Why should you buy Chinese electric vehicle stocks?
Electric vehicle sales already account for 20% of the Chinese automotive market, and growth is anticipated to continue.
China has the world's biggest electric vehicle market. According to the China Passenger Car Association, China's 2021 new energy vehicle (NEV) sales hit 2.99 million units, accounting for 14.8% of all new car sales. (In addition to electric vehicles, NEVs include hybrids and fuel cell vehicles.) In November and December 2021, China's NEV sales exceeded 20% of the market.
The upward trend is expected to continue. NEVs will account for three out of every five new automobiles sold in China by 2030, according to UBS, a Swiss bank. Meanwhile, the Chinese government has set a 20 percent sales goal for NEVs by 2025. Given that NEVs accounted for about 15% of total automobile sales in China in 2021, 20% no longer seems so lofty.
Electric vehicles are subsidized in China. Subsidies for NEVs have been cut for many years and will be phased out by 2023, but that may not matter. NEV purchasers in China enjoy a wide range of options, and demand looks real rather than fueled by subsidies.
Domestic manufacturers dominate China's electric vehicle industry.
Homegrown brands like NIO, Xpeng, BYD, and Li Auto are driving NEV sales in China. However, Tesla leads the luxury class with a 7% market share. Local NEV automakers announced record 2021 deliveries; NIO, Xpeng, and Li Auto delivered over 90,000 units.
The infrastructure for charging electric vehicles is significant.
The absence of EV charging outlets in the United States is slowing EV adoption, particularly outside California. According to the China Electric Vehicle Charging Infrastructure Promotion Alliance, China already has a comprehensive infrastructure, with over 1 million charging outlets. Furthermore, battery-swapping stations are a good feature since they reduce the time it takes to charge a vehicle.
China has complete control over the EV supply chain.
Chinese companies like Ganfeng Lithium dominate the processing of important "green metals" like lithium and cobalt. China has also invested in cobalt mining in the Democratic Republic of Congo, which supplies 60-70 percent of the world's cobalt.
Contemporary Amperex Technology (CATL), the world's leading EV battery producer, is based in China.
China might sell electric vehicles to Europe and the United States.
Although China's NEVs have mostly met local demand, manufacturers like NIO, BYD, and Xpeng are now beginning to export to Europe, beginning with Norway, where EV adoption is exceptionally strong. Perhaps the United States will follow suit.
Should you be worried about being delisted?
DiDi Global, a Beijing-based ride-hailing startup, chose to delist from the New York Stock Exchange a few months after its initial public offering (IPO) in December 2021. Chinese officials have pushed the business to float in Hong Kong instead.
Due to delisting worries, some investors are hesitant to purchase Chinese companies listed in the United States, such as NIO, Li Auto, and Xpeng.
Some of these businesses have already gone public in Hong Kong. In the worst-case scenario, investors should be allowed to swap U.S.-listed shares for Hong Kong shares, even though delisting would cause volatility.
Tesla
China accounted for about a quarter of Tesla's (TSLA 1.66 percent) revenue in the first nine months of 2021, and China accounted for approximately 23% of company sales in the third quarter. According to CleanTechnica, the firm has a 10% market share in China's electric vehicle sector, the third largest. China is a significant market for Tesla.
The majority of the automobiles manufactured at its Shanghai facility are exported. Tesla would undoubtedly prefer to boost its sales in China in the future, given its local manufacturing base. As a result, investing in Tesla instantly aligns you with China's EV market expansion.
General Motors
General Motors offers electric vehicles in China via two joint ventures (JVs), one with state-owned SAIC Motor and SAIC Motor and Wuling Automobile. The SAIC-GM-Wuling JV (SGMW) venture controlled around 15% of China's EV market between January and October. This is the country's second-largest EV market.
While that may seem significant, GM's International business, which includes profits from China, provided less than 5% of adjusted earnings before interest and taxes (EBIT) for the nine months ended September 30.
Furthermore, the two JVs account for less than a quarter of all revenues.
While GM's electric vehicle sales in China are increasing, those of its rivals are increasing much faster.
SGMW's market share has dropped by almost 2% in the last two months. The HongGuang Mini EV from SGMW is China's best-selling electric vehicle. If the corporation can develop new and successful electric vehicles, it will be able to maintain its market position in China.
Investors should be aware that just a small portion of their GM stock is exposed to China's electric vehicle market.
