The electrification of the auto industry is one of the major trends of the century. Governments the world over are committed to reducing greenhouse gasses. As a result, the world is gradually shifting from internal combustion vehicles to electric vehicles (EVs). Also, improved automotive performance, government subsidies, and cost-efficiencies are motivating consumers to switch to EVs. Consequently, the EV industry experienced unprecedented growth last year and has maintained its momentum so far this year.
The Chinese EV market, or what it calls “new-energy vehicles,” is booming. China-based manufacturers account for the majority of global EV deliveries. In fact, China accounts for about 50% of global EV sales. This suggests that Chinese manufacturers have the potential to grow their revenues at a healthy pace in the coming decade. However, the EV boom has also given rise to major EV start-ups in China, some of which went public through direct listings or reverse mergers and surged in price purely on investor optimism.
In the absence of sufficient financial strength, we think XPeng Inc. (XPEV), Li Auto, Inc. (LI), and Kandi Technologies Group, Inc. (KNDI) have run too far too fast. It appears to us from their current valuation multiples that a pullback is in the offing for these three stocks.
XPeng Inc. (XPEV)
XPEV is one of China’s leading Smart EV manufacturing companies. The company was founded in 2015 with the goal of delivering Smart EVs through innovation in autonomous driving, smart connectivity and core vehicle systems. Backed by Alibaba Group (BABA), XPEV is growing rapidly in the Smart EV market, producing popular and environmentally friendly vehicles, namely an SUV (the G3) and a four-door sports sedan (the P7).
XPEV is building its market in Europe in part by capitalizing on the favorable government policies. The company recently shipped its second batch of more than 200 of its G3 smart electric SUVs to Norway. The first batch of 100 EVs were shipped in December. Also, XPEV released a major over-the-air (OTA) upgrade for its P7 sedan customers with “40+ new functions and 200+ optimized features,” including full-scenario voice assistance, smart audio and music cockpit, in-car App ecosystem, and personalized settings. In addition, its latest features also included the Navigation Guided Pilot (NGP) beta version, to provide autonomous driving assistance.
XPEV delivered 27,041 vehicles in 2020, which more than doubled year-over-year. The company is scheduled to report its fourth quarter and full-year 2020 earnings results on March 8, 2021. However, it delivered a total of 12,964 vehicles during the quarter, representing 303% year-over-year growth on the back of strong demand for its P7 model sedan. In fact, in January alone, XPEV delivered 6,015 vehicles, which a 470% year-over-year growth. It was also the company’s third consecutive month of record-breaking delivery numbers. Revenues in the third quarter came in at $296.1 million, surging 266% year-over-year. However, XPEV is still unprofitable and reported a loss of $169.2 million.
In terms of forward p/s, XPEV is currently trading at 41.05x, 2,922.8% more expensive than the industry average 1.36x. XPEV made its debut in August of 2020 at a price of $15 per share. It’s currently trading at $46.89, gaining 121% since going public. However, despite strong global demand for its vehicles and expansion strategies, XPEV is not yet profitable.
The stock has registered a year-to-date gain of 9.5%. However, the company is not expected to generate a positive bottom-line in the near-term. Wall Street analysts expect the company’s EPS to decline at the rate of 5.2% per annum over the next five years.
XPEV’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of F, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
XPEV has an F grade for Stability and a D for Growth. It is ranked #45 of 52 stocks in the Auto & Vehicle Manufacturers industry.
In total, we rate XPEV on eight different levels. In addition to the POWR Ratings grades I’ve just highlighted, you can see the XPEV’s ratings for Value, Momentum, Sentiment, and Quality here.
Li Auto, Inc. (LI)
LI designs, develops, manufactures, and sells smart electric sport utility vehicles (SUVs). LI is the first manufacturer to successfully commercialize extended-range electric vehicles in China. It offers Li ONE, a six-seat electric SUV that is equipped with a range of extension systems and smart vehicle solutions. The company has approximately 45 retail stores and 97 services centers across China.
