Electric cars are growing in popularity, a trend fueled by social acceptance, the green mentality, and a recognition that the internal combustion engine does have its flaws.
Some of those flaws are addressed by electric vehicles (EVs). They bring lower emissions, less pollution from the car, and the promise of high performance off the mark. For the present, the main drawbacks are the high cost and relatively short range of current battery technology. Even so, many consumers have decided that the benefits outweigh the costs, and EV sales are increasing.
China, in particular, has long been known for its pollution and smog issues, and the government is actively pushing EVs as a possible ameliorating factor. In addition, EVs, with their quick acceleration and (usually) short range, are a ready fit with China’s crowded – and growing – urban centers.
In a comprehensive review of the Chinese EV sector, Jefferies analyst Alexious Lee noted, “We are constructive on the outlook for NEV in China as the country pushes forward with the ‘electrification to digitalization’ trend. While global automakers’ JVs are quickly rolling out new models of energy saving vehicles (HEVs and PHEVs) to comply with the top-down target to reduce annual Corporate Average Fuel Consumption (CAFC), Chinese automakers (both legacy and startups) are motivated to quickly accelerate the adoption of BEV with entry-level, city commuting models and premium-positioned advanced models.”
Against this backdrop, Lee has picked out one Chinese EV stock that is worth owning, and two that investors should avoid for now. We used TipRanks’ database to find out what other Wall Street analysts have to say about the prospects of these three.
Li Auto (LI)
Chinese EV company Li Auto boasts of having the country’s single best-selling model of electric vehicle. The Li ONE sold 3,700 units this past October, bringing the total number sold in the first year of production to 22,000. At current sales and production rates, Li expects the company to double its annual sales number this year.
That’s a big deal, in the world’s largest electric car market. China produces more than half of all EVs sold globally, and nearly all of the electric busses. Li Auto, founded in 2015, has focused on plug-in hybrids – models which can plug into a charging station to maintain the battery, but also have a combustion engine to compensate for low-density charging networks. The Li ONE is a full-size SUV hybrid electric that has rapidly found popularity in its market.
Li Auto went public on the NASDAQ in July of 2020. In the IPO, the company started with a share price of $11.50, and closed the first day with a gain of 40%. In the months since, LI has appreciated 116%.
Those share gains come as the company reported strong earnings. In 3Q20, the last quarter reported, LI showed US$363 million in sales, up 28% sequentially, and forming the lion’s share of the company’s US$369.8 million in total revenue. Also positive, Li reported a 149% sequential increase in free cash flow, to US$110.4 million.
Lee is impressed with Li Auto’s technology, noting, “Li One’s EREV powertrain has proven a great success due to (1) extended range, (2) limited impact from low temp, (3) easier acceptance by car buyers. The advantage is sustainable ahead of the battery cost parity, estimated at FY25 (LFP) and FY27 (NMC), making LI AUTO the automaker to turn OCF positive and profitable earlier vs peers.”
The analyst added, “LI AUTO is the first in China to successfully commercialized extended-range electric vehicle (EREV) which is solution to drivers’ range anxiety and automakers’ high BOM. Powered by fuel, the ER system provides alternative source of electricity in addition to battery packs, which is significantly outstanding during low temp environment where BEVs may lose up to 50% of the printed range.”
Seeing the company’s technology as the key attraction for customers and investors, Lee initiated his coverage of LI with a Buy rating and a $44.50 price target. This figure implies 25% upside growth in the year ahead. (To watch Lee’s track record, click here)
There is broad agreement on Wall Street with Lee that this stock is a buying proposition. LI shares have a Strong Buy consensus rating, based on 6 reviews, including 5 Buys and 1 Hold. The shares are priced at $35.60 and the $44.18 average price target is in-line with Lee’s, suggesting 24% upside for the next 12 months. (See LI stock analysis on TipRanks)
Where Li Auto has the single best-selling EV model in China, competing company Nio is vying with Elon Musk’s Tesla for the top market-share spot in the Chinese EV market. With a market cap of $90 billion, Nio is the largest of China’s domestic electric car manufacturers. The company has a varied line-up of products, including lithium-ion battery SUVs and a water-cooled electric motor sports car. Two sedans and a minivan are on the drawing boards for future release.
In the meantime, Nio’s vehicles are popular. The company reported 43,728 vehicle deliveries in 2020, more than double the 2019 figure, and the last five months of the year saw car deliveries increase for 5 straight months. December deliveries exceeded 7,000 vehicles.
Nio’s revenues have been increasing steadily, and has shown significant year-over-year gains in the second and third quarters of 2020. In Q2, the gain was 137%; in Q3, it was 150%. In absolute numbers, Q3 revenue hit $654 million.
However, with shares rallying 1016% over the past 52 weeks, there’s little room for further growth — at least according to Jefferies’ Lee. The analyst initiated coverage on NIO with a Hold rating and $60 price target. This figure implies a modest 3% upside.
“We use DCF method to value NIO. In our DCF model, we factor in solid volume growth, positive net profit from FY24 and positive FCF from FY23. We apply a WACC of 8.1% and terminal growth rate of 5% and come to target price of US$60,” Lee explained.
Overall, Nio holds a Moderate Buy rating from the analyst consensus, with 13 reviews on record, which include 7 Buys and 6 Holds. NIO is selling for $57.71, and recent share gains have pushed that price just slightly below the $57.79 average price target. (See Nio stock analysis on TipRanks)
XPeng, Inc. (XPEV)
XPeng is another company, like Li, in the mid-range price level of China’s electric car market. The company has two models in production, the G3 SUV and the P7 sedan. Both are long-range EV models, capable of driving 500 to 700 kilometers on a single charge, and carry advanced autopilot systems for driver assistance. The G3 started deliveries in December 2018; the P7, in June 2020.
In another comparison with Li Auto, XPeng also went public in the US markets in summer 2020. The stock premiered on the NYSE on the last day of August, at a price of $23.10, and in the IPO the company raised $1.5 billion. Since the IPO, the stock is up 127% and the company has reached a market cap of $37.4 billion.
Increasing sales lie behind the share gains. XPeng reported 8,578 vehicles delivered in Q3 2020, a gain of 265% from the year-ago quarter. The bulk of those deliveries were P7 sedans – the model saw deliveries jump from 325 in Q2 to 6,210 in Q3. Strong sales translated to revenues of US$310 million for the quarter, a truly impressive gain of 342%.
Jefferies’ Lee sees XPeng as a well-positioned company that has possibly maxed out its short-term growth. He writes, “XPENG has a very strong exposure to tech-driven growth… While we favor its specialty in autonomous driving and power consumption efficiency, our FY21 forecast of 120% sales growth is lower than consensus while our FY22 forecast of 129% is higher given slower market acceptance and higher competition in Rmb200-300K segment.”
To this end, Lee rates XPEV a Hold and his $54.40 price target suggests a minor upside of ~4%.
The recent gains in XPEV have pushed the price right slightly above the average price target of $51.25; the stock is now selling for $52.46. This comes along with a Moderate Buy analyst consensus rating, based on 8 reviews, breaking down to 5 Buys, 2 Holds, and 1 Sell. (See XPEV stock analysis on TipRanks)
To find good ideas for EV stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.