Li Auto Inc.
Management Team
Products
Innovation
Distribution
Manufacturing
Valuation
Company History
Li Auto Inc. is a Cayman Islands holding company which
conduct its operations through its PRC subsidiaries and VIEs in China.
The history of the company
April 2015: Li Auto Inc. was founded
April 2017: Incorporated CHJ Technologies Inc. was
incorporated, which was later renamed to Leading Ideal Inc. in April 2019 and
further to Li Auto Inc. in July 2020.
May 2017: Li Auto
Inc. established Leading Ideal HK Limited, formerly known as CHJ Technologies
(Hong Kong) Limited.
December 2017: Leading Ideal HK Limited established a
wholly-owned PRC subsidiary, Beijing Co Wheels Technology Co., Ltd., or Wheels
Technology.
December 2018: Acquired Chongqing Lifan Automobile Co., Ltd,
which later changed its name to Chongqing Zhizao Automobile Co., Ltd.
July 2019: Gained control over Beijing CHJ and its
subsidiaries
October 2019: Beijing CHJ established Chongqing Lixiang
Automobile Co., Ltd.
December 2019: Disposed of all of its equity interests in
Chongqing Zhizao Automobile Co., Ltd.
July 2020: ADSs listed on Nasdaq
December 2021: Agreed to establish a strategic cooperation
framework with the Chongqing municipal government on the development of the NEV
sector in Chongqing.
Figure 1 illustrates the relationships among Li Auto Inc. and its subsidiaries.
Note: Certain
other subsidiaries include, among others, Chongqing Lixiang Automobile Co.,
Ltd., an indirect wholly-owned subsidiary of Leading Ideal HK Limited (Hong
Kong).
Source: Annual report 2021
Beijing CHJ -- holds a Surveying and Mapping Qualification
Certificate.
Beijing CLX – a wholly owned subsidiary of Beijing CHJ holds
a Value-Added Telecommunication Business Operating License for Internet
Information Service, or the ICP License, a Value-Added Telecommunication
Business Operating License for Information Service (excluding internet
information service), an Internet Culture Business Permit, and an Operating
License for the Production and Dissemination of Radio and Television Programs.
Chongqing Lixiang -- manufacture ICE vehicles and NEVs
Management Team
Xiang Li is the founder and has served as chairman and CEO since
the inception. He was born in 1981. The experience of Mr. Li is different from
the founder of NIO and XPeng although they are at similar age. He gave up
GaoKao, the most important exam for high school students in China. Giving up
GaoKao is nearly equal to giving up opportunity to attend university. Mr. Li’s
entrepreneur life started in high school. He submitted articles to computer
magazines and earned more than 10 thousand RMB per month which was an extremely
high salary 20 years ago. When he was in his sophomore year in high school, he
established his own website for purchase guide for computer hardware. Later, the
website was extended to pcpop.com and authohome.com. in 2008, 55% of Autohome’s
and pcpop.com shares were sold to Telstra.
Directors and Senior Management of Li Auto Inc. are quite
young compared to traditional companies (Table
1).
The oldest director is at age of 51.
Table 1 The top management team of Li Auto Inc.
Source: Li Auto Inc. Annual report 2021
Table 2 displays Mr. Li Xiang has the absolute decision making power since he owns 70% voting power although his shares takes up around 20% of the total number.
Table 2 Share ownership
Note: Each holder of Class B ordinary shares is
entitled to ten votes per share, subject to certain conditions, and each holder
of our Class A ordinary shares is entitled to one vote per share on all matters
submitted to them for a vote.
Source: Li Auto Inc. Annual report 2021
You may also notice that Xing Wang holds the second largest equity in the company. He is a co-founder, an executive director, and CEO and chairman of the board om Meituan (HKEX stock code: 3690), a leading e-commerce platform for goods and services in China. The market cap of Meituan is approximately HKD 925 billion.
Products
Compared with NIO and XPeng, Li Auto is a pioneer in
Extended-range EVs, mainly SUVs. It focuses on the middle-class families
especially with children.
November 2019: Its first model, Li One, a six-seat, large
premium extended-range electric SUV was launched with a price around RMB
350,000.
June 2022: L9, a six-seat SUV was released.
September 2022: L8, a six-seat SUV and L7, a five-seat SUV were
published together.
