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Briefing Jul 30, 2020 10:08 am EqualOcean

Li Auto is Said to Raise IPO Issue Price to USD 11.50 Per ADS

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Jul 31, 2020 01:46 pm ·

Tesla Share Prices Decouple from the Fundamentals [2/2]

This article is part II of our analysis on Tesla – check out part I before you read.  For the Model 3, we can expect a rise in sales as EV penetration increases in Europe. However, we think the sales for this model also hinge on two important factors: 1. The criteria for EV tax deduction and subsidies and 2. The corporate transportation preference. For the first factor, we have seen the EV tax policies in Europe being a crucial factor in demand for Tesla. For instance, as the benefit in kind tax was capped for EV below EUR 50k in the Netherlands, Tesla Model S and X sales dropped to near 0 from 1000 per quarter. In terms of corporate transportation preference, although each corporation’s preference may vary, it might be presumptuous to assume Model 3 will be the ideal substitute for existing corporate fleets solely based on cost. While corporate fleets in Europe are dominated by BMW 5 and Mercedes E class, both the size and the prestige of Model 3 are more in line with BMW 3. So, despite the short term cost benefit, we see that wide adoption of Model 3 in Europe could also be hampered by the demand for class. For Model Y, we currently see it as a growth driver for Tesla because of its unique design and pricing. In terms of design, Model Y is a crossover between sedan and SUV and is targeting a wide range of consumers. In terms of pricing, it is priced a little under USD 50k – it is not subject to competition with more luxury models like Audi e-tron and Jaguar i-pace. A concern for Model Y sales is the potential cannibalization. While Tesla Model 3 and Model Y use 70% of the same gears and are similar in many ways, a surge in demand for Model Y can replace the existing demand for Model 3. China – The arrogant Tesla is not about to beat local competitors Since Tesla delivered its first Shanghai-made Model 3 to Chinese consumers back in January 2020, the car model has become the best-selling EV. Tesla reached around 46,000 car deliveries in the first half of the year, dwarfing smaller ones like NIO (14,483), Li Auto (9,500) WM Motor (7310) and Xpeng Motors (3,381, ex-June). Tesla's production is ramping up meanwhile, and it aims higher. The Shanghai plant's current production capacity for Model 3 is 150,000 per annum; its Model Y production is expected to begin in early 2021 with a production capacity no less than Model 3. Factoring this, we assume it can reach a total 300,000 annum capacity in 2021.  However, we hold the opinion that the ambitious EV leader is not yet ready to reach lasting dominance in the massive and lucrative market. Experience tells us that it could be hard for overseas leaders to dominate the Chinese market easily – consider the failures of giants like Uber and Google. We see a high potential of the new-generation management growing on the ground to rule the market due to 1. favoring policies 2. deeper understanding of domestic customers and innovation in service and tech.  China's new electric vehicle (NEV) subsidy policy that came out in April continues to favor the local. It is now only applicable to NEVs with the pre-subsidy price of CNY 300k or below, with the exemption of those adopting battery swap models, like NIO. We see a critical signal here: Beijing supports new tech innovations and will foster more domestic brands. Some foreign brands' versions of Tesla and Mercedes products will not be eligible – rather they will be the 'catfish' that will motivate others.  Tesla reacted to the policy by cutting prices down, which will lead to a slipping gross profit margin of the car model (the lowest among other, 17%) and the overall automotive GPM, in our view. This activity sparked the anger of Tesla car owners as they had bought the car with higher prices before (and it happens from time to time).  However, Li Auto choose to remedy the subsidy gap caused by the changing policies for its customers (around 8,000 per Li One), showing Chinese brands providing better services to win mindshare. The company's Extended-Range Electric Vehicles (EREV) tech is helping it carve out a position for itself as a company that understands the tipping point of battery tech, and the insufficient charging infrastructure in China. Read more about Li Auto, the brand that broke NIO's record in reaching 10,000 deliveries.  Tesla's neglecting of Chinese consumers has been reported widely. For instance, it was accused of substituting promised new control chips with an older version without notice in March. Chinese customers might switch to local brands that know them better, with higher cost performance and better service.  

