Everyone wants to be part of the next big thing, and right now, in the automotive industry, that’s looking more and more like electric vehicles (EVs). A combination of social and political pressures are promoting EVs, and manufacturers – both legacy automakers like Ford and GM as well as newer companies like Elon Musk’s Tesla – are busy designing and building new lines of vehicles.
That growth hit a snag last week, when EV stocks tumbled after a series of negative news events pushed sentiment downwards. A fire hit Tesla’s main production facility, while ChargePoint Holdings, which owns and operates a network of EV charging stations, reported a wider than expected loss. This was an important data point, as charging stations – an essential piece of the EV infrastructure – can be taken as a rough proxy for the health of the EV market.
Pure-play EV companies are also under pressure of the big name traditional automakers; Ford, for example, is aggressively developing EVs, and has announced an all-electric version of its market-leading F-150 pickup.
That’s not to say compelling plays can’t be found in the current environment. EVs are growing in popularity, and are also supported by government policy; in the US, the state of California is actively pushing to for an all-electric, zero-emission vehicle fleet by 2035, while in China, the government is mandating that EVs make up a progressively increasing proportion of all vehicle sales, to top off at 40% in 2030. Government support, along with public interest, provides support for the EV market generally.
One of the most promising EV companies can be found in China, home of the world’s largest automotive market. China has 1.4 billion people, who are rapidly urbanizing and growing in wealth, and the country is becoming a voracious consumer of sorts of material goods – including cars. As noted above, government mandates in China require that, by 2030, 40% of all automotive sales be in electric vehicles.
Li Auto, founded in 2015, currently boasts one of China’s best-selling EV models, the Li ONE. In 2020, despite the coronavirus crisis, Li delivered over 32,000 units, with 14.464 of those deliveries made in Q4. The company reported US$635.5 million in revenues for the quarter, and a gross profit of US$111 million, up 45% year-over-year. The company’s quarterly net loss fell by more than half from Q3 to Q4, to just US$12.1 million, while quarterly free cash flow increased 113% sequentially to US$245.1 million.
The company’s popularity continues to increase, and Li announced on March 2 that it had delivered 2,300 Li ONE models during February. This was a 755% yoy increase, and the company stated that cumulative deliveries of the Li ONE, since its introduction, totaled 41,276 units. The company conducts its sales through 60 retail locations in 47 cities around China, and supports its vehicles with a network of 125 service centers in 90 cities. New models are planned for launch in 2022.
Among the bulls is Needham’s 5-star analyst Vincent Yu who takes a bullish stance on LI shares.
“We believe the company’s unique value proposition, focused strategy, and diligent margin and costs control, make it a quality asset in the growing EV space,” Yu noted.
The analyst added, “We think the lack of charging stations is the main bottleneck for the growth EV markets in China, and Li’s product directly addresses the problem. Li One uses extended-range technology, which allows the vehicle to run on its battery pack that can be charged by a gasoline engine, significantly increases its range (800km) while reducing vehicles’ reliance on charging stations. Li’s BEV model is set to release in 2023, capturing secular tailwinds from improvements in battery and charging technologies.”
To this end, Yu rates LI shares a Buy along with a $37 price target. This figure implies a 42% upside potential for the next 12 months.
Overall, data shows a bullish camp backing this EV player. The ‘Strong Buy’ stock has amassed 6 Buy ratings in the last three months, with just one analyst playing it safe with a Hold. LI is priced at $25.91 and its $40.21 average price target implies a 55% upside from that level in the next year.
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