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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Which Chinese EV Stocks Are Worth Betting On?

After a bright start earlier in the month, the oil price rally appears to have once again run out of steam thanks to an old nemesis threatening to overrun China once again--Covid-19. Oil prices have remained range-bound in the low 50s despite several analysts viewing drilling restrictions imposed by the Biden administration as being bullish for the sector.

The EV sector, though, has remained largely indifferent to the growing Covid threats.

After posting one of its best years in a decade, the EV sector is looking unstoppable and on track for yet another banner year. The sector's favorite benchmark--Global X Autonomous & Electric Vehicles ETF (DRIV)--has jumped right out of the gates, racking up gains of 15.8% YTD and 80.8% over the past 12 months as the U.S. and European clean energy sectors continue to bask in Biden's victory. DRIV is a broad EV-focussed ETF holding 81 stocks in the space.

Not to be outdone, its even broader Chinese peer, the KraneShares MSCI China Environment Index ETF (KGRN), has rallied 19.9% YTD and 174.4% over the past 52 weeks, continuing a trend of strong performance by companies in the Chinese sustainable energy space.

An even bigger catalyst for the global EV sector: Wall Street believes that EVs are close to a "tipping point" of mass adoption thanks to falling costs. EV sales increased at a torrid 43% clip globally last year, with price parity with ICE on an unsubsidized basis expected to be achieved as early as 2023.

Not to mention that EU regulators have just issued the go-ahead for a $3.5 billion battery project spearheaded by a dozen countries from the bloc.

Related: The Surprising Rise And Fall Of A Shale Superstar

Meanwhile, oil divestitures continue to rock the fossil fuel sector after New York City's Comptroller announced oil and gas divestitures to the tune of $4B.

Here are 3 electrical vehicle manufacturers that are likely to lead the Chinese EV charge.

#1. XPeng Motors 

A recent newcomer in the market, Xpeng Motors (NYSE:XPEV) has clearly been riding the coattails of its bigger peers, Tesla Inc. (NASDAQ:TESLA) and NIO Inc. (NASDAQ:NIO), with the stock making impressive gains thanks mainly to the growing demand for its stylish vehicles and improving financials.

Xpeng has also been drawing plenty of interest from Big Money, managing to raise nearly a billion dollars from heavy hitters such as Alibaba, Abu Dhabi's sovereign wealth fund Mubadala Qatar Investment Authority, Hillhouse Capital, and Sequoia Capital China.

XPEV comfortably beat fourth-quarter earnings expectations, thanks to a management team that's well experienced in operating the car manufacturing process. For instance, Xpeng completed its Zhaoqing plant within 15 months and has demonstrated the ability to ramp up production much faster than rivals NIO and Li Auto (NASDAQ:LI) at a comparable stage in their respective growth curves.

Newcomers like Xpeng provide an excellent opportunity for investors who missed out on Tesla's meteoric rise to capitalize on another exciting EV startup.

#2. NIO Limited

NIO Ltd (NYSE:NIO) is, by far, the largest Chinese EV maker--and has also managed to pull off one of the most impressive comebacks in the sector in recent years. Related: The 5 Best Utility Stocks In 2021

Just a year ago, many analysts had written off the Tencent-backed automaker due to high cash burn and a dearth of capital. Luckily, the company was able to navigate its troubling financial situation and now boasts a much healthier balance sheet after pricing $1.3 billion in convertible notes to be paid off in 2026 and 2027 which were oversubscribed.

NIO recently unveiled a pair of sedans that would make Tesla fans green with envy. The vehicles will compete with Tesla's Model 3, and could help the company regain its EV leadership in its pivotal China market.

That said, NIO shares could have run too far too fast. The company's ~$88 billion market cap puts it at just over $2 million per vehicle sold in 2020 compared to Tesla's ~$1.6 million per vehicle; Xpeng ~$1.4 million per vehicle and Li's ~$0.9 million per vehicle sold. That might limit the stock's near-term upside.

#3. Li Auto

Li Auto Inc. (NASDAQ:LI) is another leading EV company and the manufacturer of the iconic Li ONE smart electric sport utility vehicles (SUVs). Li Auto was founded in 2015 and is headquartered in Beijing, China.

In a sea of stocks increasingly looking overvalued after enjoying huge runups in recent times, LI stock appears to be the best value compared to its pricier brethren. The stock trades at about 11x consensus 2021 revenues, leaving enough room for more upside with sales projected to grow 112% in the current year. In comparison, Nio currently trades at 18.5x projected 2021 revenues Xpeng multiple clocks in at 19x projected 2021 revenues.

Li Auto sells Extended-Range Electric Vehicles that can run on gasoline, thus lowering dependence on EV-charging infrastructure--a big plus in a country like China where charging infrastructure is not very well developed in China. This hybrid strategy appears to be paying off, with the Li ONE SUV consistently ranking at or near the top of the list of best-selling electric SUVs in the country.

The biggest risk for LI investors at this juncture is that the company's profit margins are narrower compared to its peers, which could begin to weigh down on its valuation if no improvements are forthcoming. But with such a huge manufacturing ramp-up expected in the next few years, LI's margins should gradually improve with growing scale.

By Alex Kimani for Oilprice.com

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