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Jul 31, 2020 12:20 pm ·

Tesla Share Prices Decouple from the Fundamentals [1/2]

Recently the Tesla (NASDAQ: TSLA) share price broke above the $1,500 threshold, bringing its market cap to ~ $270 billion and making Tesla the largest car manufacturer in the world. In the past 52 weeks, Tesla share price has moved up by more than 500% despite a still negative return on equity. It is currently trading at a 730x P/E multiple vs a 10-20x in the industry, 40x multiple of luxury car maker Ferrari. Having 1% of the total car manufacturing revenue and 30% of global OEM market cap, investors are clearly valuing Tesla for far more than its sales. Although Tesla has a first mover advantage in the expanding Electric Vehicle market, we think the growth expectation baked in for Tesla’s current share price could be unrealistic. Technical Perspective – The end of the short squeeze A Short Squeeze happens when a stock rises higher sharply, forcing investors who bet on the stock price falling to purchase the stock at the market price to recover their positions, and as consequence, pushing the price even higher. We think short squeeze played a role in pushing up TSLA’s share price over a reasonable range, but now, with short bets on TSLA decrease, TSLA’s share momentum is likely going to face headwinds. According to data, TSLA shares shorted by investors were 23% of total shares one year ago, and this number decreased to ~ 8% recently. Along with short positions falling lower, the TSLA share price is also moving proportionally upward. Now, data shows it will take less than 1/3 of trading volume compared to last year to clear all TSLA’s short positions, meaning that a temporary sharp price increase will have less additional upward effects on TSLA’s share price because there will be less short sellers buying. Brand image and margin trade-off The success of Tesla in the EV market can be attributed to the brand image it has built with its technology and futuristic design. Tesla has traditionally been able to apply a premium value to its vehicles and shift consumer preferences. However, in Europe we see two headwinds regarding Tesla’s premium in brand image. 1. The high problem rate and low accessibility of relevant services are destroying Tesla’s credibility. 2. As Europe is the home court to many established auto brands such as BMW, Daimler, Volkswagen, Renault, and etc, Tesla is likely to face some headwinds as it expands. In addition, Tesla’s strategic shift, from high end S and X model sales to a focus on lower end Model 3 and Model Y sales, is further lowering margins and bringing both short term and long term bottom line concerns. Compared to the 24% gross margin of Model X and S, Model 3 and Model Y are currently running on 17% margins. With decreasing Model X and S deliveries and increasing Model 3 and Model Y deliveries, Tesla is further pressing its margins. While the increasing EV presence is a consensus, the pace of inflection is subject to debate. Given the volatility of taxes and various policy benefits in the past, Tesla might need to further lower its margin if existing tax and policy benefits are limited in any way. In the long run, as existing ICE (internal combustion engine) manufacturers launch more EV models at all price levels, Tesla might capture a smaller market share, resulting in weaker bottom-line growth. Europe – A big upside and big volatility In our view, Tesla sales in Europe have proven the high correlation of environmental law and Tesla sales. Currently, the two largest Tesla consumers in Europe are the Netherlands and Norway, accounting for 40% of total Tesla sales in the continent. Both countries are also pioneering in BEV adoption – while they account for 3.8% of total passenger vehicle sales in Europe, they accounted for 35% of the BEV market in Europe in 2018. Policy in Norway required all new light vehicles sales by 2025 to be ZEV (Zero Emission Vehicles) and 75% new heavy commercial van sales to be ZEV by 2030. In the Netherlands, the government also required an all ZEV sales target by 2030. Both countries also provided tax incentives for ZEV buyers. As a result, Tesla was able to quickly gain tractions and saw a jump in sales. With the EU's goal being to aggressively reduce carbon dioxide emissions by 2025, we might see Tesla’s adoption rate rise in other countries as purchasing and maintenance incentives come to light, especially in Germany and the UK. Policy is crucial, and growth is mixed To comply with the tough emission rules in Europe, EV penetration will rise by approximately 5.5x from 2018 to 2021, and Norway and Netherlands’ share will drop from 38% to 10%  by BNP Paribas’ estimate. Germany and the UK are likely to be the drivers for this EV growth. If sales in Norway and the Netherlands are any leading indicator for Tesla’s sales in Germany and the UK, Tesla could be capturing hyper growth in Europe and fully support a $400/share valuation given by BNP Paribas. However, we think the driver for Tesla’s growth in these two countries could be very volatile. The growth story in Germany and the UK was constructed upon the large corporate fleet demand in either country, accounting for 53% and 56% of total vehicle demand respectively. According to BNP Paribas, this could create a TAM of 3.2 million units. With multiple growth catalysts, it’s important to analyze how sales of each model for Tesla will perform under the current situation. For Model X and Model S, future sales are not looking very optimistic – 1. These two models might not be able to fully enjoy the tax benefits in Europe due to their high price, and 2. Model S and Model X are subject to quality concerns and can incur high maintenance costs. This article is part I of our analysis on Tesla. Please continue to part II.

