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Three Stocks to Play Explosive EV Growth in China

Why now might be the time to consider these Chinese electric vehicle stocks.

Vikram Barhat 31 August, 2022 | 5:48AM
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Nio car showroom

Investors who missed the bus on Tesla’s stupendous growth may find some compelling options in Chinese electric vehicle makers of which Morningstar recently initiated coverage.

This coincides with the landmark audit deal between the U.S. and China, allowing the SEC to inspect the books of Chinese companies listed on American stock exchanges, which should allay some skepticism around U.S-listed Chinese firms.

Further, China’s ambitious climate goals create a long growth runway for its domestic green mobility companies. Chinese EV sales nearly tripled to 3.4 million units in 2021. This industry electrification trend is expected to continue, according to the China Association of Automobile Manufacturers, which projects EV sales in China to increase to five million by 2022.

This may be an opportune time for investors to take a closer look at the following U.S.-listed shares of leading Chinese EV manufacturers.

Chinese EV maker, Li Auto (LI) designs, develops, manufactures, and sells premium smart new energy vehicles, or NEVs. The company sold over 90,000 EVs in 2021, accounting for about 2.7% of China's passenger new energy vehicle market.

The automaker plans to expand its product line to include battery electric vehicles (BEVs) and large plug-in hybrid electric vehicles (PHEVs) as it eyes a broader consumer base.

The firm’s flagship six-seater, Li One, a large plug-in hybrid electric sport utility vehicle is built on its proprietary extended-range electric vehicle technology, offering a total driving range of 800 km. “Li Auto put a lot of effort in its range-extension powertrain, which has become a key selling point for its value-for-money vehicles,” says a Morningstar equity report, pointing out that since they use less battery, PHEVs offer a significant price advantage compared with BEVs.

Li’s well positioned to benefit from the secular growth of China’s EV market. “We see rapid NEV adoption in China, stimulated by regulatory push and improving charging infrastructure, among others,” says Morningstar equity analyst Vincent Sun, who forecasts passenger NEVs to account for more than 30% of total passenger car sales by 2025, up from 16% in 2021.

Riding on the vehicle electrification tailwind, Li Auto’s delivery could reach over 525,000 units in 2025 from 90,491 units in 2021, taking about 6% share in the passenger NEV market in the process, he adds.

Sun pegs the stock’s fair value at US$37 per ADS, “based on our expectation that Li Auto will continue to gain market share from legacy automakers.” 

XPeng (XPEV) is a leading Chinese smart EV maker whose products primarily target the growing base of tech-savvy middle-class consumers. The company sold over 98,000 EVs in 2021, accounting for about 3% of China’s passenger NEV market. XPeng is also a leader in autonomous driving technology.

The automaker is mass producing three pure electric models: a compact sport utility vehicle, a midsize sedan, and a compact sedan, with plans to launch a mid-to-large SUV in the second half of 2022. 

“XPeng has put a lot of effort into research and development for its in-house developed full-stack autonomous driving technology, which has become a key selling point for its models,” says a Morningstar equity report.

The Xpilot software is China’s first Level 3 autonomous driving system, featuring a navigation-guided pilot for highway driving and advanced automated parking functions.

The rapid pace of NEV adoption in China has created a vehicle electrification tailwind that could push XPeng’s sales past 650,000 units in 2025 from 98,155 units in 2021, capturing about 8% share in China’s passenger NEV market, forecasts Sun, who puts the stock’s fair value at US$33 per ADS.

“Riding on the industry electrification trend and increasing consumer adoption of NEVs, we anticipate rising demand for the company’s NEV models and improving profitability on economies of scale over the next few years,” he adds.

XPeng’s second-quarter revenue grew a robust 98% year over year. “The strong growth was underpinned by the 98% growth in the quarter’s vehicle delivery,” says Sun.

Nio (NIO) designs, develops, manufactures, and sells premium smart EVs in the premium segment. Its current model portfolio includes midsize to large sedans and SUVs. Nio sold over 91,000 EVs in 2021, accounting for about 2.7% of the China passenger NEV market.

“The company differentiates itself through continuous technological breakthroughs and innovations such as battery swapping and autonomous driving technologies,” says a Morningstar equity report.

Having successfully established itself as a premium EV brand, Nio also pioneered battery swap technology as a supplement to charging. “The launch of the battery-as-a-service solution separates the battery pack from the vehicle, which cuts upfront purchase cost by 15%-30%,” says Sun, stressing that the company aims to build over 4,000 swap stations worldwide by 2025, about 1,000 of which are outside China.

Given Nio’s premium positioning and price ranges of major models, the Nio brand is perceived by car owners as equivalent to the premium image of BMW and Mercedes-Benz in the ICE market.

“The luxury branding leads to strong pricing power,” asserts Sun, who appraises the stock’s fair value at US$27 per ADS.

Nio cars are priced at a higher range compared to its peers which enable the Chinese EV giant “to ramp up its vehicle sales margin to a level close to [rival EV maker] Li Auto,” Sun adds.

The automotive firm rolled out a mid-to-large five-seater sports utility vehicle in June and plans to launch a new mass-market brand in 2024 to seize the robust demand while retaining its premium image.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Li Auto Inc ADR25.72 USD-2.54
NIO Inc ADR17.19 USD-2.44
XPeng Inc ADR13.71 USD-4.59

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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