J.P. Morgan Bets on Chinese EV Stocks Despite ‘Flattish Demand’: NIO and XPeng in Focus

There’s a concerted push toward electric vehicles these days, for multiple reasons, including social and political pushes toward cleaner vehicles and improved technology making electric drive trains more competitive with the internal combustion engine.

However, the EV markets, globally, are still facing a series of wicked headwinds. Consumer demand for durable goods – like cars of all types – is under pressure from the combination of high inflation and rising interest rates. Now add to this general factor a truth about the EV niche: it’s new, and is seeing an explosion of new companies which are competing with each other for a limited customer base. And in the Chinese market, the Chinese government hasn’t fully let go of COVID lockdown policies, causing an uncertainty to Chinese business and a depressing effect on both sales and consumer spending.

Taking a broad view of China’s EV market, JPMorgan analyst Nick Lai says: “Top-down, we expect flattish PV demand in 2023, with near-term monthly sales continuing to fall below seasonal trends until Apr-23, though the gap with seasonality should narrow in January/February… At the same, competition implies that OEMs may need to absorb a large part of NEV subsidy cuts next year and share this burden with suppliers, rather than passing it on to buyers.”

The JPM analyst doesn’t leave it at the doom and gloom. Based on “earnings visibility and balance sheet strength” and his view that “PV sales will return to seasonality in 1Q23,” Lai sees “positive risk-reward” for two Chinese EV stocks in particular. We ran them both through the TipRanks database to see what the rest of the Street thinks. Let’s take a closer look.

NIO Inc. (NIO)

We’ll start with Nio, an EV company founded in 2014 and currently offering six consumer-oriented EVs on the Chinese market. Nio started delivering vehicles in 2018, and its lineup now contains both compact- and mid-sized sedans and 5-seat SUVs. In addition to the vehicles, Nio has pioneered an approach to make EVs easier for customers to own as the company’s Battery-as-a-Service (BaaS) allows for quick and easy battery swapping, saving customers both time and money on one of the highest-cost routine maintenance procedures in EV ownership. Over the past several years, Nio has reaped the benefits of Chinese government policies that promote the switch from combustion to electric vehicles.

That government boost helped Nio increase its 2021 total deliveries by 109% year-over-year to 91,429. So far, the company is beating that total; Nio reported 92,493 vehicle deliveries from January 1, 2022 to October 30; that represents a 32% y/y gain.

NIO will release its 3Q22 financial results on November 10, but we can get a feel for the company’s performance by looking at the Q2 figures, the most recent reported. The company had a total rental revenue of $1.54 billion at the top line, and a quarterly net loss of $412 million. The revenue total is in-line with recent quarters, while the net loss is the deepest since 1Q20.

Shares in Nio are down sharply this year, with the stock having lost 70% of its value. Despite the loss in share price, JPMorgan’s Nick Lai sees Nio as a good value.

“We remain [bullish] on NIO and see positive sales momentum into 2023, driven by: (1) continued growth in the NEV market despite demand deceleration from a high base in 2022 – we expect the industry’s NEV penetration to top 30% in 2023 from 25% in 2022; and (2) our bottom-up projection that NIO will deliver 91% volume growth in 2023, or a 39% CAGR between 2022 and 2025 – for 2023, we believe newly launched models in 2H22 (i.e., ET5 sedan, ES7 SUV and ET7 sedan), the migration of existing old models to a new platform (i.e., ES6, EC6 and ES8 SUVs) and another complete new model (to debut at the annual NIO Day in Dec-22) will drive sales growth and share gains,” Lai opined.

Lai goes on to give NIO stock an Overweight (i.e. Buy) rating, and his price target of $14 implies a one-year upside potential of ~47%. (To watch Lai’s track record, click here)

While Lai is optimistic about Nio going forward, the Street consensus is even more bullish. NIO shares have 9 recent analyst reviews, all positive, for a Strong Buy consensus rating, and the stock’s $29.31 average price target suggests a robust gain of ~209% on the one-year horizon. (See NIO stock analysis on TipRanks)

XPeng, Inc. (XPEV)

Now we’ll turn to XPeng, another car maker working in China’s EV market. XPeng has several EV models in full production, including two sedans and two SUVs, with single-charge ranges from 520 to 700 kilometers. The company saw its delivery numbers take off in the first part of 2022; in August of this year, XPeng delivered 9,578 cars, for a 33% year-over-year increase. For the first 8 months of the year, the company’s deliveries totaled 90,085, nearly doubling from the same period last year.

Those deliveries slowed down as summer wound to a close, and the October total was 5,101 deliveries. While down from August’s strong number, the October total was still up 56% year-over-year, and represents a seasonal effect more than anything else. The drill-downs for October show that the company’s sedans are its most popular models, with the P7 smart sports sedan showing 2,104 deliveries and the P5 family sedan showing 1,665.

The company’s sales network is also expanding rapidly, and at the end of Q2 this year XPeng reported having 388 stores in 142 cities across China. To support its vehicles, XPeng has a network of 977 charging stations, a total that included 793 self-operated superchargers.

XPeng’s revenues peaked in 4Q21, at $1.34 billion, and have been trailing off since then. In 2Q22, the most recent quarter reported, the company had a top line of $1.12 billion; while down from the peak, that was still up 90% y/y. XPeng’s net losses, however, are deepening, and the $403 million net loss from 2Q22 was more than double the $184 million from 2Q21.

Year-to-date, the shares in this EV stock are down 87% on Wall Street. With such negative sentiment being priced in, JPMorgan’s Lai keeps his Overweight (i.e. Buy) rating as is, alongside an $11 price target. If achieved, his price target could offer a potential return of ~67%.

“We believe a more conservative multiple is now reasonable, considering: (1) a much worse competitive dynamic and pricing environment in the mass market, where XPeng is focused now; (2) XPeng’s solid balance sheet and new models in the pipeline to assist its sales and earnings momentum,” Lai noted.

The breakdown of the recent analyst reviews shows that the Street is fairly bullish on XPEV. Of the 11 reviews on file, 8 are to Buy, 2 to Hold, and 1 to Sell, giving the stock a Moderate Buy consensus. The average price target is highly bullish, at $38.52, implying an impressive 483% upside potential in the next 12 months. (See XPEV stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.