Chinese stocks are an extremely contrarian call right now. Regulators hold sway, as I've explained in recent columns, so the shares are not moving in connection with company fundamentals. We're not stock picking. We're second-guessing.
With that said, Chinese listings on U.S. markets are beaten down to an unprecedented extent, thanks to concerns over their long-term viability, as well as Beijing's crackdown on Big Tech. I have to assume the issue over access to Chinese accounts for U.S. regulators will ultimately get resolved in a way that lets Chinese stocks remain on Wall Street. And while it is ham-handed at times, the Chinese Communist Party has grown concerned enough about the recent market rout to reiterate that, despite appearances to the contrary, it really does want homegrown capitalist companies to succeed.
Looking to the longer-term for the Chinese market, the largest of what Beijing calls "platform companies" immediately spring to mind. These are names such as Alibaba Group Holding (BABA) (HK:9988), the JD.com (JD) (HK:9618), the Pinduoduo (PDD) that bring e-commerce not only to the two-thirds of the Chinese population that live in cities but increasingly to the rural hinterland as well.
Those names are exciting, but they wouldn't be the top sector pick for me. The Big Tech crackdown began after Chinese President Xi Jinping grew frustrated with "tech bro" billionaires such as Alibaba figurehead Jack Ma stealing his thunder -- meeting with foreign heads of state, suggesting/telling Chinese regulators how they should be running the show -- and those tensions remain. Some of the concern is merited, in much the same way that Western regulators are wrangling with how to police the Internet. Alibaba and Tencent Group Holdings (TCTZF) (HK:0700) were notorious for creating stables of companies, where they required big investors to buy into only their own corporate horses if they wanted access to the next top prospect. Beijing, quite rightly, has said that has to end. It has also put a stop to the practice of e-commerce sites requiring retailers to sign exclusivity deals to sell, say, on Alibaba's Taobao, or on JD.com.
The sector I'm most excited about in China is EVs. Electric vehicles are hot properties in China, the world's largest market for them, with 7.9 million EV passenger vehicles on the road, 46% of the global fleet. But best of all, the success of electric models meshes perfectly with the legislative agenda for the top echelons of political power. China is by far the world's largest importer of oil, a dependency it would like to reduce, and is also the world's largest polluter, with about 30% of all greenhouse gas. Taking fossil-fuel-fed vehicles off the road and replacing them with clean-burning alternatives is a top policy initiative. There's also the complex issue that a lot of Chinese electricity is generated from coal, but the direction is clear.
China set a 2025 target of having 20% penetration for electric vehicles as a share of total Chinese car sales. That will likely be achieved this year. It should then be increased to 30% as a result, according to Nomura's Chinese auto analysts, Benjamin Lo and Martin Heung. It's been a "great start" to the year for Chinese EVs in 2022, they note. The Chinese government hits its targets: Nomura forecasts 37.0% penetration in 2025 for passenger vehicles, up from 22.8% now. Throw in buses and the like, and total EV market share should rise from 19.6% now to 31.7% in 2025.
If and when the cross-Pacific tensions over listings are lifted, then, the U.S. stocks of Chinese EV manufacturers are poised to rally. They have strong demand driving performance. The second and third questions after the policy overhang is removed are: competition; and execution.
This is where the share-price movements of the EV manufacturers will diverge. U.S. investors have the choice of three companies listed on Wall Street: Li Auto (LI) (HK:2015), XPeng (XPEV) (HK:9868) and Nio (NIO) (HK:9866).
Warren Buffett has thrown his considerable stock-selection weight behind the current market leader in EV sales in China: BYD (BYDDY) (HK:1211). However, its primary listing is in Hong Kong, and the U.S. American Depositary Receipts are only available over-the-counter, bringing far lighter trading volumes than the companies that listed first in New York.
Li Auto has been the market darling to date. Its shares are still up 65.0% since listing on Nasdaq at US$11.50 in July 2020. They've weathered volatile trading, peaking at US$47.70 that November, and troughs around US$17 in October 2021 and recently, on March 14. They've bounced back to US$26.40 at last count.
XPeng listed at US$15 in August 2020, on the New York Stock Exchange. That was above their US$11-US$13 range. They also took to great heights in November 2020, climbing to US$74.49. They've suffered similar troughs, too, now trading at US$27.05, off recent lows of US$19.75.
Nio has been a recent laggard, but that wasn't always the way. It was first to list, waaaaay back in September 2018, when it sold shares at US$6.26, the low end of its range on a scaled-down offer size. NIO even fell below its offer price during its first day of trading, although it closed that day at US$6.60. It sank below US$2 in 2019 -- then set a high of US$69.90 in January 2021.
The original investors have never been looking at losses if they've held Li Auto or XPeng since their listing debuts. That's not true for Nio, but of course it has a longer track record. The mainland Chinese stock markets are ones that these carmakers have avoided, listing in both New York and the offshore Chinese markets in Hong Kong instead. But mainland markets aren't beyond 65% market swings for the entire market, in either direction, inside one year. Even the offshore listings can't escape dramatic, typically policy-driven volatility.
I should note that I have a small position in Nio, built up in the second half of last year at an average price of US$41.34. So far, it's been disastrous. At that point, I bought into selloffs from US$67 in January 2021, and US$55 last June. The shares are trading at US$19.94 as I write, down by 52% from my POV. It's been one-way traffic in the wrong direction since November, when concerns about U.S. listings came to a head.
