Introducing Li Auto

In this article, we introduce Li Auto (Chinese: 理想汽车)(NASDAQ: LI)(HKEX: 2015), a Chinese start-up company that adopts a family-oriented approach to targeting the mid- to high-end segment of China's automobile market.

This article is part of our China auto industry series, which includes:

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Introduction And Corporate History

Li Auto was founded in 2015 as a start-up company that designs, develops, manufactures, and sells new energy vehicles targeting the higher end (and thus far, SUV) segment of China's automobile market. The company's mission is to "create a mobile home, create happiness" (Chinese: "创造移动的家，创造幸福的家") through providing premium mobility solutions in the format of family-oriented cars.

Li Auto released its first car (the Li ONE), an extended range electric vehicle (EREV), at the end of 2019. The company prides itself on being a large-scale pioneer of EREVs in China, and believes this to be an important differentiation factor that distinguishes Li Auto from other automobile brands.

Note: an extended range electric vehicle (EREV) is a vehicle that runs on electricity only but also has a generator that can recharge the battery through the use of petrol. In comparison, pure electric vehicles can only rely on electrical charging to recharge the battery, while hybrid cars can run on both electricity and on petrol via a traditional combustion engine. EREVs are useful in that the fuel-conversion generator can provide a greater (i.e. extended) driving range compared with a pure EV, hence making EREVs more versatile for longer range driving.

Li Auto went public on NASDAQ in 2020 (NASDAQ: LI) and subsequently on the Hong Kong Stock Exchange in 2021 (HKEX: 2015).

As of December 2021, Li Auto has 206 retail stores (where potential and existing users can visit for vehicle check-ups, test-drives, and order placements), 84 vehicle delivery centres, and 48 vehicle service centres across major cities in China.

In June 2022, Li Auto unveiled its second car and flagship "smart SUV" product, the Li L9. Deliveries of the Li L9 are anticipated to commence by the end of August this year.

Brand Portfolio

Li Auto currently only has one car, the Li ONE, while a second, flagship car was recently unveiled last month.

Li ONE

The Li ONE (Chinese: 理想 ONE) is a six-seater EREV SUV and Li Auto's first car model. Management describes the Li ONE's selling points as having a long range (relative to pure EVs) and high engine performance while maintaining efficient energy consumption and benefiting from flexible power supplies. Specifically, the Li ONE has a range of 890km to 1,080 km (from a purely electrically powered range of 188km), and the vehicle can continue running without any access to electrical charging infrastructure so long as it has petrol to power the fuel-conversion generator.

The Li ONE is equipped with advanced, in-house developed software and premium features which management claim are typically only available in cars that sell at a much higher price point.

In 2021, a remake of the original Li ONE was released.

Li L9

Last month, Li Auto unveiled the brand's second car model, the Li L9. The vehicle is described as a six-seater, full-size SUV slightly longer than the Li ONE, with a driving range of 1,100km to 1,315km. The Li L9 is intended to be Li Auto's flagship model, equipped with the company's in-house developed autonomous driving system and top-notch safety features. Deliveries of the Li L9 are anticipated to commence by the end of August this year.

Financial Overview

We now turn to a financial overview of Li Auto.

#1: Li Auto Generated Total Revenue of RMB27 Billion In 2021, While Operating Income And Net Income Remain Negative

Li Auto's total revenue grew from RMB284 million in 2019 to RMB27 billion in 2021. Operating income remains negative due to high research and development (R&D) and selling, general, and administrative (SG&A) expenses, while net income is higher than operating income in 2020 and 2021 as a result of high interest income and investment income, as well as substantial positive changes in the fair value of warrants and derivative liabilities held.

Note: Li Auto commenced initial vehicle deliveries in December 2019.

#2: Almost All Of Li Auto's Total Revenue Is Attributable To Vehicle Sales

Li Auto generates revenue from two channels: (1) vehicle sales, and (2) other sales and services. The latter refers to the sale of peripheral products and services, including charging stalls, vehicle internet connection services, firmware upgrades, extended lifetime warranties, membership and maintenance services, and charging credit points.

Breaking down Li Auto's revenue by segment, we see that vehicle sales contribute to 97% of total revenue, while other sales and services account for the remaining 3%.

#3: Li Auto Generated a Gross Profit Margin of 21.3% In 2021

Li Auto's gross profit margin grew from 0% in 2019 to 16.4% in 2020 and 21.3% in 2021. In contrast, the company's operating profit margin is still negative but increasingly less so, reaching a level of -3.8% the last fiscal year.

Note: we omit the operating profit margin for 2019 as the figure is exorbitantly high (due to low revenues recorded that year since Li Auto only started delivering vehicles in December) and does not accurately capture the economic nature of the company's continuing operations

#4: Other Sales and Services Are More Lucrative Than Vehicle Sales

Breaking down Li Auto's gross profit margin by revenue segment, we see that the gross profit margin for other sales and services overtook that for vehicle sales in 2020 to reach a level of 44% in 2021, twice the gross profit margin for vehicle sales the same year. Whilst it makes sense that peripheral products and particularly, services, typically have a substantially higher gross profit margin than vehicle manufacturing and sales, management does not pinpoint the specific drivers that caused the other sales and services segment's profit margin to increase so drastically especially during the two full years of operation going from 2020 to 2021.

#1: Li Auto Delivered 322,882 Cars in 2021 And 155,804 Cars in Q1 2022

Li Auto is rapidly ramping up vehicle deliveries, from 973 cars in 2019 to 322,882 cars in 2021 and 155,804 cars in Q1 2022. All cars are manufactured at Li Auto's own manufacturing facility.

Future

We now conclude with Li Auto's future strategies going forward.

#1: Launching Pure Electric Vehicles

In addition to launching additional EREV models, Li Auto also plans to develop pure EVs (also known as battery electric vehicles, abbreviated as BEVs) with an anticipated launch date starting in 2023. The release of BEVs not only helps to broaden Li Auto's range of products, but may also help to mitigate future regulatory risks.

Specifically, certain local governments in China restrict the number of license plates issued to internal combustion engine (ICE) vehicles through the use of quota, lottery, and/or bidding systems. Auto buyers who wish to circumvent these restrictions can do so by purchasing a new energy vehicle (NEV), however the definition as to what constitutes an NEV can differ from municipality to municipality. For example, in January 2018, the Beijing municipal government announced that only BEVs would be considered as NEVs for license plate purposes, whereas EREVs would be treated as ICE vehicles. A similar announcement was also made in Shanghai, with new regulations expected to become effective in the city at the start of January 2023.

Will Li Auto Continue To Focus Only On SUVs?

Management notes that the company pairs different vehicle body types with different energy sources in vehicle design, for example, the SUV body type was considered to be the most appropriate for range-extended vehicles, although such a large body type is less energy efficient and is thus less suitable for pure electric vehicles. Consequently, non-SUV cars may also be released in the future as Li Auto expands its product portfolio.

#2: Price Differentiation

Li Auto plans to completely cover the RMB200,000 to RMB500,000 (i.e. mid- to high-end) segment of the automobile market in China, with EREV and BEV products targeting customers at different sub-segments of the price range.

Will Li Auto Consider Expanding Internationally?

Thus far, management has not touched on the prospect of international expansion.

#3: Maintaining A Family Focus

Management emphasizes that the company's core customer segment will continue to be families with children.

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