UBS has released a research report initiating coverage on LI AUTO-W (02015) with a "Buy" rating and a target price of HK$67. The firm believes the company's valuation is near historical lows, creating an attractive setup for a profit inflection and margin recovery.
According to UBS, the operational downturn at Li Auto has persisted longer than initially expected this year, but the company holds RMB 80 billion in net cash and has achieved positive operating cash flow. This provides ample resources to weather the period until the next earnings upcycle, or to return value to shareholders through further buybacks.
While many investors remain bearish on Li Auto due to sluggish sales growth and a loss recorded in the first half of the year, UBS still identifies strengths and opportunities. Year-to-date, sales of the Li Auto i6 SUV have surpassed those of the similarly priced Xiaomi Yu7, reflecting strong brand value and customer loyalty. Additionally, its Mach M100 and Mach VLA models remain at the forefront of autonomous driving and embodied AI technology.
With the launch of the Mega and i9 models expected in the second half of the year, management anticipates automotive gross margins will recover from below 10% in the second quarter to a healthier 15%-20% by the fourth quarter. UBS acknowledges that market competition remains intense and visibility into the next upcycle is still unclear, but believes the company's financial resources and endurance will ultimately support revenue growth and margin improvement by capturing market share from European premium brands.
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