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Jul 29, 2020 10:53 am ·

Li Auto's US IPO Gets Fully Subscribed

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Jul 27, 2020 02:01 pm ·

Li Auto: Short Cut or Detour? — Initiate with Buy [2/2]

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.

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Jul 27, 2020 01:55 pm ·

Li Auto: Short Cut or Detour? — Initiate with Buy [1/2]

We initiated coverage of Li Auto (LI:NASDAQ) with a Buy recommendation and a December 2020 Price Target of USD 22.9 per share. Given the recent hype in investing in EVs and Li Auto's good financial performance, we expect to see its price rise on its first trading day.  We used a blend of a 2024-based Price-to-Sales (PS), Price-to-Earnings (PE) and EV/EBITDAP-based analysis. Li Auto, the company behind Chinese electric vehicle (EV) brand Leading Ideal, has filed for a Nasdaq IPO to raise up to USD 855 million. It will likely be the second Chinese EV ‘emerging force’ to trade on the US market after NIO, which was listed on the NYSE in September 2018.  Key investment thesis We are optimistic about China's New Energy Vehicle (NEV) market, driven by government support, improving infrastructure along with the rise of local Chinese brands. On top of that, Li Auto's unique value proposition suits the massive, burgeoning and developing market, and will give it an edge over other BEV competitors by freeing customers from high battery prices and limited charging infrastructure. Li Auto adopts EREV technology rather than the BEV technology that most EV startups do. The unconventional technology can not only save the company a great fortune on battery expenses but also alleviate dependency on charging piles in short-term. Mass-produced car fleets pave the way to the upcoming AV competition. Li Auto has been able to pick up significant speed, reaching 10,000 car deliveries by far. Those running cars will serve as the best data collectors/processors for its AV research. However, we remained concerned about the firm's deliverable abilities in L4 research, given the challenges the industry facing and fierce competition. A direct sales model offers a better user experience. Abandoning distributors and providing a direct service to customers has changed the way customers purchase cars and become the major choice of China’s new generation of EV makers like NIO, WM Motor, and Xpeng.   Superior cash flow management. Li Auto is burning money way slower than its competitor NIO and sits on top of CNY 1,197.3 million net cash (including restricted cash) as of December 31, 2019, thanks to management's keen ability to manage cash flows. The company has recorded a negative operating cash flow of CNY 63 million as of March 31, 2020, a way better case compared to what NIO had before the IPO (minus CNY 4.6 billion CFO in 2017).  On the financial point, we project LI to turn profitable in 2023 with exposed to fewer balance risks as compared to NIO.  Key risks EREVs may be a short cut, but it will be hard to resist BEVs in the long term. EREV is not the mainstream in the NEV industry, which in the long term might affect the company’s profitability as well as being exposed by a lack of supportive government policies (e.g., more strict license plate in tier-one cities as Beijing compared to EVs) if it fails to transform to become fully BEV in the coming years. Unclear product pipeline. We have limited knowledge of Li's ongoing car model projects. The company currently depends on revenues generated from one single model of vehicle, the Li Auto.  Born to be different  EREV technology solves ‘range anxiety’ and affordability at one time. Among the four leading EV players NLXW (NIO, Li Auto, Xpeng and WM) in China, Li Auto went down an unconventional road that set it apart from all its peers. The company is the first Chinese startup to commercialize Extended-Range Electric Vehicles (EREVs), which requires a much smaller battery pack than battery-electric vehicles (BEVs) do. The first greatest merit of a smaller battery pack is the lower cost. The battery system takes up 50% of the total cost of an EV. The high cost makes it very hard for manufacturers to control the selling price. Take NIO, for example, its ES8 model prices at CNY 468,000 to CNY 518,000 after subsidy. In comparison, Li Auto’s EREV technology saves customers over CNY 100,000 with a battery pack half the size, while ensuring a longer range than BEVs. The technology alleviates customers’ range anxiety around worrying about running out of battery power with nowhere to go for recharge. Unlike battery-electric vehicles (BEVs), the unique technology requires a much smaller battery pack with a small internal combustion engine (ICE) present to generate additional electric power when the battery runs out. ICE works like a ‘power bank’ for the battery pack to provide constant power for the vehicle. The availability of charging facilities is improving in the nation, but there are a lot more headaches ahead. EREV’s battery pack can be charged by the small ICE, and thus an EREV can be powered either by electric or fuel. In China, especially in tier-one cities (Beijing, Shanghai, Guangzhou and Shenzhen), private charging piles are hard to build due to limited land space. According to EVCIPA, in recent years, the ratio between the charging pile inventory and the NEV inventory in China has remained at around 3:1. With the fast-growing NEV sales and the scarce land for charging pile construction, the goal of achieving one pile for one vehicle is not likely to happen any time soon. One step closer to the customers In addition to technology-driven growth in customer satisfaction, service plays an increasingly important role in shaping the company's brand value. To better serve its customers, the company has decided to provide its productions and services in an entirely different way. The traditional vehicle distribution strategy, through 4S shops causes additional charges and makes quality control harder. To solve the related problems, Li Auto customers can order their cars online, experience it in the showrooms and get it from the warehouse. This way, customers can directly deal with the company and give feedback to the company if any problem occurs. According to the company's official statistics, in a satisfaction survey of users, more than 98% of users expressed satisfaction with the experience of the vehicle and were willing to recommend it to their friends.  By the end of June, the company had opened 21 showrooms covering 18 cities in China. It aims to increase the number to above 30 by the third quarter of this year, and ultimately make it to 60 by the end of this year. In addition, all the 21 existing showrooms of Li Auto were positioned in shopping malls, which is suggestive of their strategy to target younger consuming groups who are more likely to accept new things and, thus, more likely to buy NEV cars. This article is part I of our analysis of Li Auto. Please continue to part II.

