Overview:
Chinese Market:
Reasons why NXL will gain market share in China EV market NXL’s EV deliveries to continue to grow.
New model launches, technology breakthroughs and capacity expansion are NXL’s key share price catalysts:
Initiate coverage on China’s smart EV sector with Overweight;
Key risks for China’s smart EV sector:
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.
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
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.
Chinese Market:
China NEV market set to boom China new energy vehicle (NEV) sales jumped 164% yoy to reach approximately 3.3m units in 2021, accounting for c.16% of total automobile sales in the year.
The China Association of Automobile Manufacturers (CAAM) forecasts the country’s NEV sales to reach c.13m units, 60% of China’s passenger vehicle penetration rate, in 2025F, a CAGR of 40% in 2021 to 2025F.
China NEV penetration rate accelerating We estimate China’s NEV penetration rate to reach 60% in 2025F and 85% in 2030F, underpinned by the rising popularity of smart EVs, improvements in autonomous driving and the narrowing price gap between EVs and conventional gas-powered cars as well as infrastructure expansion.
NXL’s EV deliveries grew rapidly in 2019-21 NIO’s FY21 EV deliveries touched a record high of 91.4k units, rising c.109% yoy, while XPeng’s reached 98.2k units, surging c.263% yoy. Li Auto notched 90.5k units, up c.177% yoy. NXL’s 1H22 EV deliveries fell c.10% hoh, from 200k units in 2H21 to 180k units in 1H22, principally due to the Omicron wave.
NXL set to gain more share in China’s NEV market NXL will likely continue to gain market share in China’s NEV industry in 2022-25F, underpinned by 1) continuous new model launches, 2) sophisticated ADAS systems, 3) intelligent cockpit and operating systems, 4) superior interior/exterior car designs and high-quality vehicle systems, 5) improved charging technologies and infrastructure, and 6) effective direct sales models and ecosystem.
China NEV penetration to reach 60% in 2025F. We forecast China’s NEV sales to increase from 3.3m units in 2021 to c.13m units in 2025F, a CAGR of 40%, or a penetration rate of c.60% of passenger vehicle (PV) sales in China in 2025F from 16% in 2021, underpinned by the rising popularity of smart EV, improvements in autonomous driving and narrowing price gap between EVs and conventional gas-powered cars, as well as EV infrastructure expansion (Fig 2).
NIO, XPeng and Li Auto (NXL) set to benefit from China’s smart EV boom NIO, XPeng and Li Auto (NXL) “smarten” China’s NEV market. We believe that China’s smart EV market will grow rapidly over the next ten years (2022F32F) due to:
1) favourable government policies supporting consumers switching to smart EVs and automakers investing in EV technology and capacity for EV manufacturing,
2) accelerating penetration rate, thanks to a narrowing price gap between EV and Internal Combustion Engine vehicles (ICEV),
3) significant electricification and autonomous driving trends, and
4) advanced charging technologies and sustained charging infrastructure expansion for EV users’ convenience.
Meanwhile, we believe that NIO, XPeng and Li Auto (collectively ‘NXL’) represent the ‘New Force’ in China’s smart EV market and are well positioned to capture the huge growth potential of China’s NEV market in the near, medium and long term on the back of their capabilities in
1) developing rich connectivity features with smart human-vehicle interaction and intelligent interfaces (smart cockpit and autonomous driving),
2) manufacturing vehicle systems (chassis, powertrain and electrical/electronic architecture), and
3) developing energy-efficient and environmentally-friendly battery technologies (long driving range and advanced charging technologies), which have revolutionised the mobility experience for many young people in China.
Reasons why NXL will gain market share in China EV market NXL’s EV deliveries to continue to grow.
Government subsidies for NEV have boosted domestic demand for the vehicle type over the short term. China’s NEV sales surged 164% yoy to 3.32m units in 2021 and 123% yoy to 2.47m units in the first half of 2022, driven by a rising EV penetration rate in China, reduction of the EV purchase tax by half and a myriad of new model launches.
On the other hand, NIO’s FY21 EV deliveries touched a record high of 91.4k units, rising c.109% yoy, while XPeng’s reached 98.2k units, surging c.264% yoy. Li Auto’s notched 90.5k units, up c.178% yoy. NIO’s, XPeng’s and Li Auto’s 1H22 EV deliveries climbed 21%, 124% and 100% yoy, respectively, despite the Covid19 wave and a sustained chips shortage.
NXL set to gain bigger share of China’s smart EV market. We believe NIO’s XPeng, and Li Auto’s EV sales will expand further to achieve robust EV delivery CAGR of 59%, 57% and 54% (FY21 to FY24F), respectively, fuelled by new model launches, overseas market expansion and market share gains amid rising NEV penetration rates in China.
New model launches, technology breakthroughs and capacity expansion are NXL’s key share price catalysts:
New model launches, technology breakthroughs and capacity expansion are NXL’s key 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, such as Guangzhou Auto (2238 HK, Not Rated), Geely Automobile (175 HK, Not Rated) and Great Wall Motor (2333 HK, Not Rated), all of which produce both ICEV and EV.
These traditional automotive companies have generally been trading at single-digit 5x-10x P/E, 0.5x-2.0x P/BV, or 1.0x-1.5x P/S ratios.
We believe robust EV deliveries will drive short-term share price movements. However, we are more focused on factors that can help them achieve more sustainable earnings growth, such as 1) consistent new model rollouts, 2) software (ADAS and OS) and hardware (battery, powertrain and electrical/electronic architecture) technology breakthroughs, and 3) capacity expansion, which could be the key share price catalysts.
Sector re-rating catalysts: China’s smart EV sector valuation re-rating catalysts include 1) robust EV deliveries from NXL, 2) accelerating ICEV to EV migration in China’s PV market, 3) supportive government policies for EV technology development and infrastructure, 4) rapid decline of battery costs, and 5) easing of global chip shortages.
Initiate coverage on China’s smart EV sector with Overweight;
XPeng is our top pick Initiate coverage on China’s smart EV sector. We initiate coverage on China’s smart electric vehicle (EV) sector with Overweight and Add ratings for NIO, XPeng and Li Auto.
Among the three companies, our order of preference is XPeng, Li Auto, and NIO. XPeng is our top sector pick on the back of 1) quickest EV sales growth with wider EV model portfolio, covering the fastest growing mid- to high-end segment, 2) its best-in-country autonomous driving technology and intelligent operating systems, and 3) its overseas market expansion.
We are positive on Li Auto as its extended range electric vehicle (EREV) is a hit among young parents in low-tier cities in China.
We also recommend NIO for its renowned brand name and growing market share in China’s premium EV market.
Key risks for China’s smart EV sector:
1) Change in Chinese government policies, such as an end to government subsidies and tax exemption for NEV purchases, 2) increasing competition in China’s EV market, 3) sustained supply chain constraints, which crimp EV output and increase production costs, and 4) impact of the Covid-19 pandemic in China.
