Reaching Inflection Point; Upgrade Target Price To HK$246.00
Li Auto’s deliveries in Jun 23 and 2Q23 will probably exceed 30,000 units and 84,000 units respectively, beating guidance, driven by the upbeat sales of L7. Li Auto will also release its first BEV model, Li Mega, by end-23 and start delivery by 1Q24. From now till end-25, the company will triple its product lines from three to 11. Based on higher sales, we raise our 2023-25 EPS estimates by 150%/63%/70% to Rmb2.01/Rmb4.39/Rmb7.67 respectively. Raise target price to HK$246.00. Maintain BUY.
WHAT’S NEW
• Sales momentum stronger than expected. Li Auto Inc’s (Li Auto) deliveries will probably grow by more than 130% yoy and 6% mom to over 30,000 units, based on the weekly insurance registrations (a proxy to retail sales volume) of 7,600 units from 29 May 23 to 18 Jun 23. This brings 2Q23 and 1H23 deliveries to not less than 84,000 units (+193% yoy/+60% qoq) and 136,500 units (+126% yoy) respectively, beating management’s guidance of 76,000-81,000 units and 128,600-133,600 units. New orders exceeded 30,000 units in the first three weeks of Jun 23. Management expects monthly deliveries to grow to over 40,000 units within 2023.
• Buoyant sales growth driven by new model L7. L7 mid- to large-sized (C-segment) SUV was launched on 8 Feb 23 in three variants – L7 Air, L7 Pro and L7 Max – with a price of Rmb319,800, Rmb339,800 and Rmb379,800 respectively. The deliveries of L7 Pro and L7 Max started on 11 Mar 23, while the deliveries of L7 Air started in Apr 23. Since then, L7’s deliveries grew from 7,700 units in Mar 23 to 11,100 units in May 23, and will probably grow to 20,000 units before end-23.
• Li Auto’s first BEV model, Li Mega, to be released by end-23 with delivery to start by 1Q24. Li Auto announced on Family Tech Day on 17 Jun 23 that its first battery electric vehicle (BEV) model Li Mega will be unveiled by end-23. Li Mega is a large-sized pure electric MPV with a price tag of Rmb500,000 for families, which Li Auto aims to become the best-selling passenger vehicle with the same price range in China. During the Shanghai Auto Show in Apr 23, Li Auto also said that its first BEV model will be the world’s first to feature CATL’s 4C Qilin Battery that delivers over 1,000km in range on a single charge.
• Deliveries targeted to double every year from 2022 to 2025 based on tripling of product lines from three to 11. Li Auto targets annual deliveries of not less than 300,000 units/600,000 units/1.2m units in 2023/24/25 with the launches of seven new models. By 2025, Li Auto targets to have 11 models in total, including six BEV models (the flagship model Li Mega and five other new BEV models) and five extended range electric vehicle (EREV) models (L7/L8/L9 and two new EREV models). These models will include mid- to large-sized SUVs, MPVs or crossover models with prices ranging from Rmb200,000 to Rmb500,000.
• Production capacity to increase from 500,000 units currently to 750,000 units by end-23 and over 1m units by end-24. Li Auto has two plants – the Changzhou plant and the Beijing plant. The Changzhou plant has two production lines with a monthly capacity of 25,000-30,000 for L8/L9 in two shifts and 10,000-12,000 units in one shift for L7/L8 respectively. The second production line will see a doubling in capacity to 20,000-25,000 units by adding one shift by end-23. As such, the Changzhou plant will have 650,000 units in annual capacity by end-23, up from 500,000 units currently. Additionally, Li Auto will launch its second plant in Beijing for its BEV models by Sep 23 with an initial annual capacity of 100,000 units. The Beijing plant boasts a designed annual capacity of 250,000 units with budgeted investment of over Rmb6b and estimated 2024 revenue of Rmb30b. Furthermore, Li Auto plans to increase total production capacity to over 1m units by end-24.
• Store count to spike by over 50% and city coverage to expand by over 40% in 2023. Li Auto had 290 shops across 120 cities (mainly Tier 1 and Tier 2 cities which contributed 80% of the company’s sales volume in 2022) in China as of end-22. Going forward, Li Auto will expand its distribution network to cover more Tier 3 and Tier 4 cities with a plan to add 150 new shops and include 50 more cities into its coverage in 2023. As such, the company will have 440 shops by end-23, covering 170 cities.
• To build 3,000 high-voltage recharging stations by end-25. Li Auto plans to build 3,000 high-voltage recharging stations in China by end-25 (of which 300 will be built within 2023), covering 90% of highways and major Tier 1 to Tier 3 cities in the Tianjin-Beijing-Hebei Rim, Yangtze River Delta and Pearl River Delta.
• Budgeted capex of Rmb7b-8b p.a. in 2023-25, vs Rmb5b in 2022. Going forward, Li Auto will spend Rmb7b-8b in capex per year in 2023-25 for capacity expansion, expansion of distribution network and construction of recharging stations.
STOCK IMPACT
• We raise our delivery estimates for 2023-25 by 9%/21%/25% to 350,000 units/580,000 units/840,000 units, based on the higher-than-expected deliveries in 2Q23 and strong product line-ups. We believe Li Auto captures the niche market of family-use EVs with well-designed products for the target customer groups and improving smart features such as smart cockpit and ADAS.
• We keep our assumptions on ASP and gross margin for 2023-25 at Rmb330,000/ Rmb330,000/Rmb330,000 and 20%/20%/20% respectively, flat yoy. Despite the price war in China’s EV industry, Li Auto is one of the few EV companies that has maintained steady product prices ytd due to its niche market positioning. The termination of the sales of Li ONE from 2H23 will also provide a boost to gross margin.
• We raise net margin assumptions for 2023-25 from 1.5%/3.4%/4.0% to 3.5%/4.6%/5.6% respectively based on better economies of scale from higher sales volume. Li Auto targets the R&D expenses-to-revenue ratio at 10% for 2023, and aims to reduce to a ratio to 6% in the longer term, given economies of scale. We assume R&D expenses as a percentage of revenue to drop from 15% in 2022 to 10%/9%/8% in 2023/24/25.
EARNINGS REVISION/RISK
• We raise 2023-25 net profit forecasts by 150%/63%/70% to Rmb4,182m/Rmb9,146m/ Rmb15,992m respectively, based on higher delivery estimates. Our 2023-24 earnings estimates are roughly in line with consensus, while our 2025 net profit forecast is 9% above consensus given our higher margin assumption.
VALUATION/RECOMMENDATION
• Maintain BUY and raise target price from HK$149.00 to HK$246.00, based on higher FCF estimates in our 10-year DCF model (WACC: 19%; terminal growth: 4%). Our target price of HK$246.00 implies 49x 2024F PE.