Li Xiang, chairman and CEO of electric vehicle maker Li Auto, saw his wealth jump $1.5 billion to $9.6 billion on Monday as investors approved his discounting strategy in China’s fiercely competitive EV market. But analysts warn that an intensifying price war might eventually hurt Li Auto’s margins down the road.
Following the release of fourth quarter earnings on Monday, shares of the dual-listed company jumped as much as 26% in Hong Kong on Tuesday after rallying almost 19% in the Nasdaq overnight. Li, who derives his net worth from a Li Auto stake, ranked on Monday as one of the five biggest wealth gainers worldwide, according to Forbes’s Real-Time Billionaires List.
The 42-year-old is proving that price cuts have not eaten into Li Auto’s bottom line. To defend itself against rivals such as the Huawei-backed Aito, which is targeting the same family market with its hybrid SUVs, Li Auto started in August to offer at least 15,000 yuan ($2,000) discounts on its extended-range vehicles that retail for more than $42,000.
These hybrids include a gasoline-powered engine so that batteries can be charged on the go. In addition to alleviating range anxiety — the cars can travel up to 1,100 kilometers with gas-generated electric power — Li Auto’s hybrids boast extra interior space and even a small refrigerator for longer trips.
In the fourth quarter of 2023, sales of its three models — the five-seat Li L7, six-seat Li L8 and six-seat Li L9 – more than doubled year-on-year to $5.9 billion. Net profit came in at $810 million, up 2,068% from a year earlier. Gross margins for its vehicles reached 23.5%, even higher than Tesla’s 17.6% margin during the same period, and that was after the American EV maker slashed prices in multiple markets including China. Wang Hanyang, a Shanghai-based analyst at research firm 86Research, says investors are now increasingly convinced of Li Auto’s profit prospects.
“The company launched sales promotions in Q4,” says Wang. “In the meantime, the company could still keep its vehicle margin stable. It shows Li Auto’s strong supply chain and cost management capabilities.”
For 2024, billionaire Li is aiming to sell 800,000 cars, according to a January post on his social media account. If achieved, that goal would mark a 113% jump from the 376,030 vehicles delivered in 2023.
The company said on a Monday analyst call it aims to do that by launching more models. On March 1, Li Auto plans to introduce Li Mega, a pure electric multi-purpose vehicle with a starting price under $84,500. It will rely solely on batteries for power, as will other models to be launched later.
The EV maker believes an increase in charging facilities and advances in battery technologies are alleviating range anxiety among potential customers. The company has previously said it plans to build 3,000 charging stations by the end of 2025. It currently has 330 charging stations across China.
“Management has also provided a clear path to achieve its FY24 (fiscal year 2024) sales target and is still quite self-disciplined in costs and expansion,” Shi Ji, a Hong Kong-based analyst at CMB International, wrote in a Feb 27 research note.
But 86Research’s Wang sounded a note of caution. He wonders if Li Auto will be able to maintain margins over 20% if it’s forced to cut prices more amid cut-throat competition.
This month, billionaire Wang Chuanfu’s BYD, which overtook Tesla as the world’s largest EV company by deliveries in January, slashed the price of its popular Qin Plus sedan by $1,400. The EV leader is seeking to use its discount strategies to expand in China’s EV market, in which growth is slowing. Deliveries are projected by the China Passenger Car Association to increase 25% to 11 million units this year, down from 36% growth in 2023 and 90% in 2022.
“In my view, the market seems to be overly optimistic after the Q4 earnings were announced,” says Wang. “The price war has just been initiated by BYD this year. Every EV company needs to rethink how to balance profitability and sales volume, including Li Auto.”
