LI Stock Forecast: Why the Future Looks Electric for Li Auto, Despite Political Storms

Stock Market

If Li Auto (NASDAQ:LI) stock suffers from geography. If it were an American car company, it would be worth $150 billion.

Imagine. Sales tripled year-on-year in the second quarter. Profits grew even faster. The company delivered 32,575 vehicles in June alone. Tesla (NASDAQ:TSLA) China had 74,212. 

But Li Auto is a Chinese company. Thus, its August 17 market cap of $40 billion seems reasonable, even generous.

That’s the China discount.

A Closer Look at Li Stock

China has the most dynamic economy in the world. It’s still growing at nearly 5% per year. China’s economic mandarins think this isn’t good enough.

They recently cut the benchmark interest rate to 2.5%. This is aimed squarely at stimulating demand for big-ticket items like Li’s hybrid SUV.

China now represents about 18% of the $105 trillion global economy. Five years ago, it was 15% of a $80 trillion global economy .

China is now a middle class country, with middle class appetites. Chinese consumers will buy nearly 25 million cars this year. That could rise to 30 million in 2030.

China is also becoming a post-industrial economy. Low-cost industries like apparel are being replaced by high-cost industries like computing. Growth is increasingly based on science and cutting-edge technology. China dominates the market for EV batteries, as it dominates in solar panels, with over 80% of the market.

It’s fair to ask, what’s not to like?

Why Sell China

The reason you sell China is Xi Jinping.

Xi’s turn to authoritarianism is well documented. It’s not just China’s citizens that are subject to strict mind control. China has now established police stations overseas to target anyone who disagrees.

Xi’s government is committing atrocities in Xinjiang. Promises made to respect human rights in Hong Kong have been systematically broken. China’s military is openly threatening Taiwan and the South China Sea. Xi has replaced the leaders of his nuclear arsenal, with people who are politically compliant.

Whatever you think of Vladimir Putin, Xi Jinping is 10 times worse. That’s because he has the economic and military power to carry through his designs.A war between the U.S. and China threatens the whole world with nuclear annihilation, on an Earth that’s burning with fever. Xi seems determined to bring it on.

An Economy Held Hostage

There is growing tension between China’s economy and Xi’s military designs.

The 2020 “tech crackdown” wiped out trillions of dollars in value. China’s real estate market may be worse than economic data shows. China is now withholding data on youth unemployment, which has exploded.

Post-industrial economies depend on technology, and technology depends on human capital. It’s not enough to have smart people.

Trained minds need incentives and the freedom to dream whatever they wish. You can’t imprison the human mind and get the most out of it.

Xi disagrees.

The Bottom Line

Today’s China is nothing like the China of five years ago.

There’s a growing tension between its economic needs and Xi’s lust for global power.

The Biden Administration has responded, putting China generations behind in semiconductors.

The Administration is systematically de-coupling from China. We are moving supply chains to Vietnam and other South Asian countries. We are moving production of strategic goods like chips directly to Ohio.

Li Auto makes what the world wants, a battery-first hybrid that goes 800 miles on a charge. It plans to make what we’ll want next, a fully electric car with 240 miles of range that can drive itself and charges in 10 minutes.

But buying Li Auto stock today feels like buying Volkswagen stock in 1938. Sometimes, politics trumps economics.

As of this writing, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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