Table 3: The products of Li Auto
|
Model |
Launch
date |
Seat |
Price
range (1000RMB) |
|
Li ONE |
November 2019 |
Six-seat |
350 |
|
L9 |
June 2022 |
Six-seat |
460 |
|
L8 |
September
2022 |
Six-seat |
360-400 |
|
L7 |
September
2022 |
Five-seat |
340-380 |
Innovation
EREV
Powertrain
Li ONE’s EREV powertrain primarily consists of two
components:
1)
Electric Propulsion System – front and rear dual
electric motors and a battery pack.
2)
Range Extension System – a generator, a
turbo-charged engine and a fuel tank.
The fuel tank generates electricity for the battery to drive
the motor when the vehicle runs out of battery. The battery can also be
recharged through electric piles. Theoretically, the car can be charged only by
fuel. Li Auto believes that Li ONE has a
competitive advantage over ICE vehicles in terms of performance, economy and
user experience. Li ONE has been the only product in the last 2 years. Since
October this year, Li ONE production has been officially terminated. Li L9
takes Li ONEs place since then. I
made a brief comparison between Li One and Li L9.
Table
4
illustrates the key features of Li One and Li 9. Li L9 has made improvement in
range, battery capacity and acceleration. The most impressive enhancements of
L9 are the inertia design and autonomous driving system.
Note: NEDC (New European Driving Cycle) – The
measure, originated in 1970s, is commonly applied to ICE. The test is conducted
inside doors with closed air-condition and vehicles lights. The results
obtained under NEDC are very optimistic when the consumption of energy is far
beyond 0 during winter and summer periods due to usage of air-condition.
WLTP (World Light Vehicle Test Procedure) – It was started
on the 1st September 2019 in Europe. The measure consists of low,
medium, high and extra-high speed scenarios within 1800s. It also takes load,
vehicle weight and aerodynamics into account. Compared with NEDC, the WLTP
measures are much closer to the real navigation.
CLTC (China light-duty vehicle test cycle-passenger) -It has
been implemented since the 1st. October 2021. The measures are based
on the traffic conditions in 41 cities in China including 3 types of driving
circumstances: urban, suburb and high-way.
Scenarios under high temperature (30±2℃) and low temperature (7±3℃)
with running air-conditions are conducted as well.
EPA (Environmental Protection Agency) – It is the strictest
measure among the 4 measures. EPA test requires running out of battery.
Normally, the degree
of reliability of the 4 measures are ranked as:
EPA > WLTP > CLTC ≈ NEDC
BEV
Technologies and Models in Development
Li Auto is also investing in next-generation EV technologies
especially in high-power charging (HPC) BEVs. The BEV technologies primarily
include high C-Rate Battery Pack, high-voltage platform, thermal management
system and HPC network.
My opinion: At the end of 2021, the PP&E size of BYD is 17 times bigger than
Li Auto and BYD is hence able to conduct a strategy which focus both on hybrid
plug-in EVs and BEVs. BYD is also one of the world leading battery
manufacturers which provides synergy to the company. NIO and XPeng are only concentrated
on research and manufacturing on BEVs. Contrary to his peers, NIO and XPeng, Li
Auto is now conducting the same strategy as BYD. I am very concerned whether it
could carry it through due to large capital consumption for research and
manufacture.
The capital sufficiency was raised during Li Auto 2022Q2
conference call. According to Li Auto, there is enough budget for the
development of BEVs.
Intelligent
Systems
Li Auto provides Four-Display Interactive System which
delivers convenient, user-friendly services to drivers and passengers vias the
instrument panel cluster, central information display, front passenger display,
and central control panel. The screens
are as long as the two front seats.
Autonomous
Driving
Autonomous driving is the basic component for BEVs which is
also the most overarching part. It enhances customers’ preference for BEVs. The
details are very technical. What matters most is the user experiences. According
to the consumers youtube videos or online comments, the navigation assistance
experience are nearly at the same level for the most EVs. There are some small
differences in detailed experiences.
Distribution
Li Auto has its own integrated online and offline platform
to interact directly with customers. Its
steady stream of sales leads encompasses three channels: retail stores, media
platforms and user word-of-mouth. Li Auto applies direct sales model to sell vehicles
directly to customers.
206 retail stores, 84 delivery centers and 48 servicing
centers were in the major cities in China at the end of December 31, 2021. The retail
stores are for vehicle check-up, test-drive and order placement.
