Amidst declining consumer spending, high-interest rates, and persistent inflation, the outlook for the auto industry this year appears dull. Moreover, the relationship between the United States and China is in a dangerous state, with a lack of trust on both sides.

Therefore, I think fundamentally weak Chinese auto stocks NIO Inc. (NIO) and XPeng Inc. (XPEV) might be best avoided.

Tensions between the U.S. and China have been rising over the years, ranging from trade and tariffs to tech rivalry and alleged spying.

China’s auto sales increased by 9.5% in 2022, largely due to a surge in electric vehicle purchases. However, demand slumped in December 2022, which suggests weaker growth in the Chinese auto market this year.

Meanwhile, in the US, the average price of a new vehicle was up 4.2% year-over-year in January 2023, according to J.D. Power, an all-time high for January and indicates no real relief from 2022’s record prices.

Also, Wall Street and industry analysts remain on high alert for signs of a “demand destruction” scenario for the U.S. automotive industry this year as interest rates rise and consumers grapple with vehicle-affordability issues and fears of a recession.

Take a detailed look at the stocks mentioned above:

NIO Inc. (NIO)

Headquartered in Shanghai, China, NIO designs, develops, manufactures, and sells smart electric vehicles in China. It offers five, six, and seven-seater electric SUVs, as well as smart electric sedans.

NIO delivered 10,378 vehicles in March 2023.

NIO’s forward Price/Sales of 1.39x is 60.7% higher than the industry average of 0.86x. Its forward Price/Book multiple of 7.95 is 210.9% higher than the industry average of 2.56.

Its trailing-12-month gross profit margin of 10.44% is 70.2% lower than the 35% industry average. Its trailing-12-month asset turnover ratio of 0.55x is 46.8% lower than the 1.03x industry average.

During the fiscal fourth quarter that ended December 31, 2022, NIO’s gross profit decreased 63.4% year-over-year to RMB621.76 million ($90.51 million). Non-GAAP net loss attributable to ordinary shareholders of NIO widened 194.6% year-over-year to RMB5.05 billion ($735 million), while its non-GAAP net loss per share attributable to ordinary shareholders increased 186.9% year-over-year to RMB 3.07.

NIO’s EPS is expected to decline 91.4% year-over-year to negative $0.32 in the current fiscal quarter ending March 2023. Its revenue is expected to come in at $1.70 billion for the same quarter. Also, the stock has failed to surpass the EPS estimates in each of the trailing four quarters, which is disappointing.

The stock has plunged 51.6% over the past nine months to close the last trading session at $10.51.

NIO’s POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

NIO also has an F grade for Stability and a D for Sentiment, Value, Growth, and Quality. It is ranked #53 out of 57 stocks in the Auto & Vehicle Manufacturers industry.   

To access the additional POWR Ratings of NIO (Momentum), click here.

XPeng Inc. (XPEV)

Headquartered in Guangzhou, the People’s Republic of China, XPEV designs, develops, manufactures, and markets smart electric vehicles.

In March 2023, XPEV delivered 7,002 Smart EVs.

XPEV’s forward Price/Sales of 1.81x is 109.5% higher than the industry average of 0.86x. Its forward EV/Sales of 1.32x is 18.4% higher than the industry average of 1.12x.

Its trailing-12-month gross profit margin of 11.50% is 67.2% lower than the 35% industry average. Its trailing-12-month asset turnover ratio of 0.39x is 62.1% lower than the 1.03x industry average.

During the fourth quarter that ended December 31, 2022, XPEV’s vehicle sales decreased 43.1% year-over-year to RMB4.66 billion ($678.33 million). The company’s non-GAAP net loss increased 84.2% year-over-year to RMB2.21 billion ($321.70 million), and non-GAAP net loss per ordinary share increased 84.3% year-over-year to RMB1.29.

Analysts expect XPEV’s EPS to decline 17.9% year-over-year to negative $0.32 for the current fiscal quarter ending March 2023. Its revenue is expected to decline 35.4% year-over-year to $724.20 million for the same quarter.

The stock has declined 65% over the past nine months to close its last trading session at $11.11.

XPEV’s bleak outlook is reflected in its POWR Ratings. The stock has an overall rating of F, which translates to a Strong Sell in our POWR Rating system.

XPEV is also graded an F in Sentiment and a D in Stability, Value, and Quality. It is ranked #49 in the same industry.  

In addition to the POWR Rating grades we’ve stated above, XPEV’s rating for Momentum and Growth can be seen here.

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NIO shares were trading at $9.80 per share on Monday morning, down $0.71 (-6.76%). Year-to-date, NIO has gained 0.51%, versus a 7.41% rise in the benchmark S&P 500 index during the same period.

About the Author: Nidhi Agarwal

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More...

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