16 Apr 2021

CMB International Securities | Equity Research | Sector Initiation

China NEV Sector NEV New Forces: leading the wave of vehicle OUTPERFORM (Initiation) electrification

China NEV Sector We see enormous growth potential in China’s NEV market in the next 5-10 years, highlighted by a 34% NEV sales CAGR during 2021-25E and a penetration rate Robin Xiao nearly quadrupling from 5.4% in 2020E to 20% in 2025E. We think NIO, XPENG (852) 3900 0849 (“XPEV”) and Li Auto (“LI”) are leading the vehicle electrification wave for their [email protected] proven successful NEV models, first-mover advantages, and sound financing Jack Bai capabilities. Looking ahead, we expect those three NEV New Forces to (852) 3900 0835 outperform peers in vehicle intelligence and new model development. We initiate [email protected] China NEV sector with OUTPERFORM rating. Our sector top pick is LI. Our pecking order in the sector is LI >XPEV>NIO. 2021E shipment projection NIO 87,175  NEV sales volume to surge at 34.2% CAGR during 2021-25E. We forecast XPEV 48,499 LI 57,092 NEV sales volume will achieve 1.92mn units in 2021E, up 40.1% YoY, Source: CMBIS estimates supported by favorable policies such as the extension of subsidies and the implementation of double credit policy. As the Chinese government is 2021E Revenue – RMB mn dedicated to develop the NEV market for leapfrogging, we project NEV sales NIO 33,069 volume in China to reach a CAGR of 34.2% during 2021E-25E, on the back XPEV 9,093 of Chinese government’s ambitious 20% NEV penetration target by 2025E. LI 16,564 Source: CMBIS estimates  New Forces are leading the race. NIO, XPEV and LI (The three “New Forces”) have survived a competitive market and realized eye-catching NEV 2021-2025E Sales projection sales performance in 2020. We think the three companies had passed key (k units) milestones and are heading to sustainable development. We believe 350 launching successful products at good timing, strong financing capability, and 300 differentiating positioning are critical factors that make them stand out. 250 200  Differentiated growth path. The New Forces adopt very different 150 development strategies. NIO is good at luxury branding, providing premium 100 services and operating excellent user communities; XPEV is taking the lead 50 in autonomous driving; LI runs great in precise product positioning and costs - control. Holding cash reserves of RMB 30-42bn by end-2020, we expect the New Forces are in good positions to spend more efforts and resources to LI NIO XPEV enhance their leading advantages, in our view. Source: CMBIS estimates  LI is our top pick. We initiate China NEV sector with OUTPERFORM rating given its enormous growth potential for the next 5-10 years. We apply different 2021-2025E NEV market share P/S multiples to different segment revenues in 2025E and discount them back 6.0% to 2021E as fair value. We think NIO deserves some premium in multiples for 5.0% its leading product delivery and service monetization. Our TP for NIO/XPEV/LI 4.0% is US$ 46.32/43.12/37.73, respectively. Based on the current valuation and 3.0% upside potential, we take LI as our top pick. Our pecking order in the sector is 2.0% LI>XPEV>NIO. 1.0% 0.0%  Sector risks: 1) semiconductor supply shortage; 2) vehicle defects; 3) increasing competition.

Peers’ valuation LI NIO XPEV EV 2021E Sales Major EV Model Share price Market Cap P/S multiple Source: CMBIS estimates Company Ticker shipment revenue in China 2020 （US$) (US$, mn) (US$, mn) FY21E Tesla TSLA US Model 3, Model Y 499,550 738.85 709,188 49,475 14.3 NIO NIO US ES6, EC6, ES8 43,728 35.66 58,430 7,173 8.1 Xpeng XPEV US G3, P7 27,041 31.40 24,803 2,925 8.5 Li Auto LI US ONE 32,624 19.68 17,803 3,354 5.3 Source: Company data, Bloomberg, CMBIS estimates

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Contents

China NEV market outlook ...... 3 Luxury cars are gaining market share ...... 4 NEV market has enormous growth potential ...... 6 NIO, XPEV and LI are leaders in auto electrification development .... 10 Differentiated development path ...... 12 Competition with Tesla ...... 27 MCU supply shortage may be a short term risk ...... 28 Sales and breakeven outlook ...... 29 Valuation & Sector pick ...... 32 Risk factors ...... 35 NIO (NIO US, BUY, TP US$: 46.32) ...... 36 XPeng (XPEV US, BUY, TP US$: 43.12) ...... 36 Li Auto (LI US, BUY, TP: US$ 37.73) ...... 36

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China NEV market outlook

We see enormous growth potential of the NEV market in China. In 2021-25E, we project NEV sales volume to increase from 1.37mn units in 2020 to 6.21mn units in 2025E at a CAGR of 34.2%. We also expect NEV sales penetration rate to expand from 5.4% in 2020 to 20% in 2025E.

We think there are solid fundamentals to support NEV’s extraordinary growth path in China. At the micro level, we observe significantly increasing consumer recognition of NEV, with evidences of NEV consumption upgrade towards mainstream B/C class vehicle models. Evolving NEV technologies, such as improving mile range as well as increasing smartness has boosted consumer demand for better user experiences.

At the macro level, we also see strong government policy supports to sustain NEV market’s long-term growth. Chinese government had laid out NEV development plans for 2021-2035, and non-monetary policy tools will replace subsidy-driven stimulus from 2023E. With respect to China’s passenger vehicle sales market overall, we expect sales to resume growth track after consecutive declines in 2018-20 due to various reasons. We expect passenger vehicles to achieve a high growth rate of 12-14% in 2021E on back of stimulus policies, such as “boosting rural auto sales (汽车下乡)”. We also believe luxury cars will gain larger market shares as Chinese consumers have increasing consumption power. We think a new round of automobile demand growth is coming, and NEV is in a perfect position to catch the surging wave.

Passenger vehicle (PV) sales to resume growth track China's PV sales declined 4%/9% in 2018/19 respectively. In 2020, due to impacts of COVID-19, PV sales in China read a third year consecutive decline by another 6% to 20.18mn units. Sales decline had squeezed auto manufacturers’ margins, and caused continuous market consolidation. To boost PV sales, China State Council re-initiated “boosting rural auto sales” in Dec 2020. We think the stimulus policy will encourage demand from first time buyers in rural areas, which will likely support PV models targeting mass market. We expect leading auto manufacturers’ operating leverage will improve steadily as sales volume increases. Thanks to stable sales and policy support, we expect China PV sales to resume growth track with a double digit growth rate of 12-14% in 2021E. We believe 2021 is a milestone year for a new PV growth cycle.

Figure 1: China’s PV sales forecast in 2021E base Figure 2: China’s PV sales forecast in 2021E bull case case

Source: CAAM, CMBI estimates Source: CAAM, CMBI estimates

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Considerable room for long-term auto sales growth We are optimistic on medium-to-long term auto sales outlook in China. The number of cars per 1,000 people in China was estimated to be about 190 by 2020E, which is still significantly behind the level of 400-600 cars in Japan and South Korea according to the World Bank’s statistics. We expect China resident’s disposable income will expand with continuous economic growth, and that will drive up automobile consumption for personal transportation demand in medium-long term.

Luxury cars are gaining market share

In contrast to overall PV sales trend, the sales volume of luxury vehicle (priced above RMB 300k) in China was 3.24mn units in 2020, a growth of 6.5% YoY, according to CADA. The broad sense of luxury vehicle (including Tesla, NIO and LI) recorded total sales volume of 3.46mn units, up 11.4% YoY.

The market shares of luxury brands continued to rise from 10.7% in 2019 to 13.1% in 2020. We expect the share gain of luxury brands will continue as Chinese consumers have increasing purchasing power with steady economy growth at mid-to-high speed.

Within the luxury segment, BBA (BMW, Mercedes Benz, and Audi) has occupied about 70% market shares. Tier 1 and tier 2 cities accounted for the majority of luxury car sales with YoY growth pace of 12%/9% respectively, while tier 3 and tier 4 cities also read considerable sales growth at 9%/8% respectively in 2020.

