Is Li Auto’s Luxury Focus Leaving Out China’s Middle Class?
Despite analyst optimism, American investors don’t believe Li Auto (NASDAQ:LI) can keep up its growth and profit pace. Having said that, what does this mean for LI stock?
By conventional measures it seems undervalued. The company expects sales of $10.3 billion this year. The market cap is $34 billion. That’s less than half the price-to-sales ratio of Tesla (NASDAQ:TSLA), despite a higher growth rate, and Li is profitable
Throughout the last month, Li stock has fallen almost 16%, while the rest of the market is down by just 3.5%. This comes despite continuing good results. Li sold 6,900 of its plug-in hybrids during the week of October 2-8 alone, putting it first in the luxury class among China’s domestic automakers.
Where’s the Chinese Middle Class?
It is luxury that is the problem. BYD (OTCMKTS:BYDDF) and Wuling (OTCMKTS:WLMTF), which focus on cars affordable to China’s middle class, are soaking up lower-end market demand. Li is ignoring China’s middle class just like Ford Motor (NYSE:F) and General Motors (NYSE:GM) are here.
Yet those people are buying. BYD alone shipped 51,400 cars in October’s first week. If Ford and GM acted less like Li and more like BYD, they would be doing better.
While the United Auto Workers strike to keep American auto workers in the middle class, China’s auto workers are a long way from being there. Li workers are comparatively well-paid, for Chinese auto workers. Li was recently advertising jobs at about $4.25 per hour, and was having no trouble filling them.
The only Li workers who can afford Li cars are Li executives, who are among the best-paid in the industry. It’s the kind of salary structure that makes politicians’ claims of a “communist” China absurd.
Li pays relatively well because it offers what Li executives want, an electric-powered car without compromises, thanks to a back-up gasoline engine. This lets Li deliver a full-size SUV, with electronics like those in a Tesla, at a competitive price. This is a point I have been making for months, long before the analyst community climbed on board.
Hope the High Road
Li’s plans for 2024 and 2025 involve continuing to scale its hybrid opportunity while slowly bringing in all-electric vehicles, based on new metal battery technology. This could mean 1.6 million deliveries in 1925, just three years behind the pace of BYD.
Will there be enough high-end buyers in China to absorb all that demand? There could be. However, that also makes Li’s export plans an open question. When will it enter the global market, and to what effect?
The plan currently is for Li to only export used cars, testing demand so it doesn’t have to take big risks, mainly to Asia and the Middle East. It sees little demand for family-sized SUVs in Europe, and that’s where China’s primary export markets lie.
The plan is also to keep scaling production, to 3 million in 2028. By that time, Li expects China’s EV industry to have consolidated into just four to five hands, including BYD and Tesla. Li intends to have one of those hands.
Right now, everything is going to plan. Li is beating its own production targets, and likely beating estimates on margins. Li earnings, currently scheduled for December 8, should thus beat estimates. This will make the stock appear very undervalued.
The Bottom Line on LI Stock
If China is going to evolve into a “big three” or “big four” model, as in the United States. If Li can maintain its growth pace to become one of those survivors, the stock is ridiculously undervalued.
However, Li will be making Cadillacs, not Chevys. In the long run, a company’s profits must come from the center of the market to be sustainable. Li may need to buy one of its struggling rivals to meet the market.
As of this writing, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter https://danafblankenhorn.substack.com/.