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Jul 21, 2020 05:55 pm · 36Kr

Chinese EV Startup Hozon Auto Eyes IPO by 2021

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Jul 20, 2020 09:44 am · IPO Zaozhidao

Li Auto to Board Nasdaq on July 31, Raising at Least USD 500 Mn

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Jul 11, 2020 10:23 am ·

Chinese EV Player Li Auto Files for Nasdaq IPO

Meituan and ByteDance-backed Chinese EV 'emerging force' Li Auto filed for an IPO on Nasdaq under the ticker LI, hoping to raise up to USD 100 million. But according to Chinese media, the number will be further modified. Li Auto, along with Nio, Xpeng, and WM Motor, is one of the leading EV companies in China. Once Li Auto goes public on Nasdaq, it will be the second Chinese smart EV firm traded in the US market after Nio. According to the prospectus, the company didn't begin to generate revenue until 2019.  In that year, the company earned a total of USD 284 million, and USD 120 million in the first quarter of 2020. However, like its other Chinese peers, Li Auto hasn't begun to profit. The prospectus shows that the company saw a net loss from 2018 to the first quarter of 2020 of USD 219 million, USD 344 million and USD 10.9 million, respectively. The loss in Q1 2020 showed a significant decrease of 368% YoY. Founded in 2015, the company focuses on smart electric SUVs. Its first and only model Li Auto ONE rolled off the production line in November 2019 and had delivered over 10,400 units as of H1 2020. The company plans to launch a premium electric SUV in 2022, which will be equipped with a next-generation supercharged powertrain. In the future, in order to target a wider consumer base, the company will expand its product range by developing new models, including midsize and small SUVs.

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Updated 18 hours ago · 21 Caijing

China is Formulating the World's First Robotaxi Regulation

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Aug 5, 2020 02:24 pm · EO Company

NIO Reaches Strategic Cooperation with Suning

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Aug 3, 2020 04:14 pm · Xpeng

Xpeng Delivers a Record High 1641 P7's in July

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Aug 3, 2020 11:57 am · 36kr

Alibaba to Invest in SAICs' Mobility Business

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