Robert Way
Elevator Pitch
My rating for Li Auto Inc.’s (NASDAQ:LI) [2015:HK] stock is a Buy.
I previously wrote about Li Auto’s “fair valuations” and “mixed business outlook” in a prior article for the company published on July 5, 2022. The focus of my latest update for LI is the preview of its upcoming financial results for the third quarter of this year.
I upgrade my investment rating for LI from a Hold to a Buy. One key reason is that Li Auto’s Q3 2022 bottom line should beat analysts’ expectations. Another key reason is that the company’s November 2022 deliveries and store checks done by another sell-side firm suggest that LI’s short-term outlook should be pretty good.
Li Auto Q3 2022 Financial Results Release Date
Earlier, LI issued a media release on November 29, 2022 disclosing that the company’s Q3 2022 earnings will be announced on Friday, December 9, 2022 before the market opens.
Analysts Have Low Expectations For LI’s Third Quarter Performance
The sell-side analysts covering Li Auto’s shares don’t have a positive view of the company’s upcoming Q3 2022 financial performance as seen with the market’s consensus numbers.
According to the sell-side’s consensus financial forecasts (source: S&P Capital IQ), LI’s revenue growth (in local currency or RMB terms) is expected to moderate from +209.7% YoY in Q3 2021 and +73.3% YoY in Q2 2022 to +30.0% YoY for Q3 2022. The analysts also estimate that Li Auto’s gross profit margin will contract by -170 basis points YoY from 23.3% for the third quarter of the previous year to 21.6% in the third quarter of the current year.
Taking into account the market’s expectations of slower top line expansion and lower gross margin for the company, the sell-side sees LI’s normalized net income dropping by a significant -36.8% YoY from RMB335.7 million for Q3 2021 to RMB212.0 million in Q3 2022.
In the subsequent section, I discuss about the likelihood of an earnings beat for Li Auto when it reports its latest quarterly financial results this week.
My Prediction Is That Li Auto Will Report Above Expectations Q3 Earnings
I think that LI’s actual Q3 2022 earnings will exceed market expectations, considering the company’s third quarter vehicle deliveries and its peer’s recently announced financial results.
Li Auto achieved reasonably good vehicle deliveries of 26,524 units for the third quarter of 2022. This was equivalent to a +5.6% YoY growth, and surpassed the company’s earlier management guidance of 25,500 units by +4.0%.
It is also noteworthy that the company’s new Li L9 vehicle generated an impressive 10,123 units in deliveries for September 2022. This exceeded its prior guidance of 10,000 units as indicated at the company’s Q2 2022 earnings call.
Apart from higher-than-expected vehicle deliveries for Q3 2022, there is a good chance that LI’s third quarter gross margin might turn out to be better than expected than what the market is anticipating.
One factor that supports better-than-expected gross profit margin for Li Auto is the strong vehicle delivery numbers for the new Li L9. The Li L9 boasts a relatively higher gross margin than its existing flagship Li ONE, as per management’s comments at the Q2 2022 investor briefing.
Another factor is that cost pressures for Chinese electric vehicle makers might have already eased to a greater extent than expected. XPeng (XPEV), one of LI’s key peers, saw its gross profit margin decline by just -90 basis points YoY to 13.5% for Q3 2022, according its third quarter earnings press release published on November 30, 2022. In contrast, the sell-side analysts are forecasting that Li Auto’s gross margin will decrease by a much wider -170 basis points in Q3 2022 on a YoY basis.
In conclusion, my opinion is that Li Auto’s actual normalized net profit for the third quarter of 2022 should beat expectations, thanks to decent vehicle delivery growth and a narrower-than-expected gross margin contraction.
Recent Metrics For LI Are Encouraging
There are a number of indicators suggesting that Li Auto’s near-term outlook is positive.
LI’s vehicle deliveries grew by +49.6% MoM and +11.5% YoY to 15,034 units in November 2022. Notably, this also represented the highest monthly delivery figure for Li Auto in its history.
Separately, a November 13, 2022 Morgan Stanley (MS) research report (not publicly available) titled “What We Learnt From The Stores” noted that LI’s “order intake of L8 and L9 (new vehicle launches) in aggregate are now 30-40% higher than Li ONE’s (existing flagship) average in 1H22” based on its “latest store checks.” In MS’ report, it is also highlighted that such metrics imply that Li Auto’s “founder’s target with monthly revenue exceeding Rmb10bn by year end, implying 20k+ volume sales” is achievable.
In a nutshell, these recent metrics relating to Li Auto mentioned in this section of the article are encouraging, and LI is well-positioned to deliver even higher monthly vehicle deliveries (closer to 20,000 as per founder’s goal) in December 2022 and beyond.
Closing Thoughts
My rating for Li Auto is a Buy now, as compared to a Hold previously. LI is in a good position to generate better-than-expected earnings for Q3 2022 and above-expectations vehicle delivery numbers for December, and these are positive catalysts which should re-rate its shares.
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