Automotive Author: Niko Yang Editor: Luke Sheehan Dec 24, 2021 04:44 PM (GMT+8)

The penetration rate of EV, defined as sales of EV accounts over the total vehicle sales, reached 20% in September, a figure equal to the annual target for 2025 set by the government previously.

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●      BYD, NIO, XPeng and Li Auto have had another solid quarter, with growing sales and gross margins, contracted expenses.

●      We expect the EV sector to remain a growth engine in 2022 for China's already-slowing-down economy.

●      Revaluing these four stocks implies rising opportunities ranging from 41% to 88%.

●      Risks from macro-level, supply chain and competition remain controllable.

As we near the end of 2021, China's EV industry continues with good sales momentum sprouting from last year, with year-to-date NEV sales already hitting 2.53 million, far beyond 1.36 million for the whole of 2020. 2022 is likely to be another winning year due to a number of tailwinds such as rollouts of more advanced models, better charging infrastructure and rising demand for EVs. On the other side, headwinds like supply chain shocks and intensifying competition remain in place. We believe the sector is poised to become a growth engine for China's already-slowing-down economy. On top of that, we compare and evaluate four Chinese EVs and weigh some risks in the article. Here's a 'TLDR':

Although the competition is intensifying, the whole year delivery guidance for NIO, XPeng, Li Auto and BYD remain strong due to a fast-growing demand for EVs, which implies growth opportunities ranging from 41% to 88% under the backdrop of a fall-rise capacity pattern in the supply chain.

Q3 2021 results comparison

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The 4 car makers presented another solid quarter with raised sales and gross margins and contracted expenses. Li Auto is highly likely to become the first of them to break even. The company only has one product and, as of now, has not heavily invested in R&D. But this might change as Li is designing a new model and an in-house-built autonomous driving system.

XPeng kept positioning itself as an innovator, which dragged its net profit. The company just exhibited its fourth model, G9, a large SUV, at the 2021 Guangzhou Auto Show. The car is unfinished and will be equipped with NGP 4.0. This and other R&D-heavy future developments will continue to affect the EV maker's profitability.

NIO's rather 'balanced' performance was a result of a product diversification: the company has been trying new business schemes such as carbon credit sales, data, merch and other services. This time, those contributed to the company's margin improvement.

BYD hasn't disclosed its EV-specific Q3 financials.

After comparing the trio's 3Q results, we will project their future deliveries and, based on that, break down their investment opportunities.

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XPeng 2022 TP: USD 70

In our previous analysis, we modeled XPeng's revenue and claimed the biggest challenge to it was chip shortage. XPEV's Q3 results indicated the company is less impacted compared with other NEVs. As a result of that, the stock performed well in recent days. Based on the modeling below, we think XPEV can reach USD 70 apiece in 2022.

Valuation

Our last article estimated that XPEV would deliver 78,000 vehicles in 2021 – the figure will be between 91,000 - 95,000, as the company's performance improved in Q3. The auto chip shortage didn't bother XPeng much. Based on this and our new findings on the chip shortage, we assume XPEV will grow its sales slowly in the first half of 2022, fast recovering production in the second half when the supply chain is relieved.

The sales estimation is based on a top-down analysis. In 2021, XPeng's 91,000 deliveries account for 2.7% of around 3.4 million annual sales globally. Given the growing number of new players in the space, we assume the best scenario is that its market share will increase a bit to 3% in 2022. Assuming full-year sales of new energy vehicles reach 6.5 million units in 2022 (up 90% year-on-year), XPeng's delivery figure will be between 175,000 and 195,000.

Specifically, P7 will still be the top-selling model. But P5 is likely to add more momentum as XPEV promotes it more in the less competitive middle-class EV market. G3i is said to be allocated with more production to add delivery. G9, as the newest model, will contribute fewer sales in later 2022. In our model, XPEV will sell 190,000 of these four kinds in 2022, which equals to USD 6.5 billion in revenue. The company is priced at USD 52 to 56 billion under a 2022 PS ratio of 8-9x.

Don't underestimate BYD

EVs and EV batteries

From January to November, BYD delivered 500,922 EVs, up 230% year-on-year. This particularly surpassed our previous estimation. BYD has proved its strong supply chain ability by combining its own and outsourced capabilities. As we previously mentioned, OEMs like TSLA and BYD would be less affected by the supply chain issue. Thus, we lift our estimate on EV sales, projecting they will grow by 220% in 2021, 100% in 2022. The average EV selling price will remain unchanged in 2022 as the new premium models offset some discounts to deals to stimulate more EV sales. Thus, the EV sales will grow to CNY 156 billion. Under a 7x 2022 Price to Sales ratio, which averaged NIO, XPeng and Li Auto's multiple, BYD's EV division is valued at CNY 1,092 billion. 

