Chinese stocks have had a terrible start to 2024, and the country’s stock markets have fallen to new lows amid concerns over its economy. Li Auto (LI) has lost over a quarter of its market cap this year, and is down over 41% from its 52-week highs. The slump is not specific to Li Auto, as fellow Chinese EV stocks have also tumbled.

This group is in focus today, after Tesla (TSLA) CEO Elon Musk said on his company's Q4 earnings call that “the Chinese car companies are the most competitive car companies in the world… Frankly, I think if there are not trade barriers established, they will pretty much demolish most other companies in the world.”

So, should you buy the dip in Li Auto stock amid the current slump in Chinese EV stocks? We’ll discuss in this article.

Chinese EV Stocks Rise - and Fall

Not long ago, Chinese electric vehicle (EV) stocks were a sought-after asset class. Last year, NIO (NIO) landed a massive investment from Abu Dhabi’s CYVN Holdings, and Volkswagen (VWAGY) invested in Xpeng Motors (XPEV). While these companies, and especially NIO, attract outsized attention, Li Auto quietly surpassed other Chinese startup EV companies.

In December, Li Auto delivered 50,353 vehicles - which was more than what NIO and Xpeng Motors together delivered in the month. The company’s cumulative deliveries reached 633,364 at the end of 2023. It hit the milestone of becoming the first emerging Chinese EV company to surpass 600,000 cumulative deliveries and 50,000 monthly deliveries.

Why Are Chinese EV Stocks Falling?

Sentiments toward Chinese stocks is quite negative, as most economic indicators suggest further softening of the world’s second-largest economy. Then there are structural issues like the high government debt, real estate slowdown, and troubles in the banking sector (including shadow banks). Add the aging population into the equation, and investors have yet another reason to shun Chinese stocks.

The valuations of Chinese companies have plunged over the last couple of years, thanks to the economic policies of President Xi Jinping and escalating tensions with the U.S. The possibility of Donald Trump returning to the White House is not helping the cause of Chinese companies, as it was under his first tenure that the U.S.-China trade/tech war started.

While the Joe Biden administration hasn’t been soft on China either - among others, the White House has imposed restrictions on chip exports to China - markets may fear a rerun of 2018, when Trump’s rhetoric led to a steep fall in Chinese stocks. 

Meanwhile, along with the sell-off in Chinese equities, Chinese EV stocks have also been hit by the industry-wide price war, after Tesla lowered car prices in China towards the beginning of the year. The Elon Musk-run company sees growth slowing this year, and might resort to more price cuts to spur sales.

Should You Buy the Dip in Li Auto Stock?

For those comfortable with the increased risk of investing in Chinese companies, Li Auto looks like a good bet. First, unlike its peers that are burning cash every quarter and posting dismal gross margins, Li Auto has delivered a strong financial performance. Its vehicle margin was 21.2% in Q3, with a free cash flow of $1.81 billion.

Second, it has a strong balance sheet, and held over $12 billion as cash and cash equivalents at the end of September. While some of the rival Chinese EV companies need regular cash infusions to fund their operations, Li Auto suspended its at-the-money stock offering last year, as it has ample cash to take care of its business needs.

Third, Li Auto’s models have been well-received in China, and the company is set to launch its flagship new MPV Li MEGA later this quarter. Li has rapidly grown its deliveries, and the launch of new vehicles will help it further enhance its market share in the country.

Finally, from a valuation perspective, Li Auto trades at a next 12-month price-to-earnings multiple of only about 14.4x - which looks quite attractive, especially when compared to other EV companies, most of which are currently posting losses.

Li Auto Stock Forecast

Wall Street analysts are quite bullish on Li Auto stock, and rate it as a “Strong Buy.” Of the only 6 analysts covering the stock, 5 rate it as a “Strong Buy,” and 1 as a “Moderate Buy.” 

Li Auto’s mean target price of $53.98 is nearly 95% over current prices, and earlier this month, the stock got yet another bull on the Street when Goldman Sachs initiated coverage at “buy” with a target price of $52.90. Among other drivers, analyst Tina Hou is optimistic about Li Auto’s economies of scale and the resultant operating leverage. Hou is also upbeat on the company’s upcoming models and believes they will be quite competitive compared to peers.

While analysts have mixed opinions regarding other startup EV names, like Lucid Motors(LCID) and Rivian (RIVN), they are overwhelmingly bullish on LI - even as the number of analysts covering the stock is lower than many other EV companies. 

Overall, I believe that tepid valuations, a strong growth pipeline, and the possibility of a stimulus package from China make Li Auto stock a worthy buy at these prices, even if the stock could see short-term selling pressure amid pessimism towards Chinese shares.