The Chinese electric vehicle (EV) market is one of the largest and most competitive in the world, with dozens of players vying for a share of the growing demand. Among them, two startups, Li Auto and XPeng, have attracted a lot of attention from investors and analysts. However, not everyone is bullish on both companies. A recent report by Citi analyst Jeff Chung suggests that Li Auto is a better buy than XPeng, based on their earnings potential and valuation.
Li Auto has higher earnings and lower valuation
Li Auto is one of the few profitable EV makers in China, thanks to its unique hybrid technology that combines a battery-powered electric motor with a small gasoline engine. This allows its vehicles to have a longer range and lower cost than pure electric models. Li Auto delivered 34,134 vehicles in July 2023, an increase of 227.5% from a year earlier. It also reported a net income of $149.9 million in the second quarter of 2023, beating analysts’ expectations.
XPeng, on the other hand, is still losing money despite growing its sales rapidly. It delivered 30,738 vehicles in July 2023, an increase of 228% from a year earlier. However, it posted a net loss of $145.1 million in the second quarter of 2023, wider than analysts’ estimates. XPeng focuses on pure electric models that feature advanced driver assistance systems and smart features.
According to Chung, Li Auto has higher earnings and lower valuation than XPeng. He raised his target price for Li Auto’s U.S.-listed American Depositary Receipts (ADRs) to $65 from $54.30 and kept his Buy rating on the stock. Li Auto’s ADRs closed at $41.84 on Wednesday. He also said that investors should sell shares of XPeng, which he rates Sell and has a $15 price target for the U.S.-listed ADRs. XPeng’s ADRs closed at $16.94 on Wednesday.
Li Auto has more room for growth and margin improvement
Chung also believes that Li Auto has more room for growth and margin improvement than XPeng. He expects Li Auto to increase its market share in China from 6% in 2023 to 9% in 2024, while XPeng’s market share will remain at 2%. He also forecasts that Li Auto will improve its gross margin from 16.9% in 2023 to 18.4% in 2024, while XPeng’s gross margin will decline from 11.9% to 11.2%.
Chung attributes Li Auto’s superior performance to its hybrid technology, which he says gives it an edge over pure electric competitors in terms of range, cost, and charging convenience. He also says that Li Auto has a loyal customer base and a strong brand image.
XPeng, meanwhile, faces challenges from the rising competition in the pure electric segment, as well as the uncertainty over the future of autonomous driving technology. Chung says that XPeng’s valuation is too high compared to its earnings prospects and growth potential.
XPeng has some advantages over Li Auto
However, not everyone agrees with Chung’s views. Some analysts and investors see XPeng as a more innovative and forward-looking company than Li Auto. They point out that XPeng has some advantages over Li Auto, such as:
- A partnership with Volkswagen (VOW.Germany), which will help it develop two EVs for the Chinese market using XPeng’s driver assistance features.
- A presence in the European market, where it has started selling its P7 sedan in Norway.
- A leadership position in autonomous driving technology, as it has obtained licenses to test its self-driving vehicles in China and the U.S.
- A diversified product portfolio, as it plans to launch its third model, a compact SUV called P5, later this year.
Therefore, some analysts and investors believe that XPeng has more upside potential than Li Auto in the long term.
