Drew Angerer
Thesis
Leading Chinese pure-play EV makers NIO Inc. (NYSE:NIO) and XPeng Inc. (NYSE:XPEV) enjoyed a solid recovery in November. XPEV posted a 1M total return of 55.5% as the market forced bearish investors/weak holders to flee at its October lows. In contrast, NIO posted a 1M total return of 24.5%, as buying sentiments returned strongly to China’s embattled pure-play BEV makers.
Notwithstanding, Chinese EV bears will point out that both stocks remain well below their starting point in 2022. Accordingly, XPEV’s YTD total return of -80% suggests buyers have been decimated, while NIO posted a better YTD performance of -62%.
Hence, we believe it’s opportune to update investors on whether the buying opportunity on the recent rally still has legs, as China seems to be progressively easing its COVID restrictions.
Our assessment indicates that one company has executed much better as China’s economy worsened in 2022. China’s stringent COVID restrictions and harsh property cooling measures have weakened its GDP growth significantly. Accordingly, China’s manufacturing PMI also came below consensus estimates, behooving China to accelerate its reopening moves.
Coupled with heightened competition, higher input costs, supply chain disruptions, and a weaker economy, NIO has proved its mettle against XPeng. However, both companies remain unprofitable. With a narrowed route toward external financing, given the current market conditions, we believe investors will likely focus on the company that has executed better, with clearer visibility toward reaching profitability.
We believe the competitive landscape would likely intensify further. Legacy OEMs such as General Motors (GM), Ford (F), and Volkswagen (OTCPK:VWAGY) have telegraphed ambitious plans to assume EV leadership by 2025/26. In addition, China’s NEV leader BYD Company (OTCPK:BYDDY) has continued to penetrate the EV market further, consolidating its position as the global NEV leader (including hybrids) in Q3’22, ahead of Tesla (TSLA).
Therefore, we urge investors to consider the business models and execution prowess of NIO and XPeng carefully as they take on profitable leading auto behemoths as they chart their path to profitability.
We discuss why we continue to put our bet in NIO as a potential multi-bagger speculative opportunity ahead of XPEV.
Maintain Speculative Buy on NIO and Hold on XPEV.
Competition In China Has Intensified
China’s economic malaise has battered its consumer discretionary spending, including automobiles. Yet, China’s leading NEV makers have made robust progress in 2022.
For instance, BYD delivered more than 230K of NEV in November, notching another monthly record, up nearly 153% YoY. Notably, BYD has continued to post consistent MoM gains since April 2022, corroborating the resilience of its highly vertically-integrated operating model.
Moreover, Volkswagen has continued to invest heavily in its prized Chinese market. General Motors have also stepped up on its endeavor, looking to introduce 15 EV models for the Chinese market by 2025.
Hence, we postulate that the competitive landscape in China could indicate that some unprofitable/less profitable upstarts could be squeezed out of the leading pack subsequently. With NIO and XPeng continuing to struggle for profitability, it’s vital to assess which company could emerge as the stronger competitor to take on these behemoths.
Furthermore, China’s NEV subsidies are due to be eliminated by 2023, even though Chinese media reported that there could be some revisions. Notwithstanding, it could neutralize/lessen a constructive tailwind that has driven sales over the past few years.
Therefore the market outlook remains uncertain while competition has intensified. As such, nothing short of excellent execution is required to navigate these challenges. And it’s one that XPeng has fallen short in 2022.
XPeng Restructures
XPeng Vehicle margins % (Company filings)
Given XPeng’s low vehicle margins operating model, it’s imperative for the company to continue posting robust production and deliveries growth to benefit significantly from fixed costs leverage.
However, XPeng’s massive Q3 deliveries disappointment highlighted the execution weakness in a challenging macro and supply chain environment, in which leaders BYD and NIO performed admirably.
With a vehicle margin of just 11.6% in Q3 (up from Q2’s 9.1%), XPeng’s profitability has improved QoQ.
XPeng Deliveries (Company filings)
However, the company posted deliveries growth of just 15% in FQ3; a massive downshift from FQ2’s 98%. As such, we believe it triggered a rethinking of its strategies, leading the company to announce an organizational restructuring, as CEO He Xiaoping emphasized:
Frankly, we’re going through a very challenging period in pursuing our long-term goals. In response, we recently conducted an in-depth strategic review and implemented organizational restructure. As market competition intensifies, we’ll sharpen our marketing to highlight the great value in our industry-leading smart and electrification technologies and further enhance our branding, sales, and service capabilities. (XPeng FQ3’22 earnings call)
Hence, we believe there’s little doubt that the increasingly competitive landscape hammered XPeng’s execution. Therefore, moving forward, we think it’s better to watch the action from the sidelines unless you have a very high conviction in XPeng’s management.
XPeng announced October and November deliveries of 5.1K and 5.81K, respectively. As such, the company needs to deliver about 9.59K of NEV (midpoint) in Q4, predicated on the ramp of its G9. XPeng emphasized: “The Company expects that deliveries will significantly increase in December 2022 as G9’s production ramp-up accelerates under normalized operating conditions.”
