Li Auto Incorporated Stock was trading 10 percent lower after the company announced quarterly numbers. While the sales and other financial ratios improved for Li Auto, investors were probably expecting more and in Hong Kong trading session, the stock witnessed 10 percent decline. The US ADR could also see selling pressure in today's session.

Morningstar maintains a hold rating on Li Auto Inc. (NASDAQ: LI), a leading Chinese new energy vehicle (NEV) manufacturer specializing in plug-in hybrid electric SUVs. With a current trading price of USD 25.01 and a fair value estimate of USD 33.70 as of November 2024, Morningstar identifies potential but limited upside in the stock, currently trading at 74% of its fair value estimate. While Li Auto’s delivery performance and market reach have been commendable, headwinds from rising competition and uncertain market sentiment make this a cautious investment.

Financial Health and Valuation Targets for Li Auto

1. Fair Value Estimate and Current Market Levels

Fair Value Target: USD 33.70
Current Price (as of Oct 31, 2024): USD 25.01
Support Level: Analysts consider the USD 23.50–25.00 range as a foundational support level for short-term price resistance.
2. Market Potential with Competitive Risks

Growth Drivers: As a significant player in the NEV market, Li Auto benefits from favorable regulations and growing NEV adoption in China.
Competitive Risks: Increased competition from pure electric vehicle models and pressure on margins may cap the stock's near-term price growth.

Operational and Strategic Insights

1. Revenue and Profitability Outlook

Vehicle Margin Recovery: Li Auto reported a strong quarter with a 2% revenue beat due to improved vehicle margins driven by larger deliveries and supplier rebates. However, margin gains are susceptible to price competition.
2025 Projections: Morningstar estimates Li Auto’s 2025 revenue growth at 4%–7% on increased production capacity, despite potential competitive pressures on prices.
2. Capital Allocation and Expansion Plans

Capital Allocation Rating: Standard
Expansion Strategy: Li Auto continues to increase its manufacturing capacity, with significant capital invested in both plug-in hybrid and upcoming battery electric vehicles (BEV).

Risks and Investor Considerations

1. Rising Competition from Pure BEVs

Market Competition: With BEV technology rapidly advancing, Li Auto’s plug-in hybrid offerings may lose their competitive advantage.
Demand Forecast: While NEV demand is set to grow, the rate of adoption for hybrids versus BEVs remains uncertain.
2. Economic Moat Assessment

Moat Rating: None
Investor Caution: Li Auto's lack of an economic moat highlights a vulnerability to pricing pressures, limiting the stock’s potential for sustained margin expansion.

Analyst Takeaway

While Li Auto shows promising growth metrics in the Chinese NEV market, cautious investors should consider the competitive landscape and evaluate the company's strategic initiatives in line with broader BEV trends.