Li Auto (LI) stock fell more than 7% during Friday’s trading session. The sell-off appeared to be a direct response to the US election results, with newly elected President Donald Trump promising to increase tariffs on Chinese imports. However, Li Auto does not export to the US and has no plans to do so. Therefore, I think the sell-off is not justified. More broadly, I think the stock is oversold and undervalued based on expected earnings growth. That’s why I’m bullish.
Donald Trump is the president-elect and tariffs will be headline news if he goes to the White House. While his exact plans for vehicles and electric vehicles (EVs) are uncertain, the former president said he would seek to impose tariffs of 100% or even 200% on Chinese-made vehicles entering the US market. This aggressive stance is part of Trump’s broader strategy to protect the U.S. auto industry and allay concerns about Chinese competition.
Of course, tariffs are not good for Chinese car companies exporting to the US. In fact, a 100% rate would almost certainly make any vehicle uncompetitive with a comparable car. Analysts have hypothesized that Trump’s tariffs are aimed at forcing Chinese automakers to produce in the U.S. or will be used as a bargaining chip for other concessions.
However, one reason I’m bullish on Li Auto is that its global expansion strategy appears to be focused on markets outside the United States, with a particular emphasis on the Middle East. According to reports, the company planned to enter overseas markets from 2024 and target countries such as the UAE and Saudi Arabia.
More recently, Li Auto’s CEO, Li Xiang, indicated that the company’s immediate plans do not include international expansion before 2025, with the boss stating: “We have no plans to expand globally until 2025.” Reports now suggest the company has further scaled back its export plan, focusing on its position in China’s luxury electric vehicle market.
This lack of export appetite could be seen as a sensible option. China’s EV market is the largest globally, with sales increasing 82% by 2023 and accounting for nearly 60% of global EV purchases. Overall, the Chinese EV market is expected to grow at a CAGR of 17.15% between 2024 and 2030.
While I’m bullish on Li auto, there are risks worth considering. Of course, it is a problem to be geographically focused on one country – even if it represents 20% of the world’s population – and that is a form of concentration risk. The Chinese economy is widely believed to be faltering, and more economic stimulus measures will likely be needed to boost domestic demand.
