Li Auto: Positive On December Deliveries And 2023 Outlook (NASDAQ:LI)

Elevator Pitch

I leave my Buy rating for Li Auto Inc.’s (NASDAQ:LI) [2015:HK] shares unchanged. In my earlier December 5, 2022 write-up for LI, I previewed Li Auto’s Q3 2022 earnings.

I turn my attention to Li Auto’s recently announced deliveries for December 2022 and the company’s financial outlook for fiscal 2023 with the current article. My analysis leads me to the conclusion that Li Auto continues to be worthy of a Buy rating, as the company’s December delivery numbers were very good and it is expected to achieve a faster pace of revenue growth this year.

Excellent Delivery Numbers From Li Auto

Li Auto’s deliveries for the month of December 2022 were excellent on both an absolute and a relative basis.

In absolute terms, LI achieved a delivery volume of 21,233 units in December last year, which marked the first time that the company’s monthly deliveries exceeded 20,000 units.

Li Auto’s delivery numbers were also impressive based on historical and peer comparisons.

Monthly deliveries for LI grew by +51% YoY and +41% MoM (Month-on-Month) in the final month of the prior year. On a full-year basis, Li Auto’s delivery volume jumped by +47% to 133,246 units for 2022.

It is also worthy of note that Li Auto’s delivery numbers were much better than that of its key US-listed Chinese electric vehicle or EV maker peers.

NIO (NIO) and XPeng (XPEV) recorded relatively lower deliveries amounting to 15,815 units and 11,292 units, respectively in December 2022 as compared to the numbers that Li Auto registered. Similarly, XPEV’s full-year 2022 delivery volume of 120,757 units and NIO’s deliveries amounting to 122,486 units for the whole of last year were inferior to that of LI.

Also, LI’s peers didn’t grow as fast as the company did with respect to deliveries. NIO’s +51% YoY deliveries growth for December 2022 was on par with that of Li Auto, but NIO’s +12% MoM increase in delivery volume wasn’t as good as LI’s +41% MoM growth. XPeng even saw a -29% YoY drop in delivery numbers for December last year as compared to Li Auto’s +51% YoY jump over the same period.

If one does a comparison of the EV makers based on full-year growth, LI’s +47% surge in deliveries for 2022 was superior to NIO’s +34% expansion and XPEV’s +23% increase in the same time frame.

Considering that all the Chinese EV makers had to deal with similar challenges like supply chain constraints and pandemic restrictions (in Mainland China), it was encouraging to see Li Auto post much better delivery numbers than its key peers. Notably, Li Auto’s new model, Li L9, which was introduced to the market in the middle of last year, saw deliveries surpass the 10,000 unit level in December 2022.

In a nutshell, LI’s new model launch was very successful, and the company has been able to execute well to register delivery numbers that were good in absolute and relative terms for December 2022 and full-year 2022.

Key Policy Headwind Isn’t An Issue For LI

Prior to assessing Li Auto’s 2023 growth prospects, it is worth spending some time to discuss about the biggest policy headwind for the Chinese EV sector this year.

A January 2, 2023 South China Morning Post news article highlighted that China “will phase out cash subsidies for EV purchases” which have been in place for “12 years.” It is natural to assume that EV sales growth in China will slow in 2023 as a result of this change in policy.

It is important to note that Li Auto won’t be affected by this specific policy headwind in a meaningful way. This is because LI’s customers didn’t enjoy any subsidies in the first place, as the company’s vehicles didn’t qualify for subsidies due to their high sales prices. Li Auto’s Li L8 and Li L9 vehicles are selling for prices in the RMB300,000-500,000 range, while China’s EV subsidy policy is only applicable to EVs with a sales price of under RMB300,000.

2023 Outlook Is Promising

LI is expected to witness faster revenue growth and generate positive earnings again in 2023, according to the consensus financial numbers sourced from S&P Capital IQ.

Specifically, the sell-side analysts see Li Auto’s top line growth in RMB terms accelerating from +67.4% in fiscal 2022 to +105.8% for FY 2023. The market also anticipates that LI will turn around from a normalized net loss of -RMB416 million for FY 2022 to register a positive normalized net income of +RMB3,022 million in the current fiscal year.

I think that the consensus financial forecasts for LI are achievable.

In relation to revenue expansion, there are multiple positive factors. I have already mentioned in the preceding section that demand for Li Auto’s vehicles shouldn’t be impacted by the change in EV subsidy policy. Furthermore, LI has plans to launch another new vehicle, the Li L7, this year. Li L7 will be the company’s first five-seater SUV which should allow it to target a new customer segment, as its existing vehicles are all six-seaters. Separately, Li Auto’s impressive December 2022 delivery numbers gives investors the confidence that its positive delivery growth momentum can be sustained into 2023.

With respect to profitability, the analysts expect Li Auto’s gross profit margin to improve from 19.8% in FY 2022 to 21.9% (source: S&P Capital IQ) for FY 2023. LI’s profit margin improvement is expected to be driven by positive operating leverage (revenue growth acceleration in 2023 on a large fixed cost base) and a further increase in the new Li L9’s sales (more favorable sales mix due to L9’s higher selling price). As such, it is reasonable that Li Auto can turn around from a loss last year to deliver positive net profit in the current year.

Concluding Thoughts

I continue to rate Li Auto as a Buy. LI’s strong December 2022 delivery volume growth and the company’s positive 2023 business outlook suggest that the company’s shares should perform well this year.