- We believe NIO, XPeng and Li Auto (NXL) are the ‘New Force’ in EVs amid huge growth potential in the new energy vehicle market in China and globally.
- Administrative policies are key to a healthy new energy vehicle (NEV) market as we believe financial incentives will be eventually phased out.
- We believe NXL’s smart features differentiate them from Tesla, with EV sales catalysts from localised ADAS and intelligent operation systems.
- We believe NXL’s share prices will be catalysed by 1) new model rollouts, 2) software and hardware technology breakthroughs, and 3) capacity expansion.
- We initiate coverage on China’s smart EV sector with an Overweight call and Add ratings for NIO, XPeng and Li Auto. XPeng is our sector pick.
Li Auto Inc ADD, TP HK$203.6, HK$133.1 close
Li Auto is China’s leading premium smart extended range electric vehicle (EREV) maker. The company’s EV shipments continue to grow on the back of the battery EV platform and technology in its EREV models and the expansion of its product portfolio to pure battery EVs.
NIO Inc ADD, TP HK$257.3, HK$156.8 close
NIO is China’s market-leading premium smart EV manufacturer. The company’s market share gains are underpinned by continuous rollouts of high-performance eSUV models and improvements in its battery swapping and autonomous driving technologies.
XPeng Inc ADD, TP HK$207.5, HK$92.5 close
XPeng is positioning itself in the fastgrowing mass market electric vehicle sector in China. The company is driving EV sales via product portfolio expansion, ADAS and operating system improvements and forays into overseas markets.
China’s fast-growing NEV market is the world’s largest
Global NEV sales were c.6.75m units in 2021, up 108% yoy, of which 3.3m units or half were delivered in China (source: IEA). We believe China’s smart EV market will grow rapidly over the next ten years (2022F-32F) on the back of supportive government policies and nationwide EV infrastructure expansion. NIO, XPeng and Li Auto (combined into ‘NXL’), which we believe represent the ‘New Force’ in China’s smart EV market, are well positioned to gain market share on the back of 1) launches of smart EVs with rich connectivity features, 2) manufacturing capabilities for vehicle systems, and 3) improving battery technologies, which have revolutionised the mobility experience for many young people in China.
Administrative policies are the key to a healthy NEV market
We think financial incentives for consumers, such as government subsidies and purchasing tax exemptions, are short-term catalysts for China’s NEV market. The policies that matter over the longer term are those on the administrative (supply) side, including those that encourage an increase in charging piles/charging station infrastructure and developments in EV batteries (new-type EV batteries) and the supply chain as well as financial support, such as Parallel Credit Administration and taxation benefits, for automakers.
NXL’s smart features provide differentiation and boost EV sales
NXL have proven themselves to be leaders in the ‘Smart EV’ field in China with more accurate and reliable advanced driver assistance systems (ADAS) and intelligent operating systems (OS) that come with voice assistance and interactive interfaces. As sophisticated ADAS and intelligent OS are key factors when deciding which EV to purchase, we believe NXL’s self-developed smart features will help boost their EV sales.
NXL’s EV deliveries to remain strong
NIO/XPeng/Li Auto’s FY21 EV deliveries touched a record high of 91k/98k/91k units, rising 109%/263%/177% yoy. NIO/XPeng/Li Auto’s 1H22 EV deliveries increased 21%/124%/100% yoy despite the country’s Covid-19 wave and a sustained chips shortage. We estimate NIO/XPeng/Li Auto will achieve robust CAGR for EV deliveries of 59%/57%/54% in FY21-24F, driven by new model launches, overseas market expansion and market share gains amid rising NEV penetration rates in China.
New models, technology and capacity are share price catalysts
NXL have been trading at premiums (no P/E valuations, 4x-8x P/BV or 3.0x-4.0x P/S ratio) over traditional automotive companies’ 5x-10x P/E, 0.5x-2.0x P/BV or 1.0x-1.5x P/S ratios. Besides EV deliveries, which drove NXL’s short-term share price movements, we are more focused on factors that we believe will result in sustainable earnings growth, such as consistent new model rollouts, technological breakthroughs and capacity expansion, which are potential key share price catalysts.
Initiate coverage on China’s smart EV sector with Overweight
We initiate coverage on China’s smart EV sector with Overweight and Add ratings on NIO, XPeng and Li Auto. XPeng is our top sector pick for its rapid EV sales growth, best-incountry autonomous driving technology and overseas expansion. We are positive on Li Auto for its EREV, which has attracted a lot of interest in low-tier cities in China. We recommend NIO for its renowned brand name and growing market share in China’s premium EV market. Downside risks: prolonged Covid-19 outbreak in China, sustained
supply chain constraints and keener competition from foreign automakers.