We believe that XPEV’s battering toward its October lows has likely reflected significant pessimism. But, we don’t think the recent rally is sustainable, as its price action suggests a massive covering rally.
As such, we urge investors thinking of cutting exposure to leverage on the recent recovery to take some risks off the table and rotate.
Rotate To NIO
NIO Deliveries (Company filings)
NIO posted 14.18K in NEV deliveries for November, up nearly 41% MoM. As such, NIO demonstrated that its premium EV strategy is working well, despite China’s economic malaise.
While China’s COVID restrictions have impacted its production cadence, we believe it could be less material moving forward as China progressively eases.
Hence, NIO should be able to focus primarily on its execution as it looks to deliver its Q4 guidance of 45.5K NEVs (midpoint). The company appears confident in its recent deliveries outlook as NIO emphasized: “NIO will further accelerate the production and delivery in December 2022.”
NIO CEO William Li also telegraphed recently why it’s critical for NIO to remain deeply entrenched as one of China’s leading NEV leaders, given intensifying competition. Li accentuated:
If a company is squeezed into the second tier in the final round [of competition in 2024/25], it is basically impossible for it to catch up to the first tier if it wants to. You can only be a second-tier languishing, barely alive person. – CnEVPost
Therefore, we believe it’s no surprise that the timeline aligns well with the milestones indicated by the legacy OEMs makers as they transform into EV companies.
Don’t assume these OEM makers are “dead” yet, as they invest profits from their ICE segments to take on unprofitable EV makers. The battle is far from over, and we believe only the fittest EV makers could survive the increasingly competitive landscape.
Is NIO Or XPEV Stock A Buy, Sell, Or Hold?
Maintain Speculative Buy on NIO and Hold on XPEV.
XPEV price chart (weekly) (TradingView)
The market had gotten XPEV spot on, knowing that it could face significant competitive pressures that could impact its operating model considerably.
As such, the market’s battering from its June highs has likely reflected its positioning. Hence, the recent sharp rally from its October lows resembled a covering move from bearish investors taking profit and cutting exposure.
As such, we urge investors not to join this rally but consider taking the opportunity to take some risks off the table.
NIO price chart (weekly) (TradingView)
NIO’s price action looks much more robust than XPEV, with no clear signs of a massive covering rally. Therefore, buyers are likely accumulating, trapping bearish investors at its long-term support and holding that defense line constructively.
Hence, we believe the opportunity for a mean-reversion rally for NIO is still attractive at these levels. XPEV investors who decide to cut exposure can consider rotating some exposure to NIO to take them toward the next stage of the competition in China’s increasingly competitive EV market.
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Drew Angerer
Thesis
Leading Chinese pure-play EV makers NIO Inc. (NYSE:NIO) and XPeng Inc. (NYSE:XPEV) enjoyed a solid recovery in November. XPEV posted a 1M total return of 55.5% as the market forced bearish investors/weak holders to flee at its October lows. In contrast, NIO posted a 1M total return of 24.5%, as buying sentiments returned strongly to China’s embattled pure-play BEV makers.
Notwithstanding, Chinese EV bears will point out that both stocks remain well below their starting point in 2022. Accordingly, XPEV’s YTD total return of -80% suggests buyers have been decimated, while NIO posted a better YTD performance of -62%.
Hence, we believe it’s opportune to update investors on whether the buying opportunity on the recent rally still has legs, as China seems to be progressively easing its COVID restrictions.
Our assessment indicates that one company has executed much better as China’s economy worsened in 2022. China’s stringent COVID restrictions and harsh property cooling measures have weakened its GDP growth significantly. Accordingly, China’s manufacturing PMI also came below consensus estimates, behooving China to accelerate its reopening moves.
Coupled with heightened competition, higher input costs, supply chain disruptions, and a weaker economy, NIO has proved its mettle against XPeng. However, both companies remain unprofitable. With a narrowed route toward external financing, given the current market conditions, we believe investors will likely focus on the company that has executed better, with clearer visibility toward reaching profitability.
We believe the competitive landscape would likely intensify further. Legacy OEMs such as General Motors (GM), Ford (F), and Volkswagen (OTCPK:VWAGY) have telegraphed ambitious plans to assume EV leadership by 2025/26. In addition, China’s NEV leader BYD Company (OTCPK:BYDDY) has continued to penetrate the EV market further, consolidating its position as the global NEV leader (including hybrids) in Q3’22, ahead of Tesla (TSLA).
Therefore, we urge investors to consider the business models and execution prowess of NIO and XPeng carefully as they take on profitable leading auto behemoths as they chart their path to profitability.
We discuss why we continue to put our bet in NIO as a potential multi-bagger speculative opportunity ahead of XPEV.
Maintain Speculative Buy on NIO and Hold on XPEV.
Competition In China Has Intensified
China’s economic malaise has battered its consumer discretionary spending, including automobiles. Yet, China’s leading NEV makers have made robust progress in 2022.
For instance, BYD delivered more than 230K of NEV in November, notching another monthly record, up nearly 153% YoY. Notably, BYD has continued to post consistent MoM gains since April 2022, corroborating the resilience of its highly vertically-integrated operating model.
