Let’s talk about electric cars. It’s an opportune time, as the auto industry is shifting to electrification. While the base technology is hardly new, a combination of factors has recently pushed it back into the limelight. Improvements in battery technology, along with advances in plastics, carbon fiber, and metallurgy, now make possible the production of lighter weight, longer ranged, electric vehicles (EVs), while the political climate has shifted in favor of them and against the gasoline powered internal combustion engine.
The result – a global EV market that is predicted to climb as high as $917 billion by 2028. That represents a 20% compound annual growth rate – and that sort of growth is bound to attract investor interest.
Corporate customers are also taking notice. In a major move recently, the car rental giant Hertz announced an order for 100,000 Tesla Model 3 vehicles. A buy on this scale will account for 20% of the Hertz’s fleet, and creates an important link between the EV experience and potential buyers.
For investors looking to jump on the EV bandwagon, there are plenty of options. As Bernstein analyst Eunice Lee points out, China remains the world’s largest automotive market – both for conventional cars and EVs. The Asian giant, with a population over 1.4 billion, of whom some 800 million live in the major urban areas, has a voracious appetite for vehicles – and a government that is actively pushing for adoption of EVs.
With all of that behind it, it’s no wonder that Lee sees current conditions offering an opportunity to buy into Chinese EV stocks. The analyst is especially bullish on two names, and she’s not alone. According to TipRanks database, both tickers carry a Strong Buy consensus rating from the analyst community. Let’s take a closer look.
We’ll start with Li Auto. This company was founded in 2015 and produces the Li ONE, a six-seater SUV model that began serial production in 2019 and is now China’s best selling EV model. Li was able to deliver over 32,000 Li ONE units last year, despite the corona crisis, and saw both production and deliveries increase through the year. Nearly half of all deliveries – over 14,000 – were made in the fourth quarter.
This year, Li has seen revenue increase from Q1 to Q2, and finished 1H21 with $207.9 million in total sales. $121 million of that was in the second quarter. Despite the rising sales figures in 1H21, the company’s stock price fell, bottoming out in mid-May at $17. It has nearly doubled since then, gaining 90%. Li will report Q3 results on November 12.
Going forward, Li has plans to increase its lineup, with new models scheduled for release in 2022. In the meantime, the company continues to post solid delivery figures for the Li ONE, with 8,589 units delivered in July of this year, 9,433 more delivered in August, and another 7,094 delivered in September.
Covering Li Auto for Bernstein, Eunice Lee initiates her coverage on the stock with an Outperform (i.e. Buy) rating, and sets a $43 price target that implies room for 35% growth in the year ahead.
Backing this stance, the analyst writes: “We have a positive view on Li Auto’s roadmap to launching electric vehicles and we initiate coverage on Li Auto with an Outperform rating… As outlined earlier, China currently lacks charging infrastructure and we expect the issue to endure for some time. Hence we think Li Auto’s choice of the EREV technology will remain competitive for a very long time, especially in lower tier cities and rural areas. Li Auto’s EREV is a solution for this transitory period as the country builds out charging infrastructure and move towards increasing BEV adoption. Li Auto is also simultaneously developing BEV platform and expanding its sales network to drive growth.”
Overall, the analyst consensus rating on LI is a Strong Buy, based on 6 reviews that include 5 Buys against just a single Hold. The stock is selling for $31.67, and its $39.88 average price target suggests it has room for ~26% upside growth over the next 12 months. (See LI stock analysis on TipRanks)
Next up, XPeng, is another automaker focused on the mid-range price bracket, and Li’s major competitor. The company has built its success to date on two EV models, the P7 sedan and the G3 SUV. Both are battery powered, all-electric, with moderate pricing and modern styling augmented by long range; the P7 reaches 700 kilometers per charge, and the G3 can drive 520 kilometers between charges. The G3 also boasts a mere half-hour charging time.
These two models were joined in September by the P5 family sedan, which XPeng markets as the ‘world’s first LiDAR-equipped smart car.’ Deliveries of the P5 began in October of this year; initial numbers should be available by the end of the year. The company’s latest delivery numbers – for the P7 and G3 models – climbed above the 10,000 unit mark in September, and reached 23,666 for Q3, a 199% yoy increase. Year-to-date, XPeng has delivered 56,404 vehicles, for a 301% yoy gain.
With these numbers, it’s no surprise that XPeng has seen revenues increase sequentially in the last 3 quarters. The most recent quarter reported, 2Q21, showed 3.761 billion CNY, or US$555 million, at the top line, a company record and up more than 500% yoy. The Q3 numbers are expected on November 18.
In her initiation of coverage report, Bernstein’s Lee writes: “Xpeng targets mid to high price segments (RMB150- 400k), the lower end of which is below comparable products on the market and offers a large addressable market that has historically served the domestic auto brands better. Xpeng has made most progress on ADAS development in China which we think will help build its brand equity in the domestic market. There is also significant room for margin improvement as its delivery volumes continue to pick up.”
To this end, Lee gives the stock a $56 price target, indicative of a 20% upside in the next 12 months, to back up her Outperform (i.e. Buy) rating.
Lee’s bullish view is no outlier here; this stock has a unanimous Strong Buy consensus rating based on 5 positive reviews. The shares are priced at $46.87 and their $55 average price target implies ~18% one-year upside potential. (See XPeng’s stock analysis at 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.