BYD
BYD has the largest portion of China's EV market, at 18 percent. Auto and associated items account for more than half of the company's sales. BYD delivered 97,242 cars in November. Ninety thousand one hundred twenty-one were electric vehicles, including plug-in hybrids. Furthermore, 46,137 of the units were fully electrified. As a result, the conventional carmaker has switched to electric vehicles.
Besides automobiles, BYD makes around 40% of its money from mobile device components and about 8% from rechargeable batteries and solar items. However, the firm is seeing excellent growth in the electric vehicle market, which may account for a growing share of the company's revenue mix.
The price-to-sales ratio for BYD shares is roughly 3.6. Value-oriented investors will find BYD stock appealing since it has a lengthy history of operations and a lower price-to-sales multiple than many EV businesses.
NIO (NIO)
NIO, dubbed "China's Tesla," is a pioneer in the luxury EV industry, and Tencent Holdings funded the company when it was formed in 2014. Despite its Shanghai headquarters, NIO has an American depositary receipt (ADR) on the New York Stock Exchange, making it accessible to US investors.
In 2021, NIO delivered 91,429 automobiles, including 10,489 in December alone, a roughly 50% increase yearly.
Despite its reputation for SUVs, NIO just unveiled the ET5, a mid-size electric car intended to compete with Tesla's best-selling Model 3. The ET5 is NIO's most pre-ordered car, with deliveries scheduled for September 2022. NIO, unlike Tesla, does not produce its vehicles instead of working with JAC, a state-owned automaker.
NIO and Shell agreed in November 2021 to collaborate on installing 100 battery swapping stations in China by 2025. EV drivers may acquire a new battery without having to wait for their old one to charge at battery switching facilities. Long charging periods have been a key deterrent to the adoption of electric vehicles.
The firm is also moving into Europe, beginning with Norway, which has the world's highest EV penetration rate. As part of the agreement, NIO drivers will be allowed to access Shell's charging network across Europe.
Nonetheless, NIO has a high valuation, which is why the stock faltered in 2021.
Xpeng (XPEV)
Alibaba-backed Xpeng is a Chinese electric vehicle manufacturer with an ADR listed in the United States, making it simple to invest.
The business, which was founded in 2015, makes a smart electric SUV (the G3) and a sedan (the P7) aimed at the mid- to high-end passenger vehicle market. Xpeng has promoted its smart features, such as autonomous driving and voice assistants, similar to Tesla. The Xpeng P5, a smart family sedan that will be released in late 2021, is the first mass-production automobile to include LiDAR technology, allowing for improved road barrier detection even in bad weather.
Xpeng delivered 98,155 electric vehicles in 2021, a 263 percent increase year over year. The automaker also presented the G9, a new SUV that will debut in China in the third quarter of 2022. Furthermore, Xpeng intends to grow its European footprint in 2022, beginning with Norway.
Nasdaq-listed Li Auto (LI) Li Auto is China's biggest electric SUV manufacturer, catering to the mid- to the high-end market. Li Auto's first vehicle, the Li ONE, is a six-seat luxury electric SUV available in May 2021.
In 2021, the firm delivered 90,491 automobiles, with 14,000 shipped in December, a 130 percent increase. Li Auto intends to grow its addressable market by extending its product range with other kinds of automobiles in the future.
Li Auto was created in 2015 and is supported by Bytedance, the owner of TikTok, and Meituan Dianping, an e-commerce company.
NIU Technologies (NIU)
NIU Technologies is a micro-mobility company that develops smart electric scooters and motorbikes. The Nasdaq-listed firm, created in 2014, has an ADR that makes it simple to invest.
NIU sold 238,188 units in the fourth quarter of 2021, up 58 percent yearly. NIU sold over 1 million copies for the whole year, increasing 72.5 percent. NIU's major market is still China, but the firm is quickly growing overseas.
NIU distributes scooters via its rapidly expanding retail network. In the fourth quarter alone, they opened 422 new shops, bringing the total number of outlets in China to 3,108 by 2021.
Not only that, but in 2021, NIU increased its production capacity from 1 million to 2 million units.
How Do EV Stocks in China Compare?
Nio (NYSE: NIO), Xpeng (NYSE: XPEV), and Li Auto (NASDAQ: LI), all of which are listed in the United States, have underperformed this year, with their stocks down around 30% since early January. So, what do these equities do now that the market has corrected? While Nio and Xpeng are still more expensive than Li Auto, their higher prices are likely justified. Here's some additional information about these businesses.
