3/5 Li Auto has a decent balance sheet, but does show concerning signs of financial health in some areas.

  • Cash: Li Auto has a substantial amount of cash and cash equivalents on hand, but they are also quickly declining due to investments in R&D. They have taken out a lot of debt to fund this, which causes some worries.
  • Debt: There is also a significant amount of debt on the balance sheet, including convertible and short term debt, which has been steadily increasing. Also they have a lot of lease obligations on their balance sheet, which also increases their liabilities.
  • Goodwill: The company also has goodwill from acquisitions, which are often problematic as they are sometimes recognized as an asset to artificially boost net worth.
  • Equity: Li has equity reserves on their balance sheet, but it is declining due to losses.

Given their current issues, I would classify the company as having a slightly below average balance sheet health rating of 3/5.