An Analyst's Chinese EV Stock Pair Trade: Buy Nio, Short Xpeng

With the Chinese electric vehicle stocks rallying hard in 2020, investors are jittery over the scope for further upside. The stocks have pulled back recently, and an analyst at Daiwa Securities said it may be time to take profits.

The EV Analyst: Kelvin Lau initiated coverage of Nio Inc – ADR NIO with a Buy rating and $59 price target.

The analyst initiated coverage of Xpeng Inc – ADR XPEV shares with a Sell rating and $32 price target, while Li Auto Inc. LI was initiated with a Hold rating and $33 price target.

Nio Vs. Xpeng Vs. Li Auto: Of the three U.S.-listed EV makers, Li Auto and Xpeng look the most expensive when weighed against their fundamentals, Lau said in a note. 

Xpeng appears to be more vulnerable to Tesla Inc's TSLA potential price-cutting strategy, the analyst said.

Li Auto's extended-range EVs target customers concerned about BEV battery performance and safety, he said. 

For Xpeng and Li Auto, Lau sees the potential for weaker-than-expected sales.

Using Tesla as a reference, Xpeng's 2021E price-to-sales ratio of 18 times looks particularly high, while Nio's 14 times and Li Auto's 12 times appear reasonable, the analyst said. 

"Investors may need to wait until we are closer to 2022 to see better valuations, which limits Xpeng and Li Auto's prospects for a further rerating in 2021E, in our view," he said. 

Daiwa Securities recommended a pair trade in Chinese EV makers: going long on Nio and shorting Xpeng.

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Analyst Positive On EV Demand Outlook: Chinese new energy vehicle sales volume is expected to rise from an estimated 9% increase in 2020 to 32% in 2021, Daiwa said.

This represents an upward revision to the firm's estimate for a 5% decline for 2020 and 20% growth in 2021.

Competition To Depress EV Prices: Next year is likely to be a big one for new smart car and NEV launches, Lau said.

Leading brands such as Tesla are likely to maintain their price leadership strategy and gain market share, the analyst said.

The analyst projects that ASPs, especially in the mid-range of 150,000-300,000 yuan ($22,980-$45,965), to come under pressure.

The waning enthusiasm of local governments to support every new-gen auto start-up will likely lead to small brands closing down, he said. 

The Trend Of ‘Smart Car Tech': The focus of new-gen auto companies is likely to be on customer-facing features like design, advanced driver-assistance systems, in-vehicle infotainment and vehicle-to-everything systems, Lau said.

It will likely take time for new-gen autos companies to take the lead in truly differentiating themselves from traditional players, the analyst said. 

The analyst sees likely improvements in ADAS functionality as stimulating sales volumes over the next three years.

Price Action: Nio shares have added about 1,000% year-to-date compared to Xpeng's 133% gains since its listing on Aug. 27.

Li Auto shares have advanced about 95% since it began trading on the Nasdaq on July 30.

Photo courtesy of Xpeng.