The year 2024 has not been kind to Chinese stocks, with markets experiencing significant declines due to growing concerns over the country’s economic outlook. Li Auto (NASDAQ:LI) has been particularly affected, witnessing a more than 25% drop in market capitalization and a staggering 41% decline from its 52-week highs. This downward trend is not unique to Li Auto, as other Chinese electric vehicle (EV) stocks have also faced substantial setbacks.
The spotlight on this group intensified when Elon Musk, CEO of Tesla (TSLA), lauded Chinese car companies as the most competitive globally during the Q4 earnings call. Musk expressed the belief that, without trade barriers, these companies could outperform most others worldwide. Given the current slump in Chinese EV stocks, the question arises: Is it wise to consider buying the dip in Li Auto stock? This article will delve into the analysis.
Chinese EV Stocks: A Rollercoaster Ride
Chinese EV stocks were once highly coveted, attracting substantial investments such as NIO securing funding from Abu Dhabi’s CYVN Holdings and Volkswagen investing in Xpeng Motors. While NIO received significant attention, Li Auto quietly outperformed other Chinese startup EV companies. In December, Li Auto achieved a milestone by delivering 50,353 vehicles, surpassing the combined deliveries of NIO and Xpeng Motors for the same period. The company’s cumulative deliveries exceeded 600,000 by the end of 2023, making it the first emerging Chinese EV company to achieve such figures.
Factors Behind the Fall in Chinese EV Stocks
Negative sentiments towards Chinese stocks stem from economic indicators signaling a further softening of the country’s economy. Structural issues, including high government debt, a real estate slowdown, and banking sector troubles, contribute to investor skepticism. Additionally, the aging population and geopolitical tensions, especially with the possibility of Donald Trump’s return to power, further dampen confidence in Chinese stocks.
The decline in valuations over the past few years can be attributed to President Xi Jinping’s economic policies and escalating tensions with the U.S. While the Joe Biden administration has also taken a firm stance against China, the market fears a repeat of the 2018 scenario when Trump’s rhetoric triggered a significant fall in Chinese stocks.
Furthermore, Chinese EV stocks face challenges from an industry-wide price war, initiated by Tesla’s decision to lower car prices in China at the beginning of the year. With Tesla anticipating slowed growth, the company might resort to additional price cuts to stimulate sales.
Analyzing the Li Auto Opportunity
For investors willing to take on the increased risk associated with Chinese companies, Li Auto presents a compelling opportunity. Unlike its peers experiencing cash burn and low gross margins, Li Auto has demonstrated a robust financial performance. With a Q3 vehicle margin of 21.2% and a free cash flow of $1.81 billion, the company stands out.
Li Auto boasts a strong balance sheet, holding over $12 billion in cash and cash equivalents as of September. Unlike some rival Chinese EV companies reliant on regular cash infusions, Li Auto suspended its stock offering last year, having ample cash to support its operations.
The company’s models have gained popularity in China, with the upcoming launch of its flagship new MPV Li MEGA expected to further enhance its market share. From a valuation perspective, Li Auto trades at a next 12-month price-to-earnings multiple of approximately 14.4x, making it an attractive option compared to other EV companies currently incurring losses.
Wall Street analysts express bullish sentiments towards Li Auto, rating it as a “Strong Buy.” Of the six analysts covering the stock, five recommend a “Strong Buy,” while one suggests a “Moderate Buy.” The mean target price of $53.98 indicates a nearly 95% upside potential. Goldman Sachs recently initiated coverage with a “buy” rating and a target price of $52.90, citing optimism about Li Auto’s economies of scale and upcoming competitive models.
While opinions on other startup EV names like Lucid Motors (LCID) and Rivian (RIVN) remain mixed among analysts, the overwhelming positivity towards Li Auto, despite a lower analyst coverage, suggests a strong consensus. In conclusion, considering modest valuations, a robust growth pipeline, and potential stimulus measures from China, Li Auto stock appears to be an attractive investment opportunity even amid short-term selling pressure linked to pessimism towards Chinese shares.
Featured Image: Unsplash
Author Faith Yakubu 