Figure 3: Segments mix in China Figure 4: Premium segment share of total market

Source: CADA, CMBIS Source: Global Insight 01/2019, CMBIS

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Figure 5: Sales volume of major luxury brands in Figure 6: Sales volume of luxury brands by city tier China in 2020 level in 2020

Source: CADA, CMBIS Source: CADA, CMBIS

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NEV market has enormous growth potential

We see enormous growth potential of the NEV market in China under the background of energy structure transformation. NEVs also help to achieve leapfrog development of the China auto industry. China’s NEV market was initially promoted through heavy subsidy and experienced some disruptions due to government policy changes. Entering into 2021, we think the market is getting mature, since 1) China has formed the world’s largest consumer market for NEV; 2) NEV cost has experienced continuous decline and is about to reach cost-parity line by 2023E; 3) government policy has laid a solid foundation, turning from subsidy driven towards non-monetary long-term development mechanism; and 4) NEV upgrade to high-end car model will bring more competitions as well as opportunities. We project NEV sales volume in China to reach CAGR of 34.2% in 2021E-25E, deriving from the Chinese government’s ambitious 20% NEV penetration target by 2025E. We think the room for future development of NEV is huge.

NEV development: A leapfrog strategy We think three major considerations jointly led NEV development in China. 1) China has more than 70% dependency ratio on crude oil import, which makes NEV development a natural selection to reduce oil import dependency and to ensure energy safety. 2) NEV could also help ease air pollution pressures as petroleum fuel vehicles’ pollution had become public concerns of the Chinese society. 3) NEV manufacturing adopts significantly different technology route compared with traditional ICE, which will create a leapfrog development opportunity for China’s auto industry.

Government policy laid a solid foundation for long-term development The Chinese government has provided enormous support from the very beginning of the NEV development in the country. In Sep 2001, MIIT has set up a special project for EV within the national "863" plan during the "Tenth Five-Year Plan" period. However, we observe that the first rapid growth period of the China NEV industry began in 2012. Since the "Energy Saving and New Energy Vehicle Industry Development Plan (2012-2020) 《节 能与新能源汽车产业发展规划（2012—2020 年）》" was issued by the State Council and implemented in 2012, China NEV market has entered into a new phase. In Nov 2020, the State Council released New energy vehicle industry development plan (2021-2035), which laid the foundation of NEV development for next 15 years.

Subsidies contributed to the world’s largest NEV consumer market China has the world’s largest NEV consumer market on back of strong policy supports. The Country has ranked No.1 in terms of both NEV production and sales volume for six consecutive years since 2015. In 2020, despite impacts suffered from COVID-19, China still realized NEV sales of 1.37mn units in 2020, accounting for more than 40% of NEV sales of the global market. Those achievements were highly dependent on policy support in early development phases of the NEV industry, however, as subsidy to the NEV manufacturers has lowered retail price and thus boosted end-users demand.

In the early stages of NEV development in China, government had utilized various industrial policies to boost NEV purchase demand. Major policy tools include fiscal subsidies, purchase tax reductions, and restriction exemption (mostly in tier 1 cities). Starting from 2019, government has gradually withdrawn direct subsidy support to manufacturers, and shifted the fiscal supports to users. Government hopes that the NEV industry can shape its own competitiveness to compete with ICE and achieve a healthy development in the long run without any policy and subsidy support.

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We estimate the central and local governments have provided a total of RMB 200-300bn subsidies for NEV industry in the past decade. In 2016, MoF disclosed the fraudulent acts of NEV companies, which shifted government subsidy from manufacturer end to user end, and gradually reduced subsidy strength from 2017. The subsidy policy adjustments have made NEV sales somewhat bumpy in 2018-19. In 2020, however, we observed strong NEV sales volume rebound on the back of increasing NEV competitiveness as well as consumer recognition.

Figure 7: Global NEPV sales in 2019/2020 Figure 8: NEPV sales by country in 2020

Source: GGII, CMBIS Source: GGII, CMBIS

Non-monetary policy tools will be future growth driver We expect Chinese government to gradually reduce market intervention, as domestic NEV market has grown large enough to support its own development. In Jul 2018, China officially relaxed the restrictions on foreign corporation for setting up NEV companies in China. Tesla (TSLA US, NR) as the global NEV leader, took its first mover advantage to set up Giga Shanghai factory in China and achieved impressive sales results in 2020. We think introducing competition and cutting subsidy support will force Chinese NEV companies to accelerate innovation.

Going forward in the near term, MIIT official extended the financial subsidy for NEV by three years to end-2022 on 23 Apr 2020. For the longer-term, MIIT released the "New Energy Vehicle Industry Development Plan (2021-2035)" on 2 Nov 2020. According to the "Plan", China will set an ambitious target to have NEV sales volume accounting for 20% of total vehicle sales by 2025E. In Jun 2020, MIIT revised “Corporate Average Fuel Consumption (CAFC)” and “NEV credit” regulation to foster future ICE fuel consumption improvement and to promote NEV sales and the revised regulation is executed since 2021. We think the policy power will gradually show up, and it will become long term policy support to sustain NEV development.

As subsidy support phase out, we expect the China NEV market to experience a market- clearing phase likely with some bankruptcies in 2020, while some NEV OEMs are also facing increasing challenges. However, as the market expands and competition becomes more orderly, we think leading players will benefit from the changing competitive landscape.

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Figure 9: Summary of national subsidy scheme (RMB/unit) Range (NEDC, km) 2016 2017 2018 2019 2020 2021E 2022E 2023E 100≤R<150 25,000 20,000 ------150≤R<200 45,000 36,000 15,000 - - - - - 200≤R<250 45,000 36,000 24,000 18,000 - - - - 250≤R<300 55,000 44,000 34,000 18,000 - - - - 300≤R<400 55,000 44,000 45,000 18,000 16,200 12,960 9,072 - 400≤R 55,000 44,000 50,000 25,000 22,500 18,000 12,600 - PHEV 30,000 24,000 22,000 10,000 8,500 6,800 4,760 - Retreat % -20% 14% -50% -10%/-15% -20% -30% -100% Source: MIIT, CMBIS

NEV to become mainstream vehicle consumption The year of 2020 was a milestone of NEV development in China, in our view. We observed significant NEV purchase upgrades, reflecting increasing consumer recognition and a breakthrough of NEV demand towards high-end vehicles.

The proportion of A00-class NEV sales has begun to decline since 2017. The sales penetration rate of the A-00 class NEV declined from 54% in 2017 to 18% in 2019. Meanwhile, the proportion of A-class NEV sales gradually increased from 36% in 2017 to 51% in 2019. Market share of B/C-class NEV cars also rose from 4%/0% in 2018 to 13%/3% in 2019. In 2020, the market shares of B/C-class NEV cars climbed further to 29%/10% respectively, reflecting the strong recognition of NEV products.

In 2020, Tesla China had realized stunning sales performance with its A-class sedan, Model 3. Meanwhile, we also observe that many ICE big names were also accelerating their pace in electrification. For example, BBA (Daimler EQ series, BMW i series, and Audi e-tron series) have accelerated its electrification strategies since 2020. We expect several new models at different class levels to be rolled out by a variety of OEMs, forming a complete NEV product line. We expect B/C class EV will start to create challenges to ICE, and that will likely intensify competition between NEV manufacturers and the traditional ICE OEMs.

As NEV consumption gradually becomes market mainstream, we expect that will create opportunities to increase NEV market sales volume as well as ASP boom with increasing high-end vehicle sales.

Figure 10: NEPV sales in China by class Figure 11: Tesla global sales by model in 2020

Source: CPCA, CMBIS Source: Company data, CMBIS

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NEV sales to reach 6.21mn units in 2025E with a CAGR of 34% in 2021-25E Enormous long-term growth Even though the cost of NEV will gradually decrease in the next three years, the retail price will still be higher than the same grade of ICE without any subsidy, in our view. Given full recognition of this fact, the government has already extended the subsidy cutoff by 2022 compared to the initial plan of 2020. Beyond financial subsidy, we expect that other trends such as (1) CAFC and NEV credits, (2) technological support, and (3) battery charge subsidy at the operation side may provide additional support.

We expect NEV to achieve cost parity with ICE between 2023E and 2025E in terms of production cost. According to "Research on the Development Trend of Chinese Traditional and New Energy Vehicles 2050" from CATARC, it will take 5 to 10 years to reach cost parity with ICE in terms of total cost. Based on shrinking cost gap outlook, we expect NEV sales volume to surge in the coming 3-5 years. We also believe the penetration rate of NEV will expand at accelerated speed when cost parity nearly achieves.

