Stock Market

LI Stock Outlook: Can China’s Middle Class Afford This New Minivan?

Li Auto (NASDAQ:LI) stock ran into resistance last week but remains strong. Anyone who bought Li on its IPO in mid-2020 is sitting on a profit of 140%.

I’ve looked at Li stock from several angles. These include its business selling plug-in hybrids, the luxury appointments of those vehicles, the life story of founder Li Xiang, and the company’s ties to the Chinese Communist Party.

But there’s an important piece of the Li stock story we haven’t yet touched on.

The Two-Child Policy

China’s “one-child policy” has become a nightmare. One child, two parents and rising lifespans are combining to make China a very old country very quickly. Add a traditional preference for boys over girls and you can see the problem.

China’s government reversed itself in 2015, creating a two-child policy. The birth rate has risen since, but only slowly. China’s population has declined. Its median age is now 39, just like the U.S.

What does this have to do with Li Auto? Quite a lot. The Li 9 is billed as “the new family flagship.” One ad shows a father playing with his daughter inside the car, while a woman holds another child outside it. The Li 9 is a 21st century minivan.

Just last month, Li offered a special event for the press and customers. It was called its Family tech day.

A Closer Look at Li Stock

Of all China’s new EV companies, Li is the one most attuned to current government policy. Like some Americans and Europeans, the mandarins who run China fear population decline becoming political decline.

China is unlikely to encourage immigration, so the answer is to turn back the demographic clock to America’s 1950s.

This won’t be easy. Kids are expensive. A middle class society naturally leads to lower birth rates, as women see a better life for themselves outside their traditional role.

Chinese women have been taught for decades to embrace this change. Turning back the clock, especially with growing economic uncertainty, will not be easy.

Li is the avatar of this change. Whether that change is sustainable is the question. Imagine hundreds of millions of Li SUVs heading for the beach, or the mountains, or the deserts, every summer. Cars don’t scale.

Li thus faces two challenges. First, it needs to find export markets, which won’t be easy given both its niche and China’s growing isolation.

Second, it needs to expand its product line, which also won’t be easy given the dominance of BYD (OTCMKTS:BYDDF) in the mid-market, cars costing $25,000.

The Li 9 is an aspirational vehicle. A $70,000 car is a stretch for an American middle class family. It comes to nearly 500,000 Yuan. That’s almost six times the annual disposable income in wealthy Shanghai.

The Bottom Line

Until Li can find export markets, its cars will be a barometer of China’s efforts to grow its upper-middle class and induce them to have multiple children.

That’s a limited market.

With 90% of Li’s Wall Street analysts now telling customers to buy the stock, I have to be cautious.

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.