Investors should buy discounted Li Auto shares as China’s economy booms!

Dr James Fox takes a closer look at Li Auto shares after all China’s emerging EV companies recorded monthly delivery increases in February.

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Li Auto (NASDAQ:LI) shares are down 9% over 12 months. As such, the company’s share price has held up pretty well compared to some of its peers. However, the current $25 share price is some distance below the $41 level reached last summer after the launch of the long-awaited L9 SUV. So, why do I think investors should be loading up on Li shares?

Top performer

There are several interesting emerging EV companies in China, including Li, NIO, and Xpeng. While all three companies have very interest long-term growth prospects, particularly NIO with its unique battery-swapping tech, Li is the first to look financially sustainable.

Earlier this week, the car maker reported adjusted earnings per share of 13c on revenue of $2.56bn in Q4. This was considerably more than expected. Though past performance is not an indicator of future results, analysts forecast earnings of 7c a share on revenue of $2.6bn.

It had been widely tipped as the first of the Chinese EV manufacturer to become profitable, and Q4 demonstrated that.

Strong data from China

China’s economy is expected to grow by 5.2% this year. At least that was the International Monetary Fund’s forecast at the beginning of the year. Analysts are increasingly pushing their estimates upwards as Chinese economic data comes in surprisingly strong.

Last week, China’s Purchasing Managers Index data came in at 52.6 in February, up from 50.1 in January, according to the National Bureau of Statistics. This represented the fastest growth in factory activity in 11 years.

As such, analysts are expecting 6%+ economic growth in 2023.

Good start to the year

Nio, Xpeng, and Li Auto all recorded monthly delivery increases in February. Li Auto delivered 16,620 vehicles to buyers during the month, up 9.8% from January, and 97.5% higher than February 2022.

However, it’s important not to read too much into this month-on-month increase. Part of the uptick could be explained by the fact that Lunar New Year landed in January in 2023. In 2022, the holiday landed in February. Businesses normally suspend operations during the holiday period.

Strong buy for me

Let’s start with valuation. Nobody wants to buy an expensive stock, and Li trades with an EV-to-sales ratio of 2.8. That’s broadly in line with Chinese peers, but it’s much less than US peers. Sector leader Tesla trades with an EV-to-sales ratio of 7.2. This suggests fair value could be considerably above the current level.

However, it is important to remember that investors will likely prefer Tesla — a profitable US stock — over Chinese newcomer Li, especially because of geopolitical tensions. And it is worth noting that geopolitics and trade wars could continue to impact the share price. But, I still see the valuation as a big plus.

Then we come on to the strength of the company’s offering. The L9 — the firm’s second car — is an impressive vehicle. The SUV comes with two electric engines and one petrol, delivering 1,100-km of range.

It’s priced competitively within the upper end of the market at $70,000. It offers a wealth of tech, including sizeable infotainment displays controlled by 3DToF hand/finger tracking cameras. I think it could be a real winner wherever it is sold.

And finally, Li’s key battery supplier, CATL, is reportedly offering hefty discounts to key clients. This could really help margin growth in 2023. That’s why I’m buying more Li Auto shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Li Auto and Nio. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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