Starting from 2023E, we expect NEV sales volume to proliferate with improving sales structure. We take the penetration rate of 20% in 2025E set by MIIT. We project the sales volume of NEV in China to grow to 6.21mn units in 2025E at a CAGR of 34% in 2021-25E. In our view, both NEV OEMs and related NEV parts/components companies will benefit from the future rapid growth.

Figure 12: Global NEV forecast by IEA

2020 2030 2040 2050 NEV sales voulme 7mn NEV sales voulme NEV sales voulme NEV sales voulme units 30mn units 70mn units 100mn units Market share Market share Market share Market share 9% 30% 45% 60%

Source: IEA, CMBIS

Figure 13: NEV sales forecast in China Figure 14: Power battery installed forecast in China

Source: CAAM, CMBIS estimates Source: GGII, CMBIS estimates

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NIO, XPEV and LI are leaders in auto electrification development Remarkable 2020 We think 2020 was a great year for the NEV New Forces. Chinese consumers’ acceptance of NEV increased significantly as advanced power battery technologies substantially improved mile ranges. Mainstream NEV models are able to cover 400km-600km now, compared with 200km-300km in 2018-19. We think four major New Forces are leading the wave of auto electrification in China and stand out as first tier players, namely NIO (NIO US), XPeng Motors (XPEV US), Li Auto (LI US), and Weltmeister (WM, private). These players not only survived fierce market competition, but also realized eye-catching NEV sales performance in 2020. Our discussion in the following section of the report mainly focus on NIO, XPEV, and LI, we call them the three leading new forces.

In terms of 2020 EV delivery, NIO was top one with 43,728 units delivered, followed by LI, XPEV and WM, with 32,624/27,041/22,495 units delivered, respectively. New Forces’ NEV models offer quick responding powertrain, intelligent cockpit, highly automated driving assist and continuous evolution ability (through FOTA), which provide extraordinary user experiences compared with ICE. We believe these elements have helped shape New Forces' competitive advantages, increase consumer recognition, and gradually form advanced brand awareness. Moreover, we think New Forces have carved out a niche for themselves through outstanding customer services and disruptive technology innovation.

Figure 15: Mainstream NEVs’ mile range has been Figure 16: New Forces’ quarterly auto shipment had improving with power battery technology upgrade experienced continuous growth in 2019/20

Source: CMBIS estimates Source: Company data, CMBIS estimates

Competitive landscape: the door is closing to new entrants 2020 was also a watershed for NEV New Forces. On the one hand we have witnessed the success of the first-tier players, while on the other hand, we’ve also seen various setbacks of some once-influential names such as Byton, Saleen, Zotye and Changjiang EV. Although the NEV market in China is still in its early stages, we think the door to new entrants is closing. We believe there are several touchstones to test whether a company can survive, including 1. launching market-recognized EV model, 2. financing continuous R&D and production, 3. realizing mass production and delivery, 4. continuously launching new models.

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We believe NIO, XPEV, LI and WM have all passed these tests and are heading towards sustainable development. In the future, we expect competition will intensify, as traditional OEMs accelerates their EV development pace, and tech giants rich in capital, such as Baidu (BIDU US/9888 HK), Xiaomi (1810 HK) and even Apple (AAPL US) are also joining the game. We think auto manufacturing qualification and financing capability are the two key barriers for new entrants.

At current stage, as NEV market in China is proliferating at an accelerating penetration rate, we think NEV New Forces are grabbing market share from traditional ICE, while competition within New Forces is not that fierce.

Less burden compared with traditional ICE makers We think NEV New Forces have natural advantages compared with traditional auto makers. One of the key advantages is that NEV New Forces have no historical burden. After a successful 2020, NIO/ XPEV /LI all achieved bumper harvest in both sales performance and fund raising from the capital market. They can make heavy investments in certain new technologies with specific focus (i.e. cutting edge power battery solutions, smart cockpit and autonomous driving) in the coming few years to differentiate themselves further, while traditional ICE makers need to take care of the original industry chain related to ICEs, and at the same time to build NEV ecology such as design, R&D, production and quality control, sales channel, after-sales events, and so on. Therefore, compared with the New Forces, traditional players need to invest more capital and resources.

What makes NIO, XPEV and LI stand out? We believe three common strengths make NIO, XPEV and LI stand out from c.200 NEV manufacturers in China, namely 1) successful products launched at good timing, 2) strong financing capabilities and 3) differentiated positioning through specific R&D focus.

By far, NIO, XPEV and LI each has at least one hot selling EV model in the market. Rising sales figures enhance market confidence, which in turn helps these leading names raise funds through successful equity financing, build healthy balance sheets with ample cash reserves (each has RMB 20-30bn by 2020) and support them on the R&D of new models, such as on the Intelligent cockpit and autopilot.

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Differentiated development path

While sharing some common strengths, we think the three NEV New Forces have created very different product portfolios and development strategy.

We make a comparison of the three companies regarding the following six aspects: 1) Founders and their management style; 2) Market positioning and consumer profile; 3) Branding and distribution channel; 4) EV model planning; 5) Intelligence; and 6) Manufacturing facilities.

Founders and their management style Founders of NIO, XPEV and LI have strong backgrounds in the internet industry, and they are all serial entrepreneurs with successful track records. This has helped New Forces to attract venture capital and tech giants to back them in the early stage financing.

The three founders brought an internet mindset to New Forces, which helped them prioritize building user experience-focused products and services over short-term profitability. They are also good at creating word-of-mouth fission and establishing their own user ecosystem. If we look back on their development histories, each of the three has experienced trial and error and constantly revised product positioning and business strategy, which is also the perfect embodiment of Internet thinking.

We believe the three founders are very influential to their own companies and KOLs in social media. Their active exposure on social media has gained them numerous followers, bringing more traffic to their stores at no marketing costs.

Through WVR arrangement, the three New Forces ensure the founders’ absolute control over their companies, where they hold 11.5%-19.8% equity interest but 41.30%-71.2% voting rights. The three companies also have equity incentive schemes to retain talents and align management interests with companies.

Figure 17: Founder of NEVs New Forces NIO XPEV LI Founder Li Bin He Xiaopeng Li Xiang

Previous Company and Founder and CEO Co-founder Founder and CEO position of Yiche of UC Browser of Autohome

Beneficial ownership 11.50% 25% 19.80%

Voting rights 41.30% 57.40% 71.20%

Meituan, Tech Giant backing Tencent Alibaba, Xiaomi Bytedance Source: CMBIS

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Market positioning and consumer profile The New Forces have significantly different market positioning, and they all focus on emphasizing differentiated product portfolio. Compared with the barrel effect of traditional automobile enterprises, New Forces bring the long board effect into full play, constantly strengthen customers' demand for a specific function, and identify the target customer group.

NIO takes premium perception and excellent service as its core selling point. We think NIO extended its basic services provision to far beyond traditional auto makers’ service scope, such as life-long free warranty, free power swap, free remote power charging, road rescue, etc. NIO also provides value-added services such as “worry free service”. Good services have earned NIO brand reputation, but also consumed many internal resources and drove up overall expenses of the Company. NIO has price range coverage of RMB 300-500k.

XPEV focuses more on the mass market, and positions itself as a leader in intelligent and autonomous driving. XPEV has a price range coverage of RMB 150-400k. Lower price range and less operating costs also make XPEV fit the needs of ride-hailing drivers.

LI precisely targets multi-child family users. LI builds it key selling points on extended range powertrain and large vehicle space. It helps relieve consumers’ mileage anxiety arising from insufficient charging infrastructure supports. LI highlights the features of cost-effective performance, and has a price range coverage of RMB 300-400k.

Figure 18: Key words for New Forces New Forces Key words Premium branding, Service ecology, user community, BaaS, ADaS, NIO NOMI

XPEV Economy, Mass market, Autonomous driving, NGP

LI EREV, large space, family users, cost-efficiency, high margin

Source: CMBIS

The three New Forces have accumulated a considerable customer base along with their continuous ramp-up of delivery. As they use mobile APP as the key of service provision, we take URORA’s MAU data of New Forces’ mobile APP in Aug 2020 as a proxy of user profile analysis though the sample selection and the timing of the investigation may cause some bias.

In terms of gender distribution, the proportion of male users of NIO’s APP was 63.6%, and the male-female ratio was more balanced compared with LI and XPEV. For LI, its data showed that male comprised most of its user base. In terms of age distribution, New Forces’ app users were mainly concentrated in the range of 26-45 years old.