Moreover, Volkswagen has continued to invest heavily in its prized Chinese market. General Motors have also stepped up on its endeavor, looking to introduce 15 EV models for the Chinese market by 2025.
Hence, we postulate that the competitive landscape in China could indicate that some unprofitable/less profitable upstarts could be squeezed out of the leading pack subsequently. With NIO and XPeng continuing to struggle for profitability, it’s vital to assess which company could emerge as the stronger competitor to take on these behemoths.
Furthermore, China’s NEV subsidies are due to be eliminated by 2023, even though Chinese media reported that there could be some revisions. Notwithstanding, it could neutralize/lessen a constructive tailwind that has driven sales over the past few years.
Therefore the market outlook remains uncertain while competition has intensified. As such, nothing short of excellent execution is required to navigate these challenges. And it’s one that XPeng has fallen short in 2022.
XPeng Restructures
XPeng Vehicle margins % (Company filings)
Given XPeng’s low vehicle margins operating model, it’s imperative for the company to continue posting robust production and deliveries growth to benefit significantly from fixed costs leverage.
However, XPeng’s massive Q3 deliveries disappointment highlighted the execution weakness in a challenging macro and supply chain environment, in which leaders BYD and NIO performed admirably.
With a vehicle margin of just 11.6% in Q3 (up from Q2’s 9.1%), XPeng’s profitability has improved QoQ.
XPeng Deliveries (Company filings)
However, the company posted deliveries growth of just 15% in FQ3; a massive downshift from FQ2’s 98%. As such, we believe it triggered a rethinking of its strategies, leading the company to announce an organizational restructuring, as CEO He Xiaoping emphasized:
Frankly, we’re going through a very challenging period in pursuing our long-term goals. In response, we recently conducted an in-depth strategic review and implemented organizational restructure. As market competition intensifies, we’ll sharpen our marketing to highlight the great value in our industry-leading smart and electrification technologies and further enhance our branding, sales, and service capabilities. (XPeng FQ3’22 earnings call)
Hence, we believe there’s little doubt that the increasingly competitive landscape hammered XPeng’s execution. Therefore, moving forward, we think it’s better to watch the action from the sidelines unless you have a very high conviction in XPeng’s management.
XPeng announced October and November deliveries of 5.1K and 5.81K, respectively. As such, the company needs to deliver about 9.59K of NEV (midpoint) in Q4, predicated on the ramp of its G9. XPeng emphasized: “The Company expects that deliveries will significantly increase in December 2022 as G9’s production ramp-up accelerates under normalized operating conditions.”
We believe that XPEV’s battering toward its October lows has likely reflected significant pessimism. But, we don’t think the recent rally is sustainable, as its price action suggests a massive covering rally.
As such, we urge investors thinking of cutting exposure to leverage on the recent recovery to take some risks off the table and rotate.
Rotate To NIO
NIO Deliveries (Company filings)
NIO posted 14.18K in NEV deliveries for November, up nearly 41% MoM. As such, NIO demonstrated that its premium EV strategy is working well, despite China’s economic malaise.
While China’s COVID restrictions have impacted its production cadence, we believe it could be less material moving forward as China progressively eases.
Hence, NIO should be able to focus primarily on its execution as it looks to deliver its Q4 guidance of 45.5K NEVs (midpoint). The company appears confident in its recent deliveries outlook as NIO emphasized: “NIO will further accelerate the production and delivery in December 2022.”
NIO CEO William Li also telegraphed recently why it’s critical for NIO to remain deeply entrenched as one of China’s leading NEV leaders, given intensifying competition. Li accentuated:
If a company is squeezed into the second tier in the final round [of competition in 2024/25], it is basically impossible for it to catch up to the first tier if it wants to. You can only be a second-tier languishing, barely alive person. – CnEVPost
Therefore, we believe it’s no surprise that the timeline aligns well with the milestones indicated by the legacy OEMs makers as they transform into EV companies.
Don’t assume these OEM makers are “dead” yet, as they invest profits from their ICE segments to take on unprofitable EV makers. The battle is far from over, and we believe only the fittest EV makers could survive the increasingly competitive landscape.
Is NIO Or XPEV Stock A Buy, Sell, Or Hold?
Maintain Speculative Buy on NIO and Hold on XPEV.
XPEV price chart (weekly) (TradingView)
The market had gotten XPEV spot on, knowing that it could face significant competitive pressures that could impact its operating model considerably.
As such, the market’s battering from its June highs has likely reflected its positioning. Hence, the recent sharp rally from its October lows resembled a covering move from bearish investors taking profit and cutting exposure.
As such, we urge investors not to join this rally but consider taking the opportunity to take some risks off the table.
NIO price chart (weekly) (TradingView)
NIO’s price action looks much more robust than XPEV, with no clear signs of a massive covering rally. Therefore, buyers are likely accumulating, trapping bearish investors at its long-term support and holding that defense line constructively.
Hence, we believe the opportunity for a mean-reversion rally for NIO is still attractive at these levels. XPEV investors who decide to cut exposure can consider rotating some exposure to NIO to take them toward the next stage of the competition in China’s increasingly competitive EV market.
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