It's the only Chinese stock I hold, and of course the selloff had me questioning my logic. I'm in it for the long haul, though, and the shares have at least recovered from their low of US$13 before the comments of Vice-Premier Liu He caused U.S. Chinese listings to lift. I have not had the confidence to add to my holding because there's no visibility yet on how Beijing plans to support Chinese stocks. Liu's comments state that the Chinese Communist Party does want to support capital markets, but we'll have to wait to see how that plays out, as I outlined.
Macquarie has maintained its "outperform" rating in a note issued today, with a price target of US$28.30 for Nio. Barclays did the same in keeping its "overweight" stance and a target price of US$34. We can take brokerage price setting with a grain of salt but the direction is clear: Macquarie sees potential 41.9% upside, Barclays 70.5%.
Wall Street anticipates that money-losing Nio will shift into the black with its next earnings, due on June 1. It lost US$0.17 per share in Q4 2021, steepening losses from close to breakeven in Q1 2021, when it lost US$0.04 per share. Wall Street consensus is for a very narrow gain, US$0.01 per share, on its next earnings but that the company will continue into the black after that.
I've chosen a contrarian pick within a contrarian sector play. Nio is having trouble executing orders due to chip shortages and problems with its supply chain. Still, the point remains that Nio has demand for more cars than it can deliver. It's the same kind of issue that plagued Tesla (TSLA) early in its operation as a mass manufacturer. Yes, it is a problem if you can't make the models you are trying to sell. But it is a good kind of problem to have.
Nio sold 91,429 vehicles in 2021, an increase of 109.1%. It is targeting to deliver 25,000 to 26,000 cars in Q1 2022, with new models such as the ET7 sedan due to begin delivery imminently. It will have an ET5 sedan and ES7 SUV launching later this year.
XPeng has a P7 four-door sedan that competes with Tesla's Model 3, and a G3 SUV that competes with the Model Y SUV. Its P7 upscale sport sedan has helped bolster the XPeng brand at the high end, giving it a wide range of model choices.
Li Auto has done a nice job in cornering the market, so far, for mid-priced full-sized SUVs. Its Li One costs around C¥350,000 (US$55,000), and is the fourth-best-selling model in China. Production should rise from 13,000 or so models per month now to 16,000 by 2024. But so far, it depends on the one vehicle.
Most recently, Nio has looked to ward off the instability and uncertainty over Chinese accounting with a Hong Kong listing. It listed its Class A shares "by way of introduction" onto the Hong Kong Stock Exchange on March 10, with largest external shareholder Tencent converting its 9.8% stake in Class B shares into Class A.
I'm not counting on any of the Chinese manufacturers to enjoy the same kind of stock success as Tesla. They'll never enjoy the same kind of broad support as Tesla has engendered in the U.S. investment universe.
BYD and XPeng are the top picks for the Nomura analysts. BYD had 23% market share in January, up from 17% last year, and accounts for six out of the top-10 EV models in China. XPeng is their pick of choice out of the EV startups, with close to 13,000 units sold and great brand recognition. Only Tesla, with the Model Y compact SUV, breaks the ranks of the top-10 models in China. "We believe this should serve as a wakeup call to all traditional foreign automakers who have yet to come up with competitive EV products in the Chinese market," Lo and Heung say.
The tensions surrounding Chinese companies remain. There is loud debate over the extent to which China and the United States can decouple their economies. But with Apple (AAPL) , for instance, getting the bulk of its products assembled in China, it's not a decoupling that's going to happen easily, or anytime soon. We may see regime change in China if President Xi goes, before it's possible to detach U.S. manufacturers from their Chinese factories.
While Shanghai courted Tesla to become the site of its first offshore factory, there's no doubt some unease over the success that a U.S. car maker has had in selling electric vehicles to the Chinese buying public. Their stock listings may still suffer from U.S.-China tensions, but the Chinese electric-vehicle manufacturers would be the primary beneficiaries of any anti-Tesla sentiment if Beijing gets serious about staunching its sales. Already, Chinese military sites ban Tesla vehicles for fear their cameras may record something sensitive. Li Auto, XPeng and Nio are exactly the kinds of companies that Beijing wants to see succeed.
Chinese EV makers also have the advantage that, semiconductors aside, most of their manufacturing supply chain is within China. It's the leading producer of electric batteries, cornering 74.3% of the market for EV battery manufacturing this year, according to S&P Global Market Intelligence. It's also a top source (only Australia and Chile outstrip it) of the lithium that goes into them. Poland, Germany and the United States, the other top car-battery producers, are far behind with 5% to 6% market share each.
China's dominance is to the point where the Chinese EV makers are mustering plans to export extensively, mainly to Europe at first. Expect that flow of models to come from a dozen manufacturers, a "coming influx of Chinese EV exports on the global stage that will shake the auto industry over the next 12 to 36 months," according to Grace Fan, the head of disruptive-themes research at the independent-analysis house T.S. Lombard.
XPeng and Nio already export to Norway, where there's no import duty or buyer's tax on EVs. Where Li Auto currently relies on its SUV, both XPeng and Nio have multiple models that can appeal to various price points.
For that reason, I have two "joint top" picks that I'd hold through 2022, just to show I'm not playing favorites: XPeng and Nio.
Third choice: Li Auto.