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Figure 19: APP user profile - Male vs Female Figure 20: APP user profile - Age distribution

Source: Aurora Mobile, CMBIS Source: Aurora Mobile, CMBIS

In terms of APP users’ geographic distribution, XPEV seemed to have more users in tier 1 (41%) and new tier 1 cities. NIO and LI both companies had accumulated some user base in lower-tier cities in China. Looking forward, we think all three New Forces will continue to expand their market share in lower-tier cities to achieve more auto sales. In terms of commuting distance, XPEV had higher proportion in longer distance distribution. We think that also reflects that XPEV may have users running ride-hailing business.

Figure 21: APP user profile – City tiers Figure 22: APP user profile – Commuting range

Source: Aurora Mobile, CMBIS Source: Aurora Mobile, CMBIS

In terms of customer interests, according to Baidu index data, NIO and XPEV were more popular in Guangdong Province and Shanghai, while LI was discussed more in Zhejiang and Jiangsu Province. Overall, we think key consumer groups of the three New Forces are in tier 1 cities and Eastern coastal cities for stronger consumer affordability and tighter license restrictions.

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Figure 23: Baidu index: NIO

Source: Baidu, CMBIS

Figure 24: Baidu index: XPEV

Source: Baidu, CMBIS

Figure 25: Baidu index: LI

Source: Baidu, CMBIS

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Distribution channel The three New Forces adopt either direct selling or direct selling + franchise distribution models, which is very different from traditional ways through auto dealers and 4S stores. New Forces focus only on display and delivery. For store location, they prefer to have showrooms located in core business districts, airports and other high-traffic areas, which is different from the suburban location of traditional 4S stores.

The increasing number of exhibition halls improves consumer cognition, and we believe this will continue to contribute to sales and delivery growth of New Forces in the next two years. We expect the New Forces to gradually penetrate tier 3 and tier 4 cities as user base extends.

By end-2020, NIO had 23 NIO Houses and 203 NIO Spaces, covering 121 cities in China. In 2021, NIO will add 20 more NIO Houses and 120 more NIO Spaces to reach the target of 366 stores nationwide.

XPEV adopts the model of direct selling + franchise, which can leverage third-party resources to achieve rapid expansion. By the end of 2020, XPEV has 160 sales outlets (including 72 self-operated) and 54 service outlets nationwide, covering 69 cities. XPEV plans to further increase the proportion of self-operated outlets in 2021E, and grow the total number of sales outlets to 300 by 2021E, covering more than 110 cities.

LI had 60 retail centers in 47 cities and 121 after-sales maintenance centers and authorized stamping spraying centers, covering 89 cities by Jan 2021. LI plans to expand to 200 stores in 100 cities by 2021E.

Figure 26: NIO House - Hangzhou Figure 27: NIO Space

Source: SHL, CMBIS Source: NIO, CMBIS

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Figure 28: XPEV Store Figure 29: LI store

Source: XPEV, CMBIS Source: Autohome, CMBIS

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NEV model planning

Although founders of the three New Forces have all stated their respective benchmarking traditional auto makers, we do not find this meaningful. We believe their competitiveness and growth potential depends on their new model pipelines, pricing zone, technological routes, etc.

Figure 30: NIO, XPEV and LI’s major EV model in production EVs Model Price (RMB 10K) Wheelbase Mile range NIO EC6 Mid-size SUV 36.80-52.60 2900mm 430-615km ES6 Mid-size SUV 35.80-51.80 2900mm 420-510km ES8 Mid-/large-size SUV 46.80-62.40 3010mm 415-680km

LI ONE Mid-/large-size SUV 32.8 2935mm 180km/REEV

XPEV P7 Mid-size sedan 22.99-34.99 2998mm 562-706km G3 Compact SUV 14.68-19.98 2625mm 460-520km Source: Company data, CMBIS

NIO NIO currently has three models in production. NIO ES8, a medium and large SUV, was delivered in mass production in Jul 2018, with a current price range of RMB 468k to RMB 624k. The mid-size SUV NIO ES6 was mass-produced and delivered in Jun 2019, with a current price range of RMB 358k-526k. The mid-size SUV EC6 was mass produced and delivered in Oct 2020, with a current price range of RMB 368k-526k.

In terms of future model planning, two models are coming in sight. The fourth model is NIO ET7, which will be based on NIO's second-generation NT2.0 platform. It is expected to be delivered in 1Q22E, with a price range of RMB 448k-526k. The standard version of the ET7 is powered by a 70kWh or 100kWh battery pack, with a range of 500km or 700km, respectively. With the newly released 150kWh battery pack, the NEDC range can reach 1,000km. The battery pack uses advanced mass-produced solid-state battery technology to achieve an ultra-high energy density of 360Wh/kg and is upgradable for all NIO models. The 150kWh battery pack version ET7 will be delivered in 4Q22E.

The fifth model will be a mid-size sedan, also based on the NT2.0 platform, with a price range of RMB 300k-350k. According to management, NIO will continue to launch one new model per year in the next few years.

We believe NIO's model planning mainly covers the luxury segment, having little overlapping with Tesla's price range. In the context of competitors' gradual price reduction, NEV luxury brands will face competitions from middle-/high-end NEV companies. We believe NIO has successfully built a luxury brand image with growing matured user community. Therefore, we do not rule out the possibility that NIO may enter into the middle- /high-end segment through introducing an independent brand similar to Lexus vs Toyota, etc.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 18 16 Apr 2021

Figure 31: ES8 Figure 32: ES6

Source: Autohome, CMBIS Source: Autohome, CMBIS

Figure 33: EC6 Figure 34: ET7

Source: Autohome, CMBIS Source: Autohome, CMBIS

XPEV XPEV currently has two models in production. The XPEV G3, a compact SUV, achieved mass production/delivery at the end of 2018 and is currently priced between RMB 146.8k- 199.8k. G3 is expected to release an interim facelift version in 3Q21E. The mid-size sedan P7 achieved mass production/delivery in Jun 2020, with a current price range of RMB 223k- 410k. We think XPEV is having head-to-head competition with Tesla’s Model 3 within same EV class and similar price range.

XPEV launched a brand new compact sedan called P5 on 14 Apr 2021. P5 is developed based on “David-Platform”, same as the G3, and equipped with two “HAP” LiDAR produced by Livox. P5 will extend XPEV’s NGP service (through XPilot 3.5) from highway to city road with the supports from the two LiDAR. XPEV announced the P5 will start delivery from 4Q21E, and pricing and detail configurations will be released in Shanghai Auto Expo in 21-28 Apr 2021. We expect the P5 will be priced in a range of RMB180k-200k.

In terms of future model planning, we expect the fourth model will be a B-class SUV on the same platform as the P7 and installed with the latest XPilot 4.0 system. XPEV is also expected to launch its fifth model based on a brand new platform. We believe the forth and

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 19 16 Apr 2021 fifth models will widen the current price band, while remain in the middle to high-end segment.

We believe that the model planning of XPEV covers the middle to high-end market and has the highest overlap with the price range of Tesla among New Forces. Compared with NIO's current positioning in the luxury market, we believe that XPEV's product positioning reflects its overall strategy. Since XPEV mainly has sharpened its competitive advantage through automatic driving and intelligent cockpit, it needs to expand total delivery and customer base in order to collect user data and automatic driving data for technology iteration. As intelligent configuration requires heavy investment into hardware, we believe it will be barely possible for XPEV to have further price cut or entering into the low-end market.

Figure 35: P7 Figure 36: G3

Source: Autohome, CMBIS Source: Autohome, CMBIS

Figure 37: XPEV P5 Figure 38: XPEV P5 adopts 2 additional sensing equipment – the Livox HAP LiDAR

Source: Company data, CMBIS Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 20 16 Apr 2021

Li Auto LI has differentiating EV model planning compared with other New Forces peers. Currently, LI has only one SUV on sale called Li ONE. Li ONE adopts extended range powertrain system, in order to relieve consumers’ mile range concern with the most cost-effective solution in current imperfect charging network. The EV-only range is 180km, and quick charge/slow charge takes 0.5 hours/6 hours. Li ONE is precisely designed for multi-person child families, with large size and sense of space, and has won the favor of family users. Li ONE achieved mass production and delivery in Nov 2019, and has unified standard configuration with a pricing of RMB 328k. Li ONE is equipped with L2 ADAS hardware system.