Nio is still the most overvalued of the three, selling at over 10.5 times forecast revenue. According to consensus predictions, revenue will increase by more than 110 percent this year. Given the company's diverse product line (it now has three models on the market), unique technologies like battery swapping, worldwide development ambitions, and investments in autonomous driving, longer-term growth is expected to be robust. Nio has a lot more excitement, and the business is seen as Tesla's most direct competitor in China. In Q1 2021, gross margins were 19.5 percent, up from a negative 12 percent the previous quarter.
Xpeng is now trading at around ten times the estimated sales for 2021. According to average predictions, sales growth will be the greatest among the three firms this year, jumping by more than 150 percent. Investors have given the firm a premium owing to its accomplishments in the autonomous driving field and its higher predicted growth. The G3 SUV and the P7 sedan are presently available from Xpeng, while the P5 small car is expected to arrive later this year. Xpeng's gross margins have improved in recent quarters, climbing to over 11% from negative levels a year ago, although they remain lower than Nio's.
Li Auto is the cheapest of the three firms, trading at barely six times estimated sales in 2021. This year, revenues are expected to almost quadruple, with gross margins of 17.5 percent in Q4 2020. (the company has yet to report Q1 results). The company's lower value is likely owing to its emphasis on a single-vehicle – the Li Xiang ONE, an electric SUV with a tiny gasoline engine – and the fact that Li Auto lags behind competitors in terms of autonomous driving technology.
Overview Nio, Li Auto, and Xpeng's Companies
Nio, which was formed in 2014, now has three luxury electric SUVs: the ES8, ES6, and EC6, all of which start at about $50,000. The firm is developing self-driving technology and provides other unique ideas like the battery as a Service (BaaS), enabling users to subscribe for vehicle batteries rather than pay for them ahead. While the firm has increased manufacturing, it has not been without hurdles. Last year, it recalled approximately 5,000 cars due to repeated fires.
Extended-Range Electric Vehicles, or EVs with a tiny gasoline engine that may create extra electric power for the battery, are sold by Li Auto. This decreases the requirement for EV charging infrastructure in China, which is presently scarce. The company's hybrid plan seems to be working, as the Li ONE SUV, which costs about $46,000, was the top-selling SUV in China's new energy vehicle sector in September 2020. Fuel cell, electric, and plug-in hybrid cars are part of the new energy category.
Xpeng manufactures and sells luxury electric cars like the G3 SUV and the P7 four-door sedan, broadly comparable to Tesla's Model Y SUV and Model 3 sedan but are more inexpensive, with the G3 beginning at about $22,000 after subsidies. In China, the G3 SUV was one of the top three electric SUVs in terms of sales in 2019. While the firm began manufacturing in late 2018, first via a partnership with a well-known carmaker, it has already moved to its facility in Guangdong.
How Have Deliveries, Revenues, and Margins Trended
In 2019, Nio delivered almost 21k automobiles, up from around 11k in 2018. This contrasts with Xpeng, which produced over 13k cars in 2019, and Li Auto, which just started manufacturing late last year and delivered roughly 1k automobiles. While Nio is expected to supply roughly 40k units this year, Li Auto and Xpeng are expected to deliver around 25k units, with Li Auto witnessing the most increase. Nio generated $1.1 billion in revenue in 2019, compared to around $40 million for Li Auto and $330 million for Xpeng. Nio's revenues are expected to increase by 95 percent this year, while Xpeng's are expected to increase by roughly 120 percent. All three firms are still losing money because of high R&D and SG&A expenditures compared to revenue. In 2019, Nio's net margins were -195 percent, Li Auto's margins were about -860 percent, and Xpeng's margins were around -160 percent. However, when volumes increased in 2020, margins are expected to rise dramatically.
Nio's Market Cap was over $37 billion on October 28, 2020, with its stock price up roughly 7x year-to-date owing to increased investor interest in electric vehicles. Li Auto and Xpeng, which went public in the United States in August to take advantage of rising values, have market caps of $15 billion and $14 billion, respectively. Nio trades at over 15 times estimated 2020 revenues, Li Auto at around 12 times, and Xpeng at around 20 times.
Despite the high valuations, investors are likely expecting that these businesses will continue to develop in the local market before expanding into the global EV field, using China's comparatively low-cost manufacturing and network of battery and auto parts suppliers. With a slightly longer track record, bigger revenues, and investments in technologies like battery swaps and self-driving, Nio may be the safer option of the three. Li Auto also seems appealing, given its strong expansion – fueled by hybrid powertrains – and comparatively low value of roughly 12 times 2020 revenues.
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