Manufacturing
Li Auto manufacturer its own vehicles. Table 5 displays the status of the three factories. Currently, only the Changzhou factory is manufacturing vehicles. The Beijing factory is scheduled to start producing BEVs in 2023. At the beginning of 2022, Li Auto acquired 1,130,000 square meters land. Until now, there is no further plans have been made public.
Table 5 Factories of Li Auto
Valuation
I will apply DCF method to value the company of Li Auto. Valuation is based on expectation of the future. However, the future is usually uncertain especially for the high growth companies such as Li Auto. Top managers prospects on the future are good references but they are often too optimistic. In February 2021, Xiang Li addressed his letter regarding prospects by 2030 to the employees.
1.
Perception
Vision, our outlook 2030
1)
industry trend by 2030
(1)
Global environment
China plans to reach carbon peak by 2030 and hence we think the sales
growth of global NEVs will surpass the predictions from the institutions. They
anticipate that the penetration of new NEV sales will take account for 60% of
the total sales of passenger cars. The percentage in China will be even higher.
Worldwide passenger cars sales are expected to stay at between 65 -70 million units without any substantial growth. We predict the sales of new energy passenger cars will achieve 40 million units and the sales in China will be as high as 20 million units.
(2)
Development of Technology
Autonomous driving technology will be developed extremely fast. With enough data and sufficient research, the leading companies will accomplish Level 4 autonomous driving. By 2030, we think Level 4 autonomous driving system will become standard equipment in EVs.
(3) Change of the market
By 2030, the consumers will be divided into two groups with the popularization of autonomous driving.
One group believes that vehicles will become special space with autonomous driving. They hope to share the space only with their family. The space has the design we like, sufficient electricity, powerful calculation as well as super entertainment environment. The other group consider autonomous driving cars merely transportation vehicles. Only costs should be taken into consideration.
Li Auto will remain committed to its mission: create a movable home and create happiness.
2) Industrial challenge by 2030
(1)
Competitive Challenge
Intelligent vehicle competition will become more fierce and knockout rounds are coming. Taking smart phones in China as an example, the top 5 brands account for 96.5% of the total market share. The situation of intelligent vehicle market by 2030 will be very similar to smart phone market today. Only the one with above 25% market share has the chance to become global leading intelligent vehicle company.
(2)
Energy challenge
Li Auto will develop two pipelines together:
1) urban pure electricity and long-distance extended range;
2) HPC (400 kwt) 300-500 kilometers in 10 minutes.
(3)
Organization challenge
Utilize AI to establish management and operation system.
3)
Li Auto prospects by 2030
Create a movable home to become
nr 1. Intelligent electric vehicle manufacturer in the world.
2.
Marketing and strategy by 2025
1)
Time tempo by 2025
2015 – 2020 stage 0-1 start-up: We delivered Li
ONE.
2021 -2025 stage 1-10 high growth. We expect
the sales of EVs will be above 8 million units in China by 2025. 20% market share is the minimum requirement
to become a leading company in China.
2)
Target customers 2025
2015 -2020 our target consumer group
(1)
Family with kids, normally 3 generations driver out together
(2)
Possess charging conditions and need long-distance e.g., traveling.
In the next 5 years, we will cover more
consumer groups
Consumer: family consumer
Consumer needs: autonomous driving special
owned space
Price range: RMB 150t – 500t
Brand position: luxury
intelligent electric vehicle
Brand mission: create a movable
home and create happiness
Strategic objective: 20% of
market share, Leading intelligent electric vehicle manufacturer
Li
Auto’s life cycle
It is hard to predict the life cycle of a high-growth
company. It is especially difficult to draw the blueprint for Li Auto when it
is soon launching a totally different product line, BEVs, compared to the
existing one, EREVs. The prediction of
profit becomes even more difficult to estimate.
Combined all the information I gathered, I design 3
scenarios for the next 10 years:
1)
baseline scenario based on its historical market
share
2)
better scenario by upward adjusting regarding
its possible new factories plan
3)
best scenario according to Mr. Lis vision
Global
economy
The increasing prices of raw materials have forced Li Auto
to raise the price of Li One by
RMB 11,800 from April this year. It implies that Li Auto has bargaining
power over consumers. It is able to transform the increasing costs from
upstream to downstream. However, the final sales will show the degree of Li
Auto bargaining power.
