Li Auto charges ahead in fourth quarter as slowdown looms

The NEV maker’s revenue from vehicle sales rose 134% in the fourth quarter, but it forecast its overall revenue growth would slow to about 70% in the first quarter of 2024

Key Takeaways:

• Li Auto posted triple-digit revenue growth in the fourth quarter and improving margins, but forecast a sharp slowdown in the growth rate in the current quarter
• The Chinese NEV sector’s rapidly slowing growth could accelerate on growing consumer worries following a recent string of negative headlines about the technology

By Doug Young

Li Auto Inc. (LI.US; 2015.HK) is increasingly looking like a survivor in the race to see who remains standing when an ongoing consolidation wraps up in China’s overheated new energy vehicle (NEV) sector. At the same time, the company’s strong fourth-quarter results released on Monday contained numerous signs of the stiff competition that is plaguing the sector, as well as of a sharp sector slowdown that many have predicted for this year.

That slowdown could be harder-than-expected, following a growing number of negative media reports that are rapidly making Chinese consumers question the wisdom of buying NEVs. In the latest of those, a fire possibly started by an electric bike battery left 15 people dead and 44 injured at a residential compound in Nanjing last Friday.

Investors were clearly focused on Li Auto’s sector-beating results after their publication, lifting the shares by nearly 20% in Monday trade in New York. Not only did the report include strong sales growth, but the company continued to report strong profits – something only a handful of China’s large field of homegrown NEV makers have been able to do. 

Li Auto currently trades at a price-to-sales (P/S) ratio of 3.4, well ahead of other similar-profile companies like Xpeng (XPEV.US; 9868.HK) at 2.5, Nio (NIO.US; 9866.HK) at 1.3 and Leapmotor (9863.HK) at 1.9, reflecting growing investor belief in its longer-term viability. But it still trails the 6.9 ratio for Tesla (TSLA.US), seen by many as having the best prospects. Surprisingly, global NEV leader BYD (1211.HK; 002594.SZ) currently trades at a P/S of just 0.9, which seems to be the result of its surging sales and recent lack of investor enthusiasm for its stock.

All that said, we’ll return to Li Auto, whose latest results are the first among its major peers and really do look quite impressive. The company delivered 131,805 vehicles in the fourth quarter, up 185% year-on-year, bringing its total deliveries for all 2023 to 376,030, up by a similar 182% from the previous year.

Li Auto’s fourth-quarter vehicle sales totaled 40.4 billion yuan ($5.6 billion), which was up 134% from 17.3 billion yuan a year earlier. The fact that the growth rate in revenue from vehicle sales was quite a bit lower than actual unit vehicle sales growth reflects the big competition in the market, with manufacturers continually lowering their prices to keep attracting new business.

Despite that, Li Auto is showing a growing ability to operate profitably as it achieves experience and economies of scale. That’s reflected in its gross margin, which improved to 23.5% in the fourth quarter from 22.0% in the third quarter and 20.2% a year earlier. The improving efficiencies helped push Li Auto’s profit up to 5.75 billion yuan for the quarter, up from 2.81 billion yuan in the third quarter and 265 million yuan in the fourth quarter of 2022.

While the company’s rivals have yet to publish their fourth-quarter results, Li Auto easily outperformed its rivals in last year’s third quarter with 271% revenue growth, compared with just 25% growth for Xpeng and 47% for Nio. So, it’s quite likely Li Auto’s strong fourth-quarter growth will continue to outperform its rivals as well.

Bumpy road ahead

With all those positive numbers in the rearview mirror, we’ll spend the second half of this review looking at the numerous trouble signs that point to a sharp slowdown for China’s NEV sector in 2024 after several years of explosive growth.

China’s overall NEV sales grew 38% last year to about 9.5 million vehicles, which includes a growing volume of sales that are being exported. That was already down from a near doubling of sales in 2022, and a researcher from the China Automotive Technology and Research Center in Tianjin University recently told the Global Times the growth rate could slow further still to about 22% this year.

That slowdown was reflected in Li Auto’s January sales, as well as its guidance for the first quarter of this year. Its January deliveries rose 106% to 31,165 vehicles, which is quite a bit slower than the fourth-quarter growth rate. What’s more, the growth rate looks even weaker considering the Lunar New Year, when shops typically close, was in January 2022 but occurred later in February this year.

Li Auto said it expects to deliver between 100,000 and 103,000 vehicles in the entire first quarter, which would represent a 90% to 96% gain year-on-year. It forecast revenue growth of 66% to 71% for the first quarter to between 31.3 billion yuan and 32.2 billion yuan. Both growth rates are quite a bit slower than the rates for vehicle deliveries and revenue last year in general.

And as we’ve noted already, a recent string of negative headlines surrounding NEVs could put an even bigger damper on sales that are already weakening. The Nanjing fire that killed 15 and left 44 injured was just the latest of those, and comes as a growing number of residential complexes warn of the dangers of fires from electric bikes. While bikes are obviously far lower-tech than cars, the negative publicity will inevitably taint how consumers think about cars as well.

The sector also got widespread negative publicity over the Lunar New Year when many NEV owners who drove to warm Hainan island over the holiday became stranded when they wanted to leave due to strict limits on the number of NEVs allowed on ferries due to potential fire hazards. And like many people in the West have been discovering this winter, people in China’s northern regions are also discovering that electric vehicles often have performance issues in very cold temperatures.

The growing shakeup in the sector was revving up to claim a new victim, with the founder of luxury EV startup HiPhi saying his company was looking for a potential acquirer or new investors as it its current resources were only enough to keep operating for the next three months. He disclosed the news after the company earlier this month said it was halting production for six months due to financial difficulties.

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