At current stage, we think the EREV is quite attractive to end consumers as it relieves range anxiety. In terms of plug-in hybrid models, technologies adopting hybrid systems, such as BYD’s DM-i platform and Great Wall’s Lemon DHT, will excel EREV and fuel vehicles from both performance and efficiency. Regarding power system technologies, we believe BEV is the long-term hope, while hybrid is the mid-term winner.

According to LI’s 4Q20 briefing, the Company is planning to launch two new vehicles each year from 2022. The Company expects to launch both new model in 2H22E, of which a full size SUV (LI internal code “X01”) is highly visible. We expect this full size SUV will have premium positioning compared with Li ONE, and the new model will be equipped with L4 level hardware and enables autonomous driving through FOTA. We expect this full size SUV will have significantly higher pricing than Li ONE.

In respect of BEV pipeline, LI is currently developing its pure electric platforms route based on fast charging on high-voltage solutions, aiming at charging 80% battery capacity in 10- 15 minutes and supporting 500km mileage. The Company is developing two BEV platforms, namely “the Whale platform” and “the Shark platform”. The Whale platform will focus on space, targeting family users, while the Shark Platform will focus on performance, targeting younger users.

We expect LI to maintain its high-end and premium positioning in short term, while leaning towards luxury car market in first and second tier cities and family users. In the longer run, the Company plans to expand its coverage to mass market and lower tier cities. The Company’s long term pricing range will cover RMB 150-500k.

Figure 39: ONE Figure 40: EREV powertrain

Source: Autohome, CMBIS Source: Autohome, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 21 16 Apr 2021

Manufacturing facilities The New Forces prefer OEM or manufacturing factory acquisition to shorten product launch – delivery cycle and seize market shares. There is a precious window for EV new entrances to enter the market while the traditional ICE makers are also transforming towards the EV era, in our view. When traditional auto makers prepare their EV product lines during the transition period, we think the new forces could leverage first-mover advantages to build up branding and manufacturing-delivery channel to gain market shares. As time goes on with more new EV models to launch to the market, we think the time window is closing for new entrances.

Based on three leading new forces manufacturing facilities layout, we think the supply side would not constrain the short term and the key of New Forces’ auto sales ties to end-user demand and delivery.

NIO is currently relying on OEM by JAC. NIO signed an auto manufacturing framework agreement with JAC back in Apr 2016 for a phase 1 capacity of 50k units per year. On 5 Mar 2021, JAC announced to establish a JV with NIO called “Jiang Lai Advanced Manufacturing Technology (Anhui) Limited, (“ 江 来 先 进 制 造 技 术 ( 安徽) 有 限 公 司 ， aka..Jianglai)”. We expect JAC to continue to perform OEM services to NIO with the establishment of the Jianglai JV. According to NIO management’s briefing in the 4Q20 conference call, Jianglai had reached 90k units per year output and planned to expand capacity to 300k units by end-2021.

XPEV currently has two manufacturing facilities commenced operation in Henan Zhengzhou and Guangdong Zhaoqing, respectively. Zhengzhou plant was co-invested by XPEV and Haima Motor, and it has an annual capacity of 150k units, mainly for G3 SUV. Zhaoqing Plant is fully owned by XPEV mainly for P7 sedan’s manufacturing and has an annual design capacity of 100k units. The Company also has its third manufacturing base in Guangzhou under construction. Guangzhou manufacturing base requires RMB 3bn CAPEX and has 100k units annual capacity. According to recent management update, XPEV’s Guangzhou plan is expected to commence operation in 3Q22. On 8 Apr 2021, XPEV inked cooperation agreement with Wuhan City for a new NEV manufacturing base with an annual capacity of 100k units.

LI’s manufacturing facilities is located in Jiangsu Changzhou, manufactured through OEM by Chongqing Lifan’s Changzhou subsidiary. LI has a design capacity of 100k units per year in the Changzhou manufacturing base.

Figure 41: Summary of NIO, XPEV AND LI’s manufacturing facilities NIO XPEV LI Location Hefei Guangzhou Changzhou OEM qualification/partner JAC Haima Motor Chongqing Lifan Facilities & capacity JAC-NIO Zhaoqing Changzhou -150k units (1-shift) -100k units (1-shift) -100k units (1-shift) -300k units (2-shift) -180k units (1-shift) Guangzhou -100k units (under construction) Wuhan -100k units (inked aggrement) Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 22 16 Apr 2021

Figure 42: JAC NIO factory Figure 43: NIO Hefei factory

Source: XCAR.com, CMBIS Source: Cheyun, CMBIS

Figure 44: XPEV-Zhaoqing factory Figure 45: LI – Changzhou factory

Source: Autohome, CMBIS Source: Autohome, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 23 16 Apr 2021

Smart cockpit and autonomous driving Intelligent cockpit, autonomous driving, and continuously over-the-air (OTA) upgrade are the three principal features that make the New Forces stand out from traditional ICEs. In the current EV model, NIO and LI selected Mobileye’s solution to realize L2-L2.5 grade advanced driver-assistance systems (ADAS), while XPEV chooses to use NVIDIA’s AI platform for full-stack R&D development. We summarized several key highlights for the New Forces’ autonomous driving in the following table.

Figure 46: Major models of EVs Computing Auto pilot Company EV model Supplier Processor AD class power system NIO ES8, ES6, EC6 Mobileye EyeQ4 2.5tops NIO pilot L2.5 ET7 NVIDIA Orin 1,016tops NAD L4 XPEV G3 NVIDIA Xavier 30tops Xpilot 2.5 L2.5 P7 NVIDIA Xavier 30tops Xpilot 3.0 L3 LI ONE Mobileye EyeQ4 2.5tops L2 Source: Company data, CMBIS

Comparing Mobileye and NVIDIA’s autonomous driving solutions, we think NVIDIA’s solution has higher development flexibilities, while Mobileye provided highly integrated solutions. We believe automakers cannot retrieve data from Mobileye’s infrastructure and algorithm logic, therefore they cannot perform in-depth redevelopment from Mobileye’s solutions for localized enhancement from the infrastructure level.

We believe autonomous driving technologies are still in the early development stage with variate possibilities. We believe data accumulation and many algorithm optimizations and iterations will be crucial to success during the technological progressing period. For new entrants, hiring experienced personnel could shorten some development time, but we think it is more important to accumulate technology know-how based on gradual optimization and iteration for the longer-term success of AD technologies. XPEV decided to have full- stack R&D for its AD development from infrastructure level algorithm at the very beginning of the Company’s establishment.

Comparing with Tesla, we think new forces are lagging behind in both AD development and AD hardware integration due to R&D time lag and iteration gap. As the three New Forces are accelerating R&D investments, we expect the gap will be narrowed, and New Forces can do better in localization and provide users more attentive user experience.

XPEV – leading AD development among the three

XPEV uses NVIDIA as the critical processing set supplier for major EV models and uses the Infineon chipset for some of its low-end EV. XPEV uses a mainstream autoSAR operating system. In terms of AI perception, XPEV has its visual perception algorithm, leveraging GPU’s computing capability to retrieve critical data such as position, speed, road width, etc. In Jan 2021, XPEV launched its Navigation Guided Pilot (NGP) update through OTA, enabling P7’s autonomous driving capability to the L3 level. During XPEV’s 4Q20 results announcement, management said its NGP take rate had reached 20% by end-Feb 2021, and NGP mileages had exceeded 1.3mn kilometers used for more than 50% functional scenarios (mostly highway). We think XPEV is currently leading in AD development among the three.

XPEV has three types of major EV models (low, medium, and high-end). Low-end models do not support XPILOT and ADAS; medium models have XPILOT 2.5 built-in with the

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 24 16 Apr 2021 hardware and software needed, and are capable of intelligent parking, driving, and enhanced safety systems; high-end models are equipped with XPILOT 3.0 hardware but still need extra charge for activating full function. The standard price for XPILOT 3.0 activation is RMB 36k, and XPEV offers a promotion for the buy-with-car option at RMB 20k.

