Description

At the current stock price,  the market is vastly underestimating founder Li Xiang’s extraordinary ability to churn out big hits and stack the S curves. Buying the stock is a bet that he is China’s Steve Jobs or Elon Musk who will power phenomenal growth for years to come. 

One of the most respected entrepreneurs in China that you probably never heard of

Li Xiang fell in love with technology when he first touched a computer during middle school. Craving his own computer but tight on budget, he dove into the realm of DIY computers to build his own computer in high school. With his new toy, he started sharing his DIY knowledge in China’s online communities, which led to the founding of his first business PCPop.com, a website about DIY computer parts. The business became so successful during his high-school years that he decided to fully focus on his venture and forgo college education after graduation. This very risky bet turned out to be his first successful exit when a Chinese media conglomerate bought out his company during the height of the dot-com bubble. Leveraging the same business playbook he perfected in PCPop.com, he soon started another informational website Autohome that provides a wealth of information on an even bigger market - China’s rapidly growing auto market. Autohome emerged as a leading online platform for automobile consumers in China, revolutionizing the way people accessed automotive information and made purchasing decisions. Li’s success in his second company culminated in the IPO of the company on Nasdaq in 2013. 

In 2015, Li Xiang founded Li Auto. Although backed by some of China’s most successful tech companies, such as Meituan and Tencent, and well-known VC funds, such as Sequoia China and Hillhouse, Li was taken lightly by China’s traditional auto manufacturers. After all, how could a techie with zero real-world manufacturing expertise make a good car at scale? Li, along with the founders of Xpeng and Nio who also have a tech background, was mocked as “the three idiots” by China’s auto industry.  But after years of covering the auto sector during his Autohome years, Li understands Chinese consumers better than any of his competitors. Equipped with such insight, Li set out to create vehicles that catered to the specific needs and preferences of Chinese consumers. Fast forward to 2023, none of Li’s competitors are laughing at Li anymore as Li Auto has become a top three contender in EV right behind Tesla and BYD. Li’s L series is dominating EV’s luxury segment within the price range of 350K - 500K RMB( $50K - 70K). 

Current offering - the L series

The previous generation ONE has been discontinued so I will focus on Li Auto’s current line-up the L series. 

The L series is meticulously designed to cater to a specific automotive market segment: families. Recognizing the prevalent range anxiety associated with Battery Electric Vehicles (BEVs) due to the current charging infrastructure, Li strategically focuses on Plug-in Hybrid Electric Vehicle (PHEV) as his first line of products. Even though tier 1-2 cities now boast more EV charging stations than gasoline stations, the challenge of charging EVs during extended journeys remains a significant concern for Chinese families who embark on road trips several times annually. Li's PHEV is equipped with a battery optimized for daily commutes, while also utilizing gasoline for lengthier journeys. Prioritizing passenger comfort, the vehicle features premium leather seats with massage functions and an immersive entertainment system for both front and rear passengers. Technologically advanced, the car harnesses the power of cutting-edge chips from Qualcomm and Nvidia, offering drivers a Heads-Up Display (HUD) on the windshield, an Advanced Driver Assistance System (ADAS), and Level-4 autonomous driving capabilities developed by Li's dedicated in-house team. The L9 model, in particular, is very fun to drive as it boasts impressive acceleration speed from 0-60 in just 5.3 seconds, and offers a combined range exceeding 800 miles. Its sleek design, complemented by a futuristic seamless Halo front light, epitomizes refined minimalism.

The final offering is a premium PHEV series, meticulously crafted for Chinese families. It rivals the build quality of international premium SUVs but comes with superior technological features at around only half the cost. The L series resonated with many Chinese families and demand has been overwhelmingly positive. Notably, Li Auto stands out as the only EV firm that hasn't reduced its retail prices amidst the EV price war that erupted in China the previous year, yet it continues to receive more orders than it can produce.

Many L series owners I've talk with are affluent Chinese individuals who previously owned foreign gasoline vehicles. They switched to Li Auto, primarily drawn by the unparalleled driving experience and value proposition. This series has taken away much of the market share of second-tier foreign luxury brands such as Range Rover, Jaguar, Lexus, and Cadillac. The company's leadership envisions an ambitious trajectory for the L series, aiming to capture market share from the top three luxury brands Mercedes, BMW, and Audi. Interestingly, China's current economic downturn is a major catalyst for Li’s growth as even the rich are trading down. On average, Li Auto owners not only save approximately 500K RMB ($70k) on the purchase price but also benefit from a staggering 90% reduction in gasoline expenses and decreased maintenance costs. The customer feedback has been overwhelmingly positive, with many asserting they won't revert to gasoline vehicles.

But the admiration for Li Auto isn't confined to China. Even though the company exclusively markets its vehicles within China, there's a noticeable uptick in the parallel export of the L series via trading entities. The primary international clientele comes from the Middle East and Russia. I'm convinced that Li’s vehicles also possess immense potential in Southeast Asia, given BYD's success in that region. Offering a more affordable alternative to European premium SUVs, yet matching their quality and surpassing their technology, is a winning formula in many developing nations that mirror China's economic landscape.