Stage 1:
2022 -2026, 3% inflation
Stage 2:
2027 -2031, 2% inflation
Stage 3:
from 2032 -, 1% inflation
Production
Capacity
Currently, only the factory in Changzhou is in production. The annual capacity is 100,000 unit which is expected to be extended to 200,000 (Table 5). In 2021, Li Auto stared its new factory in Beijing. The original plan is to manufacture BEVs for 100,000 unit per year. Li Auto acquired land of 1.1 million square meters in Chongqing this year. The capacity is supposed to surpass the total capacity of Changzhou and Beijing.
For both
baseline and better scenarios, the growth of passenger car sales in China is assumed at 2% yearly and
the total NEV penetration will be 40% by 2031.
Baseline
scenario – produce 523,729 units by 2031 corresponding to 5% market share of
NEVs in 2031. From 2032, the nominal growth will stay at 3%.
Better
scenario – produce 1.571,186 units by 2031 corresponding to 10% market share of
NEVs in 2031. From 2032, the nominal growth will stay at 3%.
Best scenario
– reach 4,080,000 units by 2031 which is Mr. Li's prospect. From 2032, the nominal growth will stay at 3%.
The
valuation under the best scenario will not be conducted. Li Auto currently has
only around 100,000 units capacity. Although it is expanding its factories, the
total capacity is still far beyond 4 million.
I think it is highly unlikely Li Auto will reach its objective by 2030
according to its current pipeline and capital reserve.
Table 6 Vehicle deliveries by year
Note: *
refers to the estimated deliveries.
Gross Profit Margin
Li Auto has so far the highest gross margin compared with
NIO and XPeng due to its EREVs. However, BEVs are the main trend for the
automobile industry. BEVs are expected to be added to Li Autos products. The top management from Li Auto
expressed that the new models will lead to a higher gross profit margin. It is
still hard to say. I have therefore applied its rival, NIOs long term target to
its target.
Operating
Margin
R&D
Li Auto has
increased its R&D expenses to 14.4% and 17.5% for 2022Q1 and 2022Q2
respectively, which is significantly higher than last year. Li Auto has
accelerated its research speed to develop new models and its high-power
charging technology. I think the expense will stay for several years when Li
Auto aims to be a leading manufacturer in the industry.
SG&A
I assume the SG&A/revenue will converge to 5%. The same
assumption is applied to the other EV manufacturers.
Discount
rate --WACC
I have made a detailed explanation of my choice of WACC in my post
- NIO. I will apply WACC = 10.08% to the valuation of Li Auto.
ESG
considerations in FCFF model:
The same as NIO since
both of their plants are in China.
Taxation
The same as NIO because
their main operations are in China.
A summary of the input assumptions:
Results
WACC = 10.08%
Note: The annualized 10 year return from MSCI World
Automobiles from April 2022 has been applied to NIO, Tesla, BYD, XPeng. In
November, the annualized return has lowered to 7.62% based on data from MSCI
World Automobile Index. To be consistent, I will still apply 10.08% to Li Auto.
Ø
USD 1 = RMB 6.7 is applied to convert RMB to
USD
Ø
The terminal value of the company: RMB 291
billion (baseline) / RMB 873 billion (better scenario)
Ø
The present value of terminal company value:
RMB 111 billion (baseline) /RMB 334 billion (better scenario)
Ø
The total present value of the company: RMB 121
billion (baseline) /RMB 447 billion (better scenario)
Ø
Weighted average number of ADS used in computing– basic
and diluted at the end of 2021: 1.85 billion shares.
Ø
After deduction of debt, the price per share based
on DCF model is RMB 61 ($9.1) and RMB 237 ($35.3) for the baseline and better
scenarios respectively.
Within the last 52 weeks, the stock price range is $12.52 - $41.49. At
the end of October this year, the price plunged to $13.6 and it recently
renounced to $23. If the performance of Li
Auto will not be worse than the baseline scenario and the required return of
the investor is no higher than 10.08%, the long-term target is highly likely to
stay above $9.1. The market especially for the Chinese Tech companies seems
very sensitive to the interest rate hiking and supply chain situation affected
by Covid 19 in China.
Validation of the results
In order to validate the appropriateness of the model assumptions,
I present the multiples to look at the solution from another perspective.
The third stage (terminal) is assumed as the mature period of the company and hence its multiples are comparable with the industry level and other mature companies, e.g., Volkswagen and Ford.
For the terminal period, justified P/E = 13.9 and justified P/S =1.41. P is the terminal value of the equity from the model. E and S refer to earnings and sales at the first year of the terminal period.
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