Figure 47: XPILOT Function Entry-class Mid-class Luxury-class XPILOT 2.5 XPILOT 3.0 AEB None Yes Yes LDW None Yes Yes BSD None Yes Yes RCW None Yes Yes TSR None Yes Yes 360-degree panoramic camera None Yes Yes ACC None Yes Yes LCC None Yes Yes ALC None Yes Yes NGD None None Yes

Parking lot memory - parking None None Yes Source: Company, CMBIS

LI selected NVIDIA, and Desay SV Auto (002920 CH, NR)’s autonomous solution for its L2.5 ADAS development. LI’s ADAS package is built-in with Li ONE and requires no extra charges for now. LI is aware of the importance of AD in future EV sales and has been gradually establishing autonomous driving R&D. LI will accelerate CAPEX for its autonomous R&D in the coming few years.

NIO uses Mobileye’s solutions for its existing EV models. However, due to limited data accessibility for modification from infrastructure level algorithm, NIO seems to take it as a transitional plan. NIO restated the L4 autonomous driving in-house R&D project in Nov 2020 and is now in the phase of R&D team establishment and data collection. NIO’s autonomous driving system is called NIO Pilot, and its core ADAS functions are grouped as a selection package with pricing for RMB 15k for several features. NIO Pilot’s full package includes all the function selection packages and additional functions for Navigation on Pilot (NOP) system (L3 level), which enable NIO’s EVs to enter and exit the ramp, overtaking, merging lane, cruising etc., and other functions according to the path automatically under certain conditions.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 25 16 Apr 2021

Reshape user interaction through voice control

The NEV New Forces emphasize vehicle smartness in product design. They had developed advanced voice control system to pick up user command through continuous conversation to reshape user interaction and provide excellent user experiences. We think intelligent cockpit is a crucial element differencing New Forces from ICE rivals and Tesla. We think NIO and LI are leading in intelligent cockpit development, as NIO created visualized in-Car AI assistant,” NOMI”, while LI stands out with a multi-screen solution with well-adapted mobile apps.

Figure 48: NIO created visualized in-Car AI assistant Figure 49: LI stands out with a multi-screen solution

Source: Autohome, CMBIS

Source: Autohome, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 26 16 Apr 2021

Competition with Tesla

As the key rivals of the three New Forces, Tesla had initiated several price cuts on its major BEV models of Model 3 and Model Y. Frequently cutting selling prices may hurt Tesla’s brand image as existing customers may perceive asset value impairment. However, we think the advantages of price cuts outweigh potential impacts.

In a longer-term period of view, we believe Tesla’s long-term earnings growth will be building on various business models based on OTA upgrade, IVI fees, Robotaxi hailing, energy storage services, as well as EV heavy truck sharing. We believe lower selling price would be necessary for Tesla to expand its user bases and realize those business models. With increasing localized parts supply from China and auto output, we think Tesla’s Model Y will realize further cost reduction and has room to cut further. We believe Tesla is taking market share as a priority, and we believe an even lower price new car model (Model 2) is likely to be launched to seize more market shares.

We believe Tesla’s aggressive expanding market strategy will have impacts on the three New Forces. Based on EV models and pricing, we think Tesla’s Model Y may face increased competition from NIO’s EC6 and LI’s ONE, while Model 3 will have a continuous price cut against XPEV’s P7. The price of Model Y is now below NIO’s EC6 and ES6 and has potential room to have further price cuts. We think Tesla’s aggressive pricing will bring some impacts to NIO’s sales, especially the peak sales level of serval key models.

Figure 50: New Forces pricing compared with Tesla Figure 51: Tesla’s Model 3 and Model Y have similar China specification and aggressive pricing compared with New Forces Model/Type Wheelbase Mile range Price (mm) (km) (RMB k) Sedan P7 2998 562-706 229.9-349.9 Model 3 2875 468-668 249.9-339.9

SUV ONE 2935 180(EREV) 328-338 EC6 2900 430-615 368-526 ES6 2900 420-510 358-518 Model Y 2891 480-594 347.9-377.9

Source: Company data, CMBIS Source: Company data, CMBIS

In the view of the overall auto sector, however, consumer needs are by no means simple. Increasing new models will definably intensify market completion, but it is always product power which determines the success or failure of an automaker. We think the New Forces, especially NIO, actively establish competitive edges such as power battery swap services for free, offline activities, used car trade-in services, and accelerating roll-out of new models. Based on the current timeline, we believe NEV development is still in the early phase with an accelerating growth pace in China. We think differentiated products and strategic customer focus will support the New Forces’ sales growth.

We think the New Forces have two directions to compete in the market: 1) to participate through price war to defend market shares, or 2) to enhance branding image and shaping ecosystem.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 27 16 Apr 2021

For the former direction, product price may experience direct or indirect decline through 1) transferring the price and cost to selective value-added services, such as power battery leasing, and 2) launching new models which adopt cheaper parts such as LFP battery and single motor. XPEV had launched the LFP version of P7, while we think NIO is also preparing for its LFP EV model. We believe there would be a trade-off between EV sales volume and premium pricing when boosting overall revenue and gross profit for the latter direction.

MCU supply shortage may be a short term risk

Semiconductor supply shortage since 4Q20 had caused automotive production decline in 2021 due to limited MCU supply. We think the NEV New Forces are more or less suffering from the supply shortage issues, as NIO had announced temporary suspension of vehicle production for five working days in late Mar 2021.

We believe there are various reasons which lead to MCU supply shortage, including

1) automotive industry has very low MCU inventory level based on lean production and just-in-time manufacturing; 2) MCU demand is significantly higher than expectation on unexpected strong automotive demand; 3) semiconductor capacity addition takes long lead time, while manufacturing was further disrupted due to several outages caused by blizzard weather in Texas and fire accident in Japan; and 4) restocking inventory level from tier 1 OEMs had further intensified supply shortage.

In terms of MCU manufacturing technology and capacity releasing pace, we do not expect the supply shortage issue to persist long. In the near term in 2Q-3Q21E, however, we think MCU supply shortage could be a bottleneck to the NEV New Forces’ manufacturing and vehicle deliveries.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 28 16 Apr 2021

Sales and breakeven outlook

Based on the New Forces’ market positioning, target price range and new NEV model launching plan, we make our auto sales projection in 2021-25E to estimate the three companies’ financial outlook.

Sales volume, market shares and ASP trend

We expect the New Forces’ aggregate sales volume to increase from 103.4k units in 2020 to 192.7k in 2021E, led by NIO with 87.2k shipment in 2021E. Aggregate market shares of the three New Forces is expected to grow by 2.5ppt to 10.1% for NEV sales in China. In a longer-term outlook, following our growth path projection, we expect auto-shipments of the three New Forces will grow to 912k in 2025E, reflecting a CAGR of 47.5% in 2021-25E. In terms of market shares, we estimate aggregate market shares of NEV sales in China of the three new forces will increase to 14.7% in 2025E.

For growth breakdown among the three, we expect:1) XPEV shipment to accelerate at the fastest pace with 2021-25E CAGR of 54.9% on the back of leading autonomous driving technology and lower selling price range; 2) LI to have a shipment to increase at CAGR of 50.4% based on its model planning for launching two new models for each year from 2022; 3) NIO to expand at a relatively slower pace at a CAGR of 40.6% in 2021-25E for its high- end positioning with a higher price and higher base than XPEV and LI.

In 2025E, we expect NIO/ XPEV /LI to have similar market shares of 5.5%/4.5%/4.7% respectively in the China NEV sales market. Our market shipment and market share projection is highly linked with each company’s new model launching plan.

We expect all three New Forces to have a largely stable ASP trend with a close-range movement for ASP (VAT excl.) outlook. We think XPEV to have ASP gradually increase for EV model upgrade, while NIO may likely have a reverse trend for increasing penetration from high-end towards the mid-range market.

Figure 52: Our delivery projection path for the three Figure 53: New Forces aggregate market share New Forces in 2021E-2025E will increase from 7.6% in 2020 to 14.7% in 2025E

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 29 16 Apr 2021

Figure 54: ASP outlook Figure 55: Market shares in China NEV sales

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Increasing expenses from R&D and SG&A in 2021-22E

The three New Forces are accelerating R&D expense through hiring more R&D headcounts and SG&A expenses through aggressively expanding retail distribution channels to boost overall sales volume. Management of XPEV and LI intend to double the R&D headcount, and NIO also plans to raise R&D expenses to above RMB 5bn in 2021E, representing c.100% growth YoY.

In the near term, as XPEV is leading in AD development pace (XPEV launched L3 level NGP in Jan 2021, vs. NIO and LI to launch same grade functions from 2022 onwards), we expect XPEV to have higher R&D efficiency in terms of R&D expenses to revenue ratio.

