Despite China Cutting Rates, Continue to Avoid These 3 Chinese EV Stocks

The People’s Bank of China (PBOC) has been on a rate-cutting spree, lowering the interest rate on 700 billion yuan ($110.67 billion) of one-year medium-term lending facility loans to some financial institutions to 2.85% from 2.95% on Jan. 17, 2022. The PBOC then reduced the one-year loan prime rate to 3.7% from 3.8%, while the five-year loan prime rate was cut for the first time in nearly two years, lowering it by five basis points to 4.6% from 4.65%.

The Chinese economy shook off the COVID-19-pandemic-driven difficulties earlier than expected, but its economic growth has slowed due to muted consumer spending, tighter regulations, struggling property market and small businesses, and the rise in omicron variant cases. Consequently, the Chinese Central Bank has been easing its monetary policy to support the economy.

However, boosting consumer spending by cutting interest rates may not be enough to spur an electric vehicle (EV) industry rebound because countries worldwide are facing a semiconductor chip shortage. Xing Zhaopeng, the senior China strategist at Australia & New Zealand Banking Group Ltd., believes that China’s critical economic problems are supply-side constraints and insufficient demand, which will not be solved by monetary policy alone. Given this backdrop, we think it could be wise to avoid fundamentally weak and overvalued Chinese EV stocks NIO Inc. (NIO), XPeng Inc. (XPEV), and Li Auto Inc. (LI).

Click here to checkout our Electric Vehicle Industry Report for 2022

NIO Inc. (NIO)

Shanghai-based NIO designs, develops, and sells EVs. The company offers five-, six-, and seven-seater electric SUVs and smart electric sedans. It also provides energy and services packages to its users, along with marketing, design, and technology development activities. It also manufactures e-powertrains, battery packs, and components, and provides sales and after-sales management services.

NIO’s adjusted loss from operations increased 41.9% sequentially to RMB726.30 million ($114.82 million) for the third quarter, ended Sept. 30, 2021. The company’s non-GAAP net loss increased 69.7% sequentially to RMB569.70 million ($90.06 million). Also, its non-GAAP loss per share came in at RMB0.36, representing a 71.4% increase sequentially.

In terms of forward EV/S and P/S, NIO’s respective 6.40x and 6.67x are higher than the 1.32x and 1.08x industry averages. Furthermore, its 9.20x forward P/B is 206.1% higher than the 3x industry average.

Analysts expect NIO’s EPS to remain negative this year and next. The stock has missed the Street’s EPS estimates in three of the trailing four quarters. And over the past year, the stock has declined 62.4% in price to close the last trading session at $22.66.

NIO’s POWR Ratings reflect these weak prospects. The stock has an overall F rating, which equates to a Strong Sell. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

NIO has an F grade for Stability and a D grade for Value and Quality. It is ranked #57 of 69 stocks in the F-rated Auto & Vehicle Manufacturers industry. Click here to see the additional ratings of NIO for Growth, Momentum, and Stability.

XPeng Inc. (XPEV)

Headquartered in Guangzhou, XPEV is one of China’s leading electric vehicle manufacturers. The company’s offerings include SUVs under the G3 name and sports sedans under the P5 and P7 names. It also provides sales contracts, supercharging, ride-hailing services, and vehicle leasing.

For its fiscal third quarter, ended Sept. 30, 2021, XPEV’s non-GAAP net loss increased 72.5% year-over-year to RMB1.49 billion ($235.90 million). The company’s non-GAAP loss from operations increased 106.6% year-over-year to RMB1.70 billion ($268.77 million). Also, its non-GAAP net loss per share increased 28.2% sequentially to RMB1.77.

In terms of forward EV/S and P/S, XPEV’s respective 8.86x and 10.13x are higher than the 1.32x and 1.08x industry averages. Furthermore, its 6.61x forward P/B is 105.1% higher than the 3x industry average.

For the quarter ending March 31, 2022, XPEV’s EPS is expected to decrease 64.3% year-over-year to $0.23. The stock has missed consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has declined 31% in price to close the last trading session at $37.30.

XPEV’s weak fundamentals are reflected in its POWR Ratings. According to our rating system, it has an overall F rating, which translates to Strong Sell.

It also has an F grade for Stability and a D grade for Growth, Value, and Quality. It is ranked #58 in the Auto & Vehicle Manufacturers industry. To see the additional ratings of XPEV for Momentum and Sentiment, click here.

Li Auto Inc. (LI)

Based in Beijing, LI designs, manufactures, and sells smart SUVs. It sells Li-One, an electric smart six-seat SUV equipped with a range of exchange systems and smart vehicle solutions. As of Oct. 31, 2021, the company had 162 retail stores.

LI’s operating expenses increased 182.2% year-over-year to RMB1.90 billion ($301.81 million). The company’s cost of sales increased 196% year-over-year to RMB5.96 billion ($942.78 million). In addition, its interest expense came in at RMB19.23 million ($3.04 million), representing a 49.5% increase year-over-year.

In terms of forward EV/S and P/S, LI’s respective 5.15x and 6.14x are higher than the 1.32x and 1.08x industry averages. Its 46.83x forward Price/Cash Flow is 293.7% higher than the 11.90x industry average.

Analysts expect LI’s EPS for its fiscal 2021 and 2022 to remain negative. The stock has declined 24.1% in price over the past three months to close the last trading session at $25.09.

LI’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to a Sell in our proprietary rating system.

LI also has a D grade for Value and Stability. The stock is ranked #42 in the Auto & Vehicle Manufacturers industry. Click here to see the additional ratings of LI for Growth, Momentum, Sentiment, and Quality.

Click here to checkout our Electric Vehicle Industry Report for 2022

NIO shares rose $0.18 (+0.79%) in premarket trading Thursday. Year-to-date, NIO has declined -28.47%, versus a -8.75% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

More...