Li Auto IPO: NIO, Tesla And Nikola Need Not Worry, For Now.

There is a new player in the electric vehicle space – Li Auto Inc.; new only in respect to the publicly listed U.S. stocks. Li Auto Inc. is planning to come out with an IPO soon. Since we have followed the space for a while and love reading SEC filings, here are some of our preliminary thoughts about the company and the upcoming IPO.

It’s a hybrid is one of the first things you will hear from Bears on the space while talking about Li Auto and its first model that was launched in November 2019 – Li ONE. But ignore those Bear comments and do your research. What we see is a lot of potential, even though the company is a newcomer to the space that is fast getting crowded.

We love the space, so mind our optimism

As some regular readers would already know, we at Purnha love the developments underway in the electric vehicle space, which is sitting at the cusp of mass adoption as battery prices continue to come down, mile range continues to increase and government policies stay supportive.

We have continued to argue that there are more ways to invest in the space than Tesla (Nasdaq: TSLA), including Chinese players like NIO Inc. (NYSE: NIO) and Niu Technologies (NYSE: NIU), and upcoming U.S. players like Workhorse Group (Nasdaq: WKHS), Tortoise Acquisition (Nasdaq: SHLL) and Nikola (Nasdaq: NKLA).

Can Li Auto stand against them all? Don’t count them out

Yes, the space is getting crowded, now that Fisker and Rivian are also expected to hit the markets soon, but we believe counting Li Auto out at this time of the industry development will be a mistake. 

Before going into the product and technology, what makes the company a relevant contender is,

  • Proven product
  • Proven management team

Founded in 2015 and started volume production of its first model – Li ONE, six-seat, extended-range electric SUV with Level 2 autonomous driving features, late last year, the company has proven itself to be taken seriously in the space. So far, the company has delivered more than 10,400 Li ONEs, mainly catering to the low-end market, from a pricing standpoint.

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Purnha Source: SEC Filings

Equally important for the long-term success of the business is the management, and here too, the Board is made up of experts from auto, technology, supply chain, and auto manufacturing fields.

XiangLi, founder, and CEO, is also the founder of the U.S. listed Autohome Inc., (NYSE: ATHM), besides director in several private companies. Yanan Shen, a co-founder, has worked for a long time at Lenovo, including as vice president of global supply chain operations and chairman of the Board of Motorola Mobility China. Tie Li, co-founder, and chief financial officer, has served as vice president finance at Autohome. Donghui Ma, co-founder, and chief engineer, has worked as dean of the research institute at SANY Heavy Vehicle Body Co., Ltd., senior project manager at IAT Automobile Technology Co., Ltd., and director of the department of the vehicle body at Jianshi International Automotive Design (Beijing) Co.

Xing Wang, co-founder, and CEO of Meituan Dianping (3690.HK), fast-growing e-commerce platform in China, is also on the Board of directors and plays an active role.

Given the history of both Autohome and Meituan Dianping, investors will look at the management’s ability to execute favorably. 

Things we like about the company

  • Differentiated technology
  • Entering the expansion phase, requiring only the growth capital
  • Funding may not be a problem
  • Vertically integrated

Differentiated technology – Extended range electric vehicle

Instead of a usual battery electric vehicle, like Tesla, NIO, Lordstown, Rivian, and others, Li Auto has what the company calls – extended range electric vehicle (EREV) technology, which is an all-electric vehicle with small petrol unit to generate additional electric power. When the battery is discharged to a level, the petrol unit runs a generator that supplies power to recharge the battery.

Shrugging it off, as just another hybrid technology will be a mistake, the technology should work great in Countries like China with limited recharging facilities and overcome mile limitations. Li ONE has a total range of 800 kilometers, and pure electric power range of 180 kilometers.

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Purnha Source: SEC Filings

Historically, easy switching between different driving modes and enhancing energy efficiency has been a challenge for automakers. Otherwise, EREVs are as competitive as ICE vehicles in terms of pricing, something BEV’s are still at least 2 years away

Entering the expansion phase, expect high unit growth and more models

Li Auto, Inc.   
 Q4 2019Q1 2020Q2 2020
Units Delivered 973 2,896 6,604
Unit Growth Q/Q 198%128%

As the chart above shows, unit deliveries have grown at more than 100% sequentially. It is quite evident; the market has accepted the product and the company have entered the expansion phase. That should reduce the risk profile of the stock given most other players are still touting their production-ready models or artist rendition of the design.

The company is also planning to launch a full-size premium electric SUV in 2022, with next-generation EREV powertrain system.

Funding may not be a problem

Earlier this month, the company raised almost $550 million via preferred offering, but more importantly, given the history of the founding team in generating winners for the public investors, the company shouldn’t face very many challenges in terms of fund-raising.

Even otherwise, markets are usually more supportive of the growth capital requirements.

Vertically integrated with ready infrastructure

The company has plans to manufacture in-house, a different strategy from NIO Inc., which usually raises doubts about any newcomer but given the company has already set up a facility to manufacture up to 100,000 units, investors can breathe easy about capital spending in the near-term.

Secondly, vertical integration will lead to better margins down the road, besides reducing time to market for product upgrades and other developmental synergies.

Besides the manufacturing facilities, the company has also set up 21 retail stores, 18 delivery centers, and 17 servicing centers nationwide.

Risks we’ll be watching out for

Now if you feel like rushing to call your Goldman Sachs or Morgan Stanley broker, lead investment banks on the deal, we must warn you about certain risks that are worth watching out for,

  • Competition
  • Valuation
  • Technological shifts
  • Cash burn

Yes, without the government subsidies, which are expected to continue till 2022, the argument for EREV technology is easy to make given the price edge that the technology enjoys over BEV, but that’s not the case right now. BEVs, especially those with swappable battery technology like NIO Inc., do have an edge in terms of government support.  Secondly, as the company moves up the price point, the competition will get more intense with other well-entrenched players.

The company has yet to announce the price range for the IPO, so valuation can’t be ascertained at this time but given the strong market demand for all-things EVs, better to not expect any type of discount.

A big part of the thesis rest on the success of EREV technology and any technological shifts, including faster cost reductions in the price of the battery, may put a spanner in the story, cause that will make battery electric vehicles cheaper and longer mile ranges possible. The smoother transition to fully electric vehicle thesis won’t invite much interest from the investors.

Cash burn: right now, investors are caring for cash burn rate at any of the EV startups, indeed, some companies are carrying it as a badge of honor, but sooner or later, things will change and the companies will get penalized for high cash burn rates. Just make sure you don’t get caught when the tide turns.

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