【Sector Research】China NEV Sector – NEV New Forces: leading the wave of vehicle electrification

We see enormous growth potential in China’s NEV market in the next 5-10 years, highlighted by a 34% NEV sales CAGR during 2021-25E and a penetration rate nearly quadrupling from 5.4% in 2020E to 20% in 2025E. We think NIO, XPENG (“XPEV”) and Li Auto (“LI”) are leading the vehicle electrification wave for their proven successful NEV models, first-mover advantages, and sound financing capabilities. Looking ahead, we expect those three NEV New Forces to outperform peers in vehicle intelligence and new model development. We initiate China NEV sector with OUTPERFORM rating. Our sector top pick is LI. Our pecking order in the sector is LI >XPEV>NIO.

 

  1. NEV sales volume to surge at 34.2% CAGR during 2021-25E. We forecast NEV sales volume will achieve 1.92mn units in 2021E, up 40.1% YoY, supported by favorable policies such as the extension of subsidies and the implementation of double credit policy. As the Chinese government is dedicated to develop the NEV market for leapfrogging, we project NEV sales volume in China to reach a CAGR of 34.2% during 2021E-25E, on the back of Chinese government’s ambitious 20% NEV penetration target by 2025E.   

 

  1. New Forces are leading the race. NIO, XPEV and LI (The three “New Forces”) have survived a competitive market and realized eye-catching NEV sales performance in 2020. We think the three companies had passed key milestones and are heading to sustainable development. We believe launching successful products at good timing, strong financing capability, and differentiating positioning are critical factors that make them stand out. 

 

  1. Differentiated growth path. The New Forces adopt very different development strategies. NIO is good at luxury branding, providing premium services and operating excellent user communities; XPEV is taking the lead in autonomous driving; LI runs great in precise product positioning and costs control. Holding cash reserves of RMB 30-42bn by end-2020, we expect the New Forces are in good positions to spend more efforts and resources to enhance their leading advantages, in our view.

 

  1. LI is our top pick. We initiate China NEV sector with OUTPERFORM rating given its enormous growth potential for the next 5-10 years. We apply different P/S multiples to different segment revenues in 2025E and discount them back to 2021E as fair value. We think NIO deserves some premium in multiples for its leading product delivery and service monetization. Our TP for NIO/XPEV/LI is US$ 46.32/43.12/37.73, respectively. Based on the current valuation and upside potential, we take LI as our top pick. Our pecking order in the sector is LI>XPEV>NIO.

  

  1. Sector risks: 1) semiconductor supply shortage; 2) vehicle defects; 3) increasing competition. 
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