The second valuable business of BYD is EV batteries. The company has already shipped 28 GWh power and energy storage batteries this year, 226% growth YoY. According to SNE Research (link in Chinese), BYD's shipment was 25% of CATL's. Thus, this business is valued at CNY 335 billion, one-fourth of CATL's market cap as of December 24, 2021. 

Legacy OEM

As BYD pivots to the NEV business, its ICE business is quickly dwindling. The sector witnessed a YTD 32% decline in sales compared with a year ago. We estimate it will contract by 40% annually to 2022. So, the revenue will decrease from CNY 24 billion in 2020 to 8.64 in 2022. Under 2x 2022 PS ratio, ICE department is valued at CNY 17.28 billion.   

Semiconductor and electronics

We maintain the same estimation on these two segments, which should be CNY 20 billion and CNY 18 billion, respectively.

BYD's total valuation should be around CNY 1,482 billion. Compared with the current price, its stock has a 88% upside opportunity.

NIO review

During the past three months, NIO's stock has presented the worst performance in the cohort, being down by just 15% (which XPEV up 27%, BYDDF – up 13%, Li Auto – up 12%). The company was reported to have undergone an upgrade of its plant that affected production and a severe chip shortage. NIO gave somewhat unexciting delivery guidance of 23,500 to 25,500 for the fourth quarter, shy of XPEV's 34,500 to 36,500. The situation may become better in the first half of 2022 when the chip shortage is likely to be relieved.  

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As for the whole year view in 2022, we think NIO can deliver 180,000 units, with average revenue from each hitting CNY 364,000 (including revenue generated from charging data, insurance, charging hardware and other products and services). The whole year's revenue will be USD 10 billion. Under the same PS ratio as XPEV, the company is valued at 80 billion, implying 67% upbeat space.

Li Auto review

Li Auto's Q3 deliveries are now better than NIO's but lower than XPeng's. Much like its peers, the company is also preparing to roll out a premium SUV in Q2, which is likely to create new demand.

The company delivered 25,116 units of vehicles in Q3 2021, generating USD 1.15 billion in revenue. Based on this, revenue generated per car was around USD 45,788. Regarding the Q4 outlook, the company gives guidance of "between 30,000 and 32,000 units." So the annual delivery number will be at 87,270 if we assume Li Auto top the range, implying a 168% year-on-year growth. For 2022, we expect the company can deliver 174,540 vehicles (on average, 14,545 per month), representing a 100% YoY growth. Keeping the average revenue per car unchanged, we estimate its 2022 revenue to be USD 8 billion. The valuation would be USD 43 billion under a 5.4 2022 PS ratio (according to Seeking Alpha consensus). The stock has a 41% of growth opportunity.

Risk analysis

Macroeconomic risks are one of the threats to the burgeoning EV sector. As Bloomberg reported, China is taking more steps to curb risks in the real estate sector, the biggest economic engine, which could drag GDP growth if the government fails to stimulate the economy. This November's PMI of 50.1 shows manufacturing activities aren't in high confidence.

Another big risk comes from the supply chain, as we have no clear timeline of when the omnipresent shortage can end. Through 2021, we saw nimble players like Li Auto, XPeng and BYD proactively deal with the issue. Others weren't doing that well. But there is a certain degree of optimism here. IHS Markit's latest assessment shows that the chip supply imbalance has passed in this Q3 and we will see some improvement in Q4. What's more, many practitioners expect the second half of 2022 to see significant relief.

Competition among NEV players is getting fierce. BYD, XPeng and Li Auto will launch new high-end products, eating into NIO's target market. On the contrary, NIO will create cheaper products to spur sales. Besides, other new products like IM L7, General Motors' Lyriq will also enter the EV market in 2022.

In all, the performances of US-listed Chinese EVs depict a steady growth curve this year, unlike 2020's crazy soaring valuations. 2022 will probably keep the pace as 2021, with companies solidifying their fundamentals while seeing steady valuation growth. The demand for EVs will still exceed what the sector can provide. And China's largest NEV players will enjoy their first-mover advantage. 

EV