For SG&A expenses, LI has a restraint spending pace comparing with NIO and XPEV. LI already exhibited reasonable SG&A expenses control in 2020, and we expect LI to perform well on the expenses and to outperform peers. XPEV is lagging in SG&A efficiency as the Company is still in the early phase of the delivery ramp cycle. NIO has the highest SG&A expenses in terms of absolute amount as NIO adopts premium services and luxury branding positioning.

Figure 56: R&D expenses outlook Figure 57: We expect XPEV to have relatively higher R&D efficiency in near term

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 30 16 Apr 2021

Figure 58: SG&A expenses outlook Figure 59: LI is leading in SG&A expenses efficiency

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Breakeven likely to come in 2023-24E

Based on our sales and expense projections, we expect all three NEV New Forces to realize net profit breakeven in 2024E. Given better overall gross profit margin and expenses control outlook, we expect LI to be the first new forces to reach breakeven. In 2021-2023E, we expect new forces to have net losses range of RMB 585mn to RMB 5.7bn.

Sound financials with massive cash reserves

We are not concerned about the New Forces’ accelerating expenses and potential loss- making in 2021-23E. In 2020, the three New Forces had successful fundraising practice through IPO and placements. By end-2020, the New Forces had cash reserve range from RMB 30bn-42bn, enough to cover the significantly increasing R&D and SG&A expenses, in our view. Moreover, according to recent market news, the three New Forces plan to have a second listing in the HK capital market. Given NEV’s enormous growing potential in China, we expect the dual listing to be popular in the financial market, further enhancing New Forces’ financial strength. We also believe the strong financing capability is a key element to make New Forces stand out from peers.

Figure 60: New Forces to break even in 2023-24E Figure 61: New Forces are holding excessive cash reserve to sustain future development

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 31 16 Apr 2021

Valuation & Sector pick

LI is our top pick

We initiate China NEV sector with OUTPERFORM rating in view of its enormous growth potential for the next 5-10 years. Within the sector, NIO, XPEV and LI are leaders in the vehicle electrification wave in terms of product development, vehicle intelligence and financing capabilities. We initiate

 NIO with BUY rating, with a TP of US$ 46.32;

 XPEV with BUY rating with a TP of US$ 43.12;

 LI with BUY ratting with a TP of US$ 37.73;

Based on current valuation and potential share price upside, our pecking order in the sector is LI>XPEV>NIO.

We believe the market is evaluating NIO, XPEV and LI by P/S multiples, as all three companies are still making loss with highly uncertain bottom line outlook. We also expect market gives significantly higher P/S multiples to services and other revenue streams, since these segments mainly include software revenue which theoretically have extraordinary high margin as user base expands.

We expect all the three New Forces to experience explosive growth during 2021-25E. In view of technology advancement and increasing consumer recognition, we think they have rapid growth potential beyond 2025E since our NEV penetration rate projection is only 20% in 2025E in China.

We apply 5x P/S P/S multiple to XPEV’s/LI’s 2025E revenue from vehicle sales. Given different monetization pace on the services revenue, we apply 20x/10x P/S for XPEV/LI’s services and other revenue. We derive 2025E target market value and discount back to 2021E based on 18% WACC (all three New Forces have low debt in their capital structure). We derive TP for XPEV at US$ 43.12, and TP for LI at US$ 37.73, implying 37.3%/91.7% upside, respectively.

For NIO, given its leading delivery pace and first mover advantages in software service monetization, we believe the Company deserves some valuation premium. We apply 6x/25x P/S multiple to NIO’s 2025E vehicle sales/service revenue, respectively, and discount back target market capitalization to 2021E based on 18% WACC. We derive TP for NIO at US$ 46.32, implying 30.1% upside. We think the market has priced in higher sales visibility for NIO.

Our financial model and valuation method are sensitive to top line movement, which is highly in correlation with NEV delivery. Therefore, we think market will likely take monthly delivery number as a key performance tracker for NIO’s, XPEV’s and LI’s valuation. We also believe sales performance of new models are critical to New Forces’ valuation.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 32 16 Apr 2021

Figure 62: Our valuation and TP for NIO, XPEV and LI 2021E 2022E 2023E 2024E 2025E NIO Vehicle sales volume (unit) 87,175 124,501 167,591 241,155 341,094 Total revenue - RMB mn 33,069 47,224 63,329 89,575 121,691 Vehicle sales 30,619 43,524 58,047 81,655 110,327 Others and services 2,450 3,700 5,282 7,921 11,364

Share number - mn 1,639 Current price - US$ 35.66 Discount years 1 2 3 4 Discount factors 84.7% 71.8% 60.9% 51.6% Market cap - US$ mn 46,608 53,650 65,117 75,889 Vehicle sales - 6x 2025E P/S 53,100 Others and services - 25x 2025E P/S 22,789 2021 TP - US$ 28.45 32.74 39.74 46.32 Vehicle sales 32.41 Others and services 13.91 XPEV Vehicle sales volume (unit) 48,499 73,468 121,980 193,558 278,954 Total revenue - RMB mn 10,694 16,320 28,055 45,668 66,674 Vehicle sales 10,101 15,344 26,252 42,090 60,612 Others and services 592 977 1,802 3,578 6,061

Share number - mn 789 Current price - US$ 31.40 Discount years 1 2 3 4 Discount factors 84.7% 71.8% 60.9% 51.6% Market cap - US$ mn 12,685 18,687 26,693 34,035 Vehicle sales - 5x 2025E P/S 24,310 Others and services - 20x 2025E P/S 9,724 2021 TP - US$ 16.07 23.67 33.82 43.12 Vehicle sales 30.80 Others and services 12.32 Li Auto Vehicle sales volume (unit) 57,092 73,710 134,736 250,136 291,956 Total revenue - RMB mn 16,564 21,583 40,356 72,664 83,305 Vehicle sales 16,271 21,160 39,487 70,960 81,194 Others and services 293 423 869 1,703 2,111 Net profit (1,472) (1,318) (536) 1,449 2,319

Share number - mn 908.09 Current price - US$ 19.68 Discount years 1 2 3 4 Discount factors 84.7% 71.8% 60.9% 51.6% Market cap - US$ mn 14,502 23,022 35,196 34,259 Vehicle sales - 5x 2025E P/S 32,565 Others and services - 10x 2025E P/S 1,693 2021 TP - US$ 15.97 25.35 38.76 37.73 Vehicle sales 35.86 Others and services 1.86 Source: CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 33 16 Apr 2021

Figure 63: Peers’ valuation EV 2021E Sales Major EV Model Share price Market Cap P/S multiple Company Ticker shipment revenue in China 2020 （US$) (US$, mn) (US$, mn) FY21E Tesla TSLA US Model 3, Model Y 499,550 738.85 709,188 49,475 14.3 NIO NIO US ES6, EC6, ES8 43,728 35.66 58,430 7,173 8.1 Xpeng XPEV US G3, P7 27,041 31.40 24,803 2,925 8.5 Li Auto LI US ONE 32,624 19.68 17,803 3,354 5.3 Source: Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 34 16 Apr 2021

Risk factors Semiconductor supply shortage

We see semiconductor supply shortage a short-term risk factor in 2021. Global tier one manufacturers have been suffering from MCU shortage since 4Q20, and NIO’s manufacturing also halted for 5 days in Mar 2021. We think MCU supply shortage will potentially bottleneck the New Forces’ delivery.

Vehicle defects

As new players with relatively short operating history, the New Forces may face potential product defects or component failure, which could harm their reputation and lead to material financial impacts. NIO, XPEV and LI all had power battery spontaneous combustion record in the past three years. We think potential power battery defects will be a key consumer concern in near term.

