Tesla (TSLA) is currently the leading seller of electric vehicles globally and in China. And in 2019, the company sold 367,000 vehicles globally which was a 50% increase over the previous year. And this year, it’s projecting to sell 500,000.
It also has the largest market share in China, where it sold 42,000 vehicles in 2019 with the company projecting nearly 110,000 for 2020. This equates to a 23% market share in the Chinese EV market which is expected to grow in the coming years.
Chinese EV companies are also vying for a piece of the market as well. Among them, NIO (NIO) is the clear leader. It’s successfully penetrated the market, created a product that consumers want, and is increasing production. As a result, its stock has been incredibly strong this year with a 581% YTD gain, and it has a current valuation of $37.5 billion.
However, there are two more Chinese EV companies that investors should watch – Xpeng (XPEV) and Li Auto (LI). These stocks could also have a similar upside to NIO, although they are pursuing different strategies to reach their goals.
Growth in the Chinese EV Market
The total Chinese EV market is going to rapidly grow in the coming years due to secular trends and government support. By 2025, the Chinese government is targeting that 25% of car sales will be EVs as part of its plan to reduce pollution. It’s pursuing this target through a combination of subsidies, tax credits, investment, and quotas.
The country has also added to their battery charging infrastructure. For consumers, EVs are heavily subsidized, additionally, there’s an expedited process for getting permits and licenses which can take many months for gas-powered vehicles.
As a result, these policies have created a boom in the Chinese EV space. Legacy car companies like VW, Toyota Motors (TM), and General Motors (GM) are expected to introduce electric models to the Chinese market in the coming years. Additionally, as of 2019, there were an estimated 500 EV startups in China with 60 having unveiled prototypes, although only 10 are in production.
NIO is the Leader Among Chinese EV Companies
Out of the Chinese EV companies, the most prominent and successful has been NIO. It’s led by a charismatic founder, William Li Bin, and it has the biggest ambitions and deepest pockets. So far, NIO is projecting sales of around 50,000 in 2020.
Several factors are working in NIO’s favor. It’s been consistently increasing production and has a growing backlog of orders. It’s also successfully been executing Tesla’s playbook by first introducing high-end, electric sports cars that created a buzz around the company. And, it’s now starting to sell lower-priced models. It also has differentiated itself from other car companies by offering luxurious lounges for owners to use while their vehicles are charging and a free battery swap service.
This spring, NIO also received a $1 billion cash infusion from the government of Hefei to increase its production capacity. Analysts are projecting that NIO will break-even in 2021 as its sales increase and cost per car comes down.
NIO’s shares surged another 25% last week on an upgrade from JPMorgan (JPM). The bank raised its price target on the stock to $40 from $14 and believes NIO will be a “long-term winner” within the Chinese EV market. It thinks that NIO can take up to 30% of the premium passenger EV market.
XPEV went public in late-August 2020, raising $1.5 billion. It also recently launched its newest vehicle, the P7, which drew comparisons to Tesla’s Model 3. However, while Tesla is going for engineering supremacy, XPEV is focused on delivering comfort which they believe is a better selling point for the Chinese market. Driving in China can be unpleasant with heavy traffic, frequent traffic jams, and potholes in many of the less-developed areas.
So, XPEV is more focused on addressing this pain point, and the company has been compared to Buick in this regard. However, the biggest question is whether XPEV’s electric motors can work and whether the company can increase production.
XPEV opened its factory this summer in addition to a contract manufacturer which is building its first model. This gives them the capacity to produce 250,000 vehicles per year which are more than NIO or Li Auto. It also has $2 billion in cash which gives it resources to invest in further growth.
Li Auto (LI)
LI is a five-year-old company that raised $1 billion in its IPO in July. LI is different from NIO and TSLA in that it has an electric SUV with onboard, gas-powered generators. This vehicle is for rural parts of China, where charging infrastructure is undeveloped, but there are plenty of gas stations.
Essentially, it’s like a smart plug-in hybrid without the limitations of an EV, especially if charging stations are not readily available. In essence, it’s a practical solution to a problem for many potential buyers. And, it’s a different strategy from NIO or Xpeng whose vehicles are more designed for urban or suburban-dwelling customers.
Li Auto started making deliveries in late-2019, and it’s expected to produce 4,000 cars in October. It has 31 retail outlets in 26 cities. It has successfully increased revenues and gross margins to 13.1% as costs come down with increased production, however, it’s not expected to be profitable anytime soon given expected spending on autonomous driving, marketing, and more retail locations.
Analysts are generally positive on the stock. Bernstein expects Li Auto to break-even sometime between 2022 and 2023. Goldman Sachs projects that LI will sell 445,000 vehicles annually by 2025.
Both XPEV and LI have the potential to soar like NIO and TSLA. However, there are many potential, stumbling blocks.
One advantage for NIO and TSLA is that they were able to build “brand equity” and market share, while the market was in its infancy. XPEV and LI are attempting to do the same with a greater deal of competition.
This means that XPEV and LI will have a tougher time establishing themselves compared to NIO and TSLA. Speed also matters given the number of EVs that will be coming to that market in the coming years. They also have to navigate the challenges of scaling up production while maintaining quality and keeping costs low. Other important factors are building out its retail network and charging infrastructure.
However, the Chinese EV market is going to be so big and grow so fast that there will be room for plenty of winners. Through its policies and investments, it’s clear that the Chinese government also wants domestic EV makers, so this is another tailwind for LI and XPEV.
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NIO shares were trading at $27.61 per share on Wednesday afternoon, down $0.35 (-1.25%). Year-to-date, NIO has gained 586.82%, versus a 8.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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