Li Auto: A Strong Plug-in Hybrid EV Offering, but Lacking Clear Battery EV Strategy and Track Record

Equity Analyst

Vincent Sun

Li Auto is a leading new energy vehicle, or NEV, manufacturer in China, producing large plug-in hybrid electric sport utility vehicles, or SUVs, for family car use. Its first model six-seater Li One SUV is built on its proprietary extended-range electric vehicle technology, offering total driving range of 800 km. Unlike competitors, Li Auto adopts a single point pricing strategy for enhanced price transparency. The full-size SUV L9, built on the company’s new-generation plug-in hybrid powertrain platform, started delivery in third-quarter 2022 priced at CNY 459,800. In addition, Li Auto released the L7 SUV in February 2023. For its new model pipeline, the company plans to release pure electric model Mega in addition to plug-in hybrid electric vehicles, or PHEVs, in 2023.

Li Auto put a lot of effort in its range-extension powertrain, which has become a key selling point for its value-for-money vehicles. As it uses less battery, PHEVs offer significant price advantages compared with battery electric vehicles, or BEVs.

We see rapid new energy vehicle, or NEV, adoption in China, stimulated by regulatory push and improving charging infrastructure, among others. By 2025, we expect passenger NEVs to account for more than 40% of total passenger car sales, up from 16% in 2021. Riding on the vehicle electrification tailwind, we forecast Li Auto’s delivery to reach around 624,000 units in 2025 from 133,246 units in 2022, taking about 5% share in the passenger NEV market by volume. We forecast an improved outlook for vehicle sales profit due to increased vehicle deliveries and lower unit production cost. Our positive long-term profitability outlook for Li Auto’s vehicle segment leads to the first profitable year in 2023.

Li Auto acquired its Changzhou plant, which was leased previously, in 2021. The plant, with annual designed capacity of 100,000 units, is used for manufacturing Li L7, L8 and L9. The company aims to expand its Changzhou capacity to 200,000 units this year. It has also commenced construction of a Beijing production base for the company’s future BEVs.

Business Strategy & Outlook

We like Li Auto’s precise product positioning, offering value-for-money premium family cars to Chinese consumers. However, we do not think product capability alone is moaty and guarantees a competitive advantage for NEV manufacturers in the midcycle as competition gradually catches up with similar value proposition cars.

Li Auto accounted for 2% of China’s passenger NEV market in 2022, despite putting only two models on sale. The stellar performance was attributable to the company’s successful positioning of Li One, in our view. The plug-in hybrid electric vehicle, or PHEV, is a six-seater, large-size SUV. The model is attractively priced to compete with SUVs of the same size. It is the same size as a Tesla Model X but at a Model 3 price, or BMW X5 size at an X1 price. Since its launch in November 2019, Li One registered significant sales growth with total delivery exceeding 90,000 units in 2021.

The company is also leading the development of PHEV powertrain technology in China. The range-extension system was developed in-house using electric motors, a range extender (generator), and an internal combustion engine, or ICE. The range extender, propelled by an ICE engine, can either power the electric motors to drive the vehicle or charge the battery pack. Li One is equipped with a 40.5 kWh battery pack for 180 km driving range on battery and a 45 L fuel tank and a 1.2-liter turbocharged engine for a total range of 800 km on full-charge and fuel tank.

While range-extension technology offers an alternative NEV powertrain solution, we think price advantage is only attractive to consumers before pure electric models reach cost parity with ICEs. According to Li Auto, the bill of material, or BOM, cost of its PHEVs is approximately 10% higher than comparable ICE models. Given NEVs are exempt from the 10% purchase tax, we believe the company’s PHEVs have reached price parity with ICEs on an aftertax basis, but offer enhanced digital experiences.

We do not think Li Auto has a moat as the firm does not prove to have pricing power. While Li One is priced as entry-level luxury autos, pricing is below premium brand models of comparable size. Rather, it is in the price range of the ICE versions of Toyota Highlander or Volkswagen Teramont. The large-size electric SUV segment is currently not as crowded as compact and midsize segments. Once competition heats up, we believe other automakers can offer similar value proposition NEV products.

In addition, the company’s product strategy benefits from lower battery cost of PHEV powertrain than pure electric EVs, or BEVs. According to Li Auto, the BOM cost of comparable BEVs are currently about 25%-30% higher than PHEVs given BEVs require a larger battery pack. With BEVs expected to become as affordable as ICEs in the next three to five years, the scarcity of Li Auto’s value proposition will disappear with competitors launching pure battery large SUVs at similar price levels.

None

Economic Moat

Li Auto Inc.

Li Auto, Inc. is a holding company, which engages in the design, development, manufacture, and sale of electric vehicles. Its product, Li ONE, is a large electric sport utility vehicle equipped with a range extension system and smart vehicle solutions. The company was founded by Xiang Li in April 2015 and is headquartered in Beijing, China.

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