Deutsche Bank analysts led by Edison Yu initiated coverage on Chinese electric vehicle (EV) maker Li Auto (NASDAQ: LI) with a Hold rating and a price target of $35, representing an 8.5 percent upside potential from Friday's close.

Li Auto has proven itself to be a focused and efficient operator as demonstrated by its margin/cash flow performance and strong sales, despite having a meaningfully smaller store footprint and social media following than Nio and Xpeng Motors, the analysts said in a note sent to investors on Monday.

They went on by saying that Li Auto chose to differentiate its offering by using an extended range hybrid powertrain to addresses many of the practical shortcomings of BEVs while keeping costs low.

However, Li Auto's management understands BEV is the endgame, and “we suspect the company may already be accelerating developmental efforts,” the report said.

The market reception to these products will be key to Li's future success. Separately, the bank sees Li Auto as an early laggard when comparing with Nio/Xpeng on vehicle autonomy.

Li Auto currently offers L2+ ADAS functionality but it does not have "navigate on pilot" capability or automated parking assist. The company is working on these features and plans to roll out later this year.

For L3 capabilities and above, Li Auto will pivot away from Mobileye and use Nvidia's Orin, aiming for a launch in 2022, bringing in-house a much greater degree of software development, the report noted.

Li Auto currently sells only one model, the 6-seater Li ONE large SUV, which the analysts believe provides a premium cockpit experience that has resonated well with users. The report explains:

The interior is designed with 4 displays: instrument cluster panel, central info display, front passenger display and central control panel.

These displays are powered by a Linux-Android Auto dual system architecture where the two systems are connected but can still operate independently.

The Linux-based system is mainly used for driving control while Android Auto is used for infotainment. Under the hood, Li Auto is using a Qualcomm 820A chipset (CPU+GPU) and all systems can be firmware upgraded over-the-air (FOTA).

Additionally, the Li ONE has many other luxury features standard such as Napa leather cover, seat heating for 1st & 2nd rows, laminated acoustic glass, silver-plated heat insulated windshield and tires with acoustic technology (Michelin).

Two weeks ago cnEVpost reported that Shenzhen-listed Jiangsu Miracle Logistics System Engineering recently announced that it has won the "X01 assembly line" project of Li Auto's Changzhou branch, with a contract value of RMB 160 million and a delivery date of March 30, 2022.

During the third-quarter earnings call, Li Auto CEO Li Xiang also said that the company plans to launch one new vehicle per year after 2022, including a full-size large SUV with extended-range technology.

Li Auto is developing a fully electric one which could take 24-36 months. The company will also need to prove it can roll out in-house capabilities in ADAS/AD, Deutsche Bank noted.

Li Auto stock rose 2.7 percent to $33.12 in pre-market trading on Monday.

Li Auto already trades at almost a 50% discount to Nio/XPEV on consensus 2022E EV/Sales which suggests that it is already getting penalized, the report said, adding "so we are hesitant to get too negative on the stock unless demand momentum or operational execution starts to show signs of cracks."

Li ONE becomes best-selling new energy SUV in China in 2020