Li recently unveiled its plan to establish a new research and development center in Shanghai for autonomous driving, and for the development of other cutting-edge electric vehicle-related technologies. In September, LI entered a three-way strategic cooperation with NVIDIA Corporation (NVDA), and NVDA’s Chinese partner, Huizhou Desay SV Automotive. In the deal, LI is expected to be the first OEM equipping its vehicles with the powerful NVIDIA Orin SoC chipset. The full-size extended-range premium smart SUV is set to be launched in 2022.
LI reportedly delivered 5,379 Li-One vehicles in January 2021, representing a 355.8% year-over-year gain in vehicle deliveries for the month, and representing cumulative vehicle deliveries of 38,976 vehicles. LI will release its fourth quarter and full-year 2020 financial results on February 25.
LI’s vehicle sales have increased 28.4% sequentially to $363 million in the third quarter ended September 30, 2020. The company delivered 8,660 vehicles during the quarter, with margin of 19.8%. However, the company is still unprofitable and reported a loss of $26.5 million from operations.
In terms of forward p/s, LI is currently trading at 19.98x, 1,371.4% more expensive than the industry average 1.36x. LI experienced a slight correction in December. The company filed to offer 47 million additional shares, seeking to raise approximately $1.5 billion for continued research and development. The stock is up 4.3% year-to-date. But we think LI is poised to lose market share because Tesla (TSLA) is planning to begin deliveries of its China-made Model Y soon, at a price close to Li One’s.
It’s no surprise that LI has an overall rating of D, which equates to Sell in our POWR Ratings system. LI also has a D grade for Value and Sentiment. It is ranked #43 in the Auto & Vehicle Manufacturers industry.
Click here to see the additional POWR Ratings for LI (Growth, Momentum, Stability, Quality and Industry).
Kandi Technologies Group, Inc. (KNDI)
KNDI is a leading EV supply chain company in China that designs, develops, manufactures, and commercializes EVs, vehicle parts, and off-road vehicles. The company operates four business lines – the development and sale of pure electric automobiles, electric vehicle parts, intelligent battery swapping systems, and all-terrain vehicles.
Last month, KNDI signed a contract through its Kandi Hainan subsidiary to sell 3,000 of its K23 electric vehicles to ridesharing company Zhejiang Ruiheng Technology. The sale is part of KNDI’s rideshare development program: “300,000 government-accredited pure EVs within 5 years.” The stock jumped as high as 18% after the announcement, but soon retreated to a modest 4% intraday gain.
Last November, short-seller firm Hindenburg Research released a scathing report that accused the company of faking sales to raise $160 million from U.S, investors. In that report, the firm claimed that almost 64% of KNDI’s sales over the last year have been to undisclosed related parties. The company is facing a series of class action lawsuits by various law firms alleging that it artificially inflated its reported revenues through undisclosed related party transactions.
In the third quarter, KNDI’s total revenues were down 40.9% to $18.7 million because EV parts sales declined 67.4% year-to-date to $8.4 million. However, off-road vehicle sales of $8.9 million represented an 51.6% increase compared to the same period last year. Hence, the company reported a loss of $0.03 per share, a significant improvement from the year-ago loss of $0.23 per share.
In terms of forward p/s, KNDI is currently trading at 8.39x, which is significantly higher than the industry average 1.36x. However, KNDI has gained 30.4% year-to-date to close Friday’s trading session at $9.00. But in addition to the lawsuits, KNDI’s weak business execution and bleak revenue growth prospect makes it a very risky bet.
KNDI’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, which translates to Sell in our POWR Ratings system. KNDI has an F grade for Stability and D for Value. In the 85-stock China industry, it is ranked #80.
Beyond what we stated above, we also have given KNDI grades for Growth, Momentum, Sentiment, Quality and Industry. Get all the KNDI ratings here.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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XPEV shares rose $0.07 (+0.16%) in after-hours trading Tuesday. Year-to-date, XPEV has gained 5.09%, versus a 4.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
More Resources for the Stocks in this Article
|Ticker||POWR Rating||Industry Rank||Rank in Industry|
|XPEV||Get Rating||Get Rating||Get Rating|
|LI||Get Rating||Get Rating||Get Rating|
|KNDI||Get Rating||Get Rating||Get Rating|