Not sexy enough, but efficient enough.
Image credit: Yuanpu Huang for EqualOcean
This article is part II of our analysis on Li Auto – check out part I before you read.
Mass-produced car fleets pave the way to the upcoming AV competition
In the cash-burning car manufacturing industry, beginners like Li Auto cannot afford to be left behind. Autonomous Driving is one of the hottest spots in the niche that finds almost all serious players weighing in.
Last month, the founder of the company, Li Xiang, announced a long-term plan for autonomous driving deployment. Li Auto will launch its map navigation assisted driving function Navigate on Autopilot (NOA) in 2021 or 2022; it also plans to introduce a new model capable of Level 4 autonomous driving by 2024 that can be upgraded over-the-air (OTA).
Such an ambitious goal might seem far-fetched, considering that big Internet giants like Waymo, Uber, and Baidu all missed their own timetables for launching L4 driverless cars — this presses the question about what Li Auto is actually capable of.
Li Auto’s L2.5 autonomous driving solution is behind its competitors in both hardware configurations and software systems. Li ONE was installed with 18 sensors in total with no LiDAR involved, and its in-car chips have the lowest Tera Operations Per Second (TOPS) among its peers.
The insufficient ADAS solution directly leads to an unsatisfactory driving experience. Many of its customers’ complaints concern the car’s insensitive reactions when faced with complex road conditions.
As such, we remain concerned about the firm’s deliverable abilities in L4 research, given the challenges the industry faces right now and fierce competition for talents, though we believe that its massive cars running on the road produce valuable data. In the short term, it’s difficult for EV startups to afford the expensive Lidars and to develop L4 self-driving solution themselves while widening losses before they reached the critical mass of car production. The early efforts created a set of footprints in the industry. Thus, companies should be able to grab the window of opportunity for fully autonomous driving to see the day of true commercialization and earn profits.
A detour?
Though EREV technology can alleviate many existing pain points of BEVs, we found that the tech defects and long-term risks in the fast-growing EV market pose enormous challenges for Li Auto.
EREVs enjoy much lower state subsidies than BEVs. According to the National Development and Reform Commission (NDRC) of China, EREV belongs to the plug-in hybrid electric vehicle (PHEV) category; buying these, customers can only get CNY 8,500 in subsidies per vehicle from the government. BEVs, on the other hand, can receive up to CNY 22,500 per vehicle. For the same reason, customers purchasing EREVs still need to apply for an ICE license plate, which is hard to acquire in tier-one cities.
EREV is not a typically sexy story that Wall Streets, major OEMs, tech startups or investors can easily enjoy. Car manufacturers are reluctant to commercialize their technology because they are concerned its advantages don’t last.
Though industry insiders told EqualOcean that they believe batteries will remain unable to reach the highest efficiency for EVs before 2023, the declining cost of battery tech and the improvement of infrastructure elements are undeniable trends. The current range and cost advantages of the EREVs over BEVs will likely be hard to sustain.
Compared to ICE and BEV, EREV requires a more intricate system that enables the battery and the ICE to work closely together to provide consistent power. The tricky system requires a very high standard for the manufacturing platform and the engine structure. Being considered as an intergradation between ICE vehicle and BEV, automakers lack the motivation to redesign the whole system for the EREV model. For the reasons above, EREV will still be an unpopular technology that requires more market education costs and suppliers will keep a high bargaining power.
Valuation
Considering the positives and negatives discussed above, We initiate coverage on Li Auto (LI:NASDAQ) with a Buy recommendation and December 2020 Price Target of USD 22.9 per share.
We used a blend of a 2024-based Price-to-Sales (PS), Price-to-Earnings (PE) and EV/EBITDAP-based analysis. The summary is shown below. The PS approach uses a target multiple of 2.3x 2024 revenue, guided by the average of 1.4x multiple of 2024 consensus revenue that NIO (NIO:NYSE) currently trades, the 1.1x multiple of 2022 consensus revenue at which BYD (002594:SZ) currently trades, and the 4.3x multiple of 2024 consensus revenue at which TSLA (TSLA:NASDAQ) currently trades.
Following a similar approach, we use a target multiple of 17.2x EV/EBITDAP and 36.6x P/E. Considering that stock markets are currently in hype for electric cars, and leaders are trading at a quite high valuation, we assign the highest multiple among the three PEs with only 20% contribution to stay conservative.
Given Li Auto's limited track record of management, we kept a high discount rate of 20%. We note the key downside risks to our valuation include: 1) sooner-than-expected tipping point of battery tech which gives BEV makers a strong price advantage; 2) lower-than-expected new car model roll-out which dragging top-line; 3) unproven track record and execution challenge, given the fiercer competition between domestic brands as well as one strongest Tesla. Upside risks include: 1) better-than-expected management of profits and deliveries of cars.