Product Roadmap and Competition

And Li’s ambition reaches far beyond the PHEV niche. Li’s first vehicle from the new M series called MEGA, the upcoming BEV series years in the making, is about to be revealed at the end of the year. Although its price is still kept a secret, Li has indicated it will be north of 500K RMB. This 7-seater flagship MPV targets a highly profitable niche segment currently dominated by Toyota Alphard.  Renowned for its opulent interiors and unmatched comfort, the Alphard dominates the business-purpose vehicle sector, retailing at over 800k RMB (100K), nearly double its price in Japan.  But Li is going to use the same playbook to take down Toyota, a notable laggard in the EV transition and technology in general. The gas-burning Alphard appears highly vulnerable against a competitively priced luxury high-tech BEV. 

Next year Li Auto will start producing a few more EV models from the M series that span a similar range of L series from 300k-500k RMB. The M series will not cannibalize the market share of the L series because the L series is intended to be purchased as the first vehicle to solve the range anxiety problem but the M series will be very appealing for families looking to buy a second vehicle. In fact, during my interviews, many owners of the L series have indicated keen interest in the M series. 

Among the earliest Model S owners in China who personally received the key from Elon Musk, Li deeply understands how formidable a competitor Tesla could be especially for a startup.  That’s why, so far, Li has wisely stayed out of the world’s most competitive BEV market while dominating the luxury PHEV segment. However, 2024 will witness Li Auto’s foray into the BEV market. After years of R&D efforts, Li believes he has finally found the perfect recipe to secure a part of the market.  The luxury M series, will have limited price overlap with the mass-market Tesla Model Y. The selling point is going to be again full of luxury features and high-tech capabilities. The other juggernaut BYD mainly focuses on the mass market as well. After being inside a few BYD vehicles, I think the company excels at making great vehicles at affordable prices but does not know how to make luxury cars yet. The competitors in the luxury segment are foreign luxury brands and other Chinese newcomers such as Nio and Atto(supported by Huawei). Monthly sales reports have shown foreign luxury brands’ EV sales have been abysmal in China. In July, Li Auto’s L7, L8, and L9, the company’s sole productions, claimed the 1st, 2nd, and 7th spot in sales volume across the entire luxury SUV segment encompassing both gasoline cars and EVs. The top-selling foreign brand EV, BMW’s iX3, ranked 13th. While Nio has one model that comes in third, the rest of its SUV models are not selling well. Li is outselling Nio in three-to-one in the SUV space. 

Q2 ‘23 results comparison

*BYD has yet to release its ‘23 half-year interim report, GM and OM numbers are for the year of ‘22.

Tesla, BYD, and Li Auto (collectively referred to as TBL) stand out as the most sought-after brands among Chinese consumers. They are also the only profitable EV manufacturers. In contrast, Xpeng and Nio have prematurely expanded their offerings, gravely impacting their operational margins. Li Auto adopts a more streamlined approach, offering just one series that encompasses three highly popular models. Interestingly, this is the same strategy adopted by Tesla to great success: the Model 3 and Model Y share use the same platform while the Model S and Model X share the same platform. This strategy facilitates rapid scaling and optimizes operational efficiency. The models within the L series benefit from shared components and are produced on the same assembly lines. By limiting the number of models, the company can concentrate its marketing efforts more effectively. This approach also simplifies sales training, reduces showroom rental costs, and ensures that customers have a manageable yet sufficient range of choices.

Valuation

Li remains steadfast in his notably ambitious target of achieving an annual production of 1.6 million units by 2025 and a 20% market share. This would signify a quintupling of production in just two years. Realistically, I contend that Li Auto could reach a sales volume of 1 million units by 2025. Several factors support this projection:

• 1. The penetration of EVs in China is expected to rise to 50% by 2025, up from 33% in 2023. Such a favorable trend is likely to particularly benefit the market frontrunners TBL.

• 2. Historically, Li Auto's popularity has been concentrated in tier 1-2 cities. This presents a significant opportunity to capture market share from legacy luxury brands in lower-tier cities.

• 3. The current demand for the L series stands at over 400,000 units this year. With the anticipated launch of the L6 next year, achieving sales of half a million units for the L series in 2024 seems plausible. The remaining 500,000 units could be attributed to the sales of the M series.

If we model 1m units in 2025 and an average selling price of $45K, we get about $45B rev. The company has 5.5B net cash and 1.5B NOL assets. In other words, this EV company, based on enterprise value, is trading at 0.8 EV/R, similar to legacy auto’s multiple. Furthermore, all potential overseas sales are not contemplated which could add more upside to the stock in the long term. I refrain from forecasting an upside from this stock because the market seems yet to have settled on the correct multiple for EV manufacturers. I feel at least 2-3X sales is reasonable given the DTC model that will end up selling many high-margin ancillary services such as insurance and financing. And just like Tesla, Li uses its own OS and does not support Apple Carplay or Google. Service fees from the app ecosystem in the future could provide additional high-margin revenues. 

Catalyst

M series goes into production

Penetration into lower-tier cities 

Broad EV adoption