Chinese EV maker Li Auto Inc. (LI) set an all-time high in monthly deliveries, delivering 8,589 Li ONEs last month. This represents a 251.3% year-over-year increase. The company also garnered much attention, launching the 2021 Li ONE on May 25, 2021, featuring enhanced upgrades, including an improved NEDC range of 1,080 kilometers. However, the stock has lost more than 4% over the past month to close yesterday’s trading session at $31.35.

LI’s total revenues declined 13.8% sequentially to $545.68 million for the first quarter ended March 31, 2021, while its net loss for the quarter increased 54% year-over-year to $54.94 million. Even though several countries are focusing on ramping up domestic semiconductor chip production, the global chip shortage may last until 2023, which could be detrimental to LI’s growth. Moreover, there has been a significant decline in hedge funds’ interest in the stock. So, LI’s near-term prospects look bleak.

Here’s what I think could influence LI’s performance in the near term:

Uncertain Regulatory Environment

U.S.-listed Chinese stocks have recently lost more than $765 billion in value since reaching a record high in February 2021, following the Chinese authorities’ crackdown on its technology and education sectors. China’s crackdown on recent IPO DiDi Global Inc. (DIDI) has led it to lose more than 34% since its debut on the NYSE on June 30, 2021. So, LI’s performance could also be affected by Beijing’s ongoing regulatory measures.

Moreover, following its rival XPeng Inc.’s (XPEV) path, LI said on August 3 that it is looking to raise as much as HK$15 billion ($1.93 billion) in an initial public offering in Hong Kong. However, last month, the Biden administration issued a warning about doing business in Hong Kong as China continues to clamp down on political and economic freedoms in the territory. So, LI’s operations could be affected significantly.

Debt Offering

On April 12, 2021, LI announced that it completed the offering of $862.5 million in aggregate principal amount of its 0.25% senior convertible notes due 2028. The company is expected to use the net proceeds to research and develop new vehicle models and technologies, working capital, and other general corporate purposes. However, this news was not well received by investors, as this is expected to dilute the value of LI’s shares.

Poor Profitability

In terms of forward trailing-12-month gross profit margin, LI’s 17.22% is 50.6% lower than the industry average of 34.89%. In addition, the stock’s trailing-12-month ROCE, ROTC, and ROTA are negative compared to the industry averages of 14.26%, 6.38%, and 4.66%, respectively. Its trailing-12-month levered FCF margin is also negative compared to the industry average of 7.70%.

POWR Ratings Reflect Bleak Prospects

LI has an overall rating of D which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. LI has a D grade for Quality, in sync with its lower-than-industry profitability ratios. Moreover, it has an F grade for Stability.

The stock has a D grade for Value, consistent with its forward EV/S and P/S of 7.84x and 9.05x, higher than the industry averages of 1.52x and 1.27x, respectively.

LI is ranked #45 of 57 stocks in the Auto & Vehicle Manufacturers industry. In addition to the POWR Ratings grades I’ve just highlighted, we’ve also rated LI for Sentiment, Growth, and Momentum. Get all the LI ratings here.

Better than LI: Click here to access several top-rated stocks in the same industry.

Bottom Line

LI crossed the 8,000-vehicle delivery milestone last month, and it could cross the 10,000-cars-a-month mark in September. However, the company faces intense competition from other Chinese EV makers such as XPEV and NIO Inc. (NIO), and American EV giant Tesla, Inc. (TSLA). Moreover, analysts expect its EPS to remain negative in the about-to-be-reported quarter (ended June 30, 2021) and in the current year. So, the stock is best avoided now.

LI shares were trading at $30.26 per share on Friday afternoon, down $1.09 (-3.48%). Year-to-date, LI has gained 4.96%, versus a 19.16% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

More Resources for the Stocks in this Article