Jeez took much longer than expected to finish this because I definitely did not think I would be writing this much. But here are my thoughts regarding $LI. Would love to hear what other people think and consider opposing/alternative viewpoints given how this is a rather contrarian case compared to what I see amongst most investors.

Achieved first operating profit, and consecutive quarters of positive operating and free cash flow, whereas profitability of peers like $NIO and $XPEV, who receive more attention, are still in the distant future.

Highest gross margins for FY21 of 21.3% compared to NIO’s 18.9% and XPEV’s 12.5% due to only producing one model so far which gives it strong savings from economies of scale and production facilities being highly optimised. XPEV’s low margins can also be attributed to it having the lowest ASPs.

LI, whose products may not be as flashy as its peers, has established a niche within the mid-market for family SUVs and has been greatly rewarded for its laser-focus. QoQ delivery momentum in 2021 was very strong, which can be expected to continue going into 2022. So far, YoY comps for 2022 are off to a great start with Q122 being up 152% YoY, although down -9.95% from Q421 due to seasonal factors.

LI does not have a pure electric vehicle, with its current model being a plug-in hybrid (thus having much greater total range than pure EVs). This may have played a helping hand during this transition phase in capturing demand from consumers who may be hesitant due to range anxiety typically associated with EVs but do want to hop onto the EV transition. Management has stated that they are confident in demand for the foreseeable future and have been focusing efforts to bring more production capacity online. Guided for annual production capacity of 500-750k units in 2023 (that is ~41700 units per month).

Strong top-line performance and margin improvements have allowed LI to achieve profitability despite continued heavy increases in R&D (more than tripling in 2021), which management stated they will continue to prioritise. LI’s smart tech features like ADAS are often dwarfed by that of its peers NIO and XPEV; but management is well aware of this and investing to brush up, with promising results so far — recent OTA (over-the-air) 3.0 software update that included their full-stack self-developed NOA (navigation on ADAS) and AEB (Automatic Emergency Braking) function that has been awarded Champion of the Year 2021. Personally, I’ve never thought much about LI’s technological offerings so this is an interesting development that I would want to monitor, especially as they endeavour to develop the full-stack of capabilities in-house (as opposed to relying on other third-parties).

LI is chock-full of cash, like seriously loaded. 47.52B CNY of cash and short-term investments against ~6B CNY of debt, giving it a net cash position of 41.5B CNY, ~6.52B USD, against a market capitalization of ~28B USD. Its net cash position accounts for ~23.3% of its MC already. Given how LI is very likely to exit 2022 profitability and no longer cash-burning, this net cash is certainly a huge plus.

Regarding its positive cash flow at a ~16% free cash flow margin exiting FY21, I would definitely want to look at its annual report (to be released) to determine the sustainability of such a high margin for an automaker (for comparison, $TSLA, though many years more mature, exited FY21 with a 9.29% FCF margin). From what I can see so far, it seems that the bulk of the free cash flow comes from delaying accounts payable, which isn’t sustainable. At least for now, taking LI’s FCF at face value, it gives us a TTM EV/FCF ratio of 31x, on the back of 186% revenue growth. How often do you find a hyper-growth company that is profitable and trading at 30x trailing EV/FCF?

I believe that LI is often overlooked in favour of its peers by investors (for valid reasons) due to it currently only producing plug-in hybrids, while the long-term future is definitely pure electric vehicles. In addition, its battery tech and smart features (which are the important selling points of an EV) are inferior to its competitors. Personally, I didn’t think much about LI’s long-term future before this ER and my investment has been based on its relative valuation attractiveness to its peers amidst current strong fundamentals thus far.

Moving forward, however, management does have a plan to continue expanding far into the future with more models and transitioning to pure-electric makes while heavily investing into R&D efforts to catch up. They have stated that they believe the addressable market for their current targeted family SUV one is still very large and that alone can sustain their growth for a good few years.

In addition, management also has a customer-centric philosophy of understanding their customers’ needs and exceeding them: “There are things that users do not even realise that they want, but the moment that they see their products, they'll realise this is what they actually wanted.” This mindset, though alone is not sufficient, is what helped propel Amazon to meteoric success.

The upcoming release of its premium flagship L9 SUV has generated much hype and is priced much higher than its current Li ONE model, which would put it in direct competition with NIO’s SUVs (though once again, not entirely because one is a PHEV, the other is a BEV). It would be interesting to see how their L9 is received over the next few months.

Management has also stated that unlike competitors like NIO who are aggressively expanding overseas and exploring ancillary products and services (smartphone, AR/VR), LI is very much focused on its home market and continuously enhancing its core product and technologies. I believe these disparate approaches can both be good; just because they are opposites doesn’t mean one is better than the other. In LI’s case, its strategic focus is very much welcomed given how it will be navigating the very large challenge of releasing new models (after relying on just one for a while) and transitioning to pure-electric models.

As an investor, given management’s vision with laser-focus, mindset, and proven execution thus far, I like what I see and am becoming more cautiously optimistic about LI’s long-term runway, and will slowly adjust and adapt my thesis and expectations as I monitor developments and their results along the way. There is also much upside via multiple re-rating if LI continues to execute as planned and proves its long-term sustainability to investors. Lastly, with rock-solid fundamentals (high margins, operating and cash-flow positive, top-line growth) whilst trading at objectively (as a growth stock, not a mature automaker so please don't bring it comparisons to Ford or GM lol) and relatively (to its peers) attractive valuation, I believe that LI is a compelling case worthy of consideration by any investor looking at EV companies.