Increasing competition

We believe the New Forces are facing increasing competition, not only from NEV peers, such as Tesla, but also from traditional ICE manufacturers. Traditional players are accelerating their transformation paces to meet regulatory fuel saving requirements and to earn emission reduction credit. We think NEV market competition will intensify in China as more players are entering into the market and more models are going to be launched.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 35 16 Apr 2021

CMB International Securities | Equity Research | Company Initiation

NIO (NIO US)

Premium services driving auto sales BUY (Initiation)

Target Price US$ 46.32 NIO is a pioneer in China NEV industry. The Company currently has three Up/Downside +29.9% primary production models, namely ES8, ES6 and EC6, with ET7 upcoming in Current Price US$ 35.66 1Q22E. NIO has its core strategy that emphasizes premium customer services. The Company provides various quality services to solve short-term inconvenience for using BEV, and to increase its branding recognition. NIO is China NEV Sector leading in auto sales and revenue among the three New Forces. We initiate NIO Robin Xiao with BUY rating. Our TP for NIO is US$ 46.32. (852) 3900 0849 [email protected]  Premium services driving auto sales. NIO has its core strategy that

emphasizes premium customer services. The Company provides various Jack Bai quality services to solve short-term inconvenience for using BEV, and to (852) 3900 0835 increase its branding recognition. Other than services, NIO also places focus [email protected] on connecting users through online and offline user community interactions. Through successful brand building and premium services network, NIO is Stock Data able to attract target customers. In 2020, NIO delivered 43,728 units of BEV, Mkt Cap (US$ mn) 58,430 ranking the first among the New Forces companies. Avg 3 mths t/o (US$ mn) 4,491 52w High/Low (US$) 66.99/2.88  Increasing R&D efforts for AD development. NIO launched its flagship Total Issued Shares (mn) 1,362 Source: Bloomberg sedan, the ET7 in Jan during NIO Day. The Company is accelerating R&D efforts through full-stack AD development based on NVIDIA’s Orin processor Shareholding Structure and Aquila Super Sensing hardware solutions in ET7. Mgmt. guided to Li Bin 10.6% Founder vehicles 10.1% double R&D expenses in 2021E. NIO also plans to kick off its brand new Tencent 10.0% “AD as a service (ADaS)”, the NAD service, through a monthly subscription Source: Bloomberg business model. We believe NIO is leading in New Forces for its monetization of software services. Share Performance Absolute Relative  Battery swap: a convenient solution to resolve users' range anxiety. 1-mth -20.6% -23.9% 3-mth -36.6% -41.3% NIO also provides battery rental services as an option for vehicle purchase, 6-mth 27.0% 6.0% namely “Battery as a Service (aka. BaaS)”. We believe that the expansion Source: Bloomberg of NIO's power swap network will bring a non-linear positive effect, that is, the gradual improvement of the power swap network layout will enhance 12-mth Price Performance convenience and support the continuous increase of auto sales volume. US$  Initiate BUY with a TP of US$ 46.32. We estimate the sales volume of NIO 70.0 NIO US CCMP (rebased) 60.0 will reach 341k units by 2025E with a CAGR of 50.8% in 2020E-2025E. We 50.0 expect NIO’s bottom line to break even in 2024E. Based on our SOTP 40.0 valuation, our TP for NIO is US$ 46.32. Initiate coverage with BUY rating. 30.0 20.0 Earnings Summary 10.0 (YE 31 Dec) FY19A FY20A FY21E FY22E FY23E 0.0 4/2020 8/2020 12/2020 Revenue (RMB mn) 7,825 16,258 33,069 47,224 63,329 YoY growth (%) 58 108 103 43 34 Source: Bloomberg Net income (RMB mn) (11,413) (5,611) (5,740) (4,479) (2,040) EPADS(RMB) (3.35) (7.46) (11.58) (12.64) (9.49) Auditor: PwC Zhong Tian LLP YoY growth (%) NA NA NA NA NA Consensus EPADS (RMB) NA NA -2.54 0.09 1.89 P/E (x) NA NA NA NA NA P/S (x) 48.0 23.1 11.4 8.0 5.9 Yield (%) - - - - - ROE (%) (171) (10) (5) (5) (2) Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 36 MORE REPORTS FROM BLOOMBERG: RESP CMBR OR http://www.cmbi.com.hk 16 Apr 2021

Company background

A Pioneer in China NEV industry Founded in Nov 2014, NIO is a global smart EV brand. The Company currently has three primary production models, namely ES8, ES6 and EC6, with ET7 upcoming in 1Q22E. NIO is committed to creating a pleasant lifestyle for users by providing high-performance intelligent EV and extreme user experience. The Company has a product focus on the luxury car market, with a price range of RMB 358k-624k, directly competing with traditional luxury ICE brands such as BBA (BMW, Benz, and Audi).

NIO emphasizes premium customer services as its core strategy. The Company provides various quality services to solve short-term inconvenience for using BEV, and to increase its branding recognition. Other than services, NIO also focuses on connecting users through online and offline user community interactions, which reflects NIO's idea of reshaping user experience in the automotive industry.

NIO went public on the New York Stock Exchange in 2018, mark as the first IPO among various NEV New Forces. In 2020, NIO delivered 43,728 units of BEV, ranking the first among the New Forces. The Company is market leader in high-end EV sales in China.

Figure 64: Premium services is a crucial element driving NIO’s auto sales

Source: Company data, CMBIS

Global R&D presence NIO has 11 R&D and production facilities in Hefei, Shanghai, Beijing, San Jose, Munich and other locations worldwide. Among them, NIO has its global headquartered in Shanghai, and has a key R&D Center for existing models in production. The Shanghai headquarters is responsible for vehicle model development, manufacturing operations, marketing and sales, and user services.

Hefei Government shows great support to NIO NIO gained strong supports from Hefei government. In Apr 2020, NIO chose to have its China business headquarters in Hefei and injected its core business and related assets in China, including vehicle research and development, supply chain and manufacturing, sales and service, and energy service into NIO (Anhui) Holding Co., Ltd., the legal entity of NIO China. A group of strategic investors including Hefei Municipal Government had invested RMB 7bn into NIO China, which sustained NIO’s business when the Company was once tight in cash flow.

On 4 Feb 2021, NIO announced that it would acquire 3.305% of the equity of NIO China from two minority strategic investors with RMB 5.5bn, and increase the registered capital of NIO China of RMB 10bn. After the completion of share buyback and capital subscription, NIO will hold 90.36% of the equity in total in NIO China.

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16 Apr 2021

Figure 65: NIO’s global footprint

Source: Company data, CMBIS

BEV Model planning NIO currently has three models in production, namely ES8, ES6, and EC6.

 ES8, a medium to large size SUV, realized mass production and delivery from Jul 2018, with a price range of RMB 468k-624k.  ES6, mid-size SUV realized mass production and delivery from Jun 2019, with a price range of RMB 358k-526k.  EC6, a mid-size sportive SUV, realized mass production and delivery from Oct 2020 with a price range of RMB 368k-526k.

The fourth model is NIO ET7, a high-end luxury sedan, which will be based on NIO's second-generation NT2.0 platform. ET7 is expected to be delivered in 1Q22E, with a price range of RMB 448k-526k. The standard version of ET7 will be powered by a 70kWh or 100kWh battery pack, with mile ranges of 500km and 700km respectively.

NIO also announced a brand new 150kWh battery pack with ET7. The newly announced large capacity battery has a NEDC range of 1,000km with ET7. The battery pack uses advanced mass-produced solid-state battery technology to achieve an ultra-high energy density of 360Wh/kg and is upgradable for all NIO models. The 150kWh battery pack version ET7 will be delivered in 4Q22.

The fifth model will be a midsize sedan, also based on the NT2.0 platform, with a price range of RMB 300k-350k. The Company plans to launch one new model each year in the next few years.

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16 Apr 2021

BEV model mainly cover luxury segment We believe that NIO's model planning mainly covers the luxury segment, and has little overlapping with Tesla China’s price range. In the context of rival's gradual price reduction, we expect NEV luxury brands will face more competition from middle-/high-end NEV brands. We believe NIO has successfully built a luxury brand image with accumulative maturing user community. In the longer-term outlook, we think NIO may enter into the middle-/high-end segment through an independent brand with similar branding structure such as “Lexus vs Toyota”, etc.

Figure 66: Monthly sales Figure 67: Price range vs Tesla

Source: CPCA, CMBIS Source: Autohome, CMBIS

Figure 68: ET7 Figure 69: NT2.0 Platform

Source: Autohome, CMBIS Source: Autohome, CMBIS

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16 Apr 2021

Autonomous driving (AD) We believe NIO uses supplier solutions to realize ADAS features for current BEV models on sale. For example, EC6 is equipped with AD hardware solutions including a sensing scheme of a set of three upfront cameras, four round-looking cameras, one Bosch fourth- generation 77GHz millimeter-wave radar, four 24GHz angle radars, and 12 ultrasonic radars. The system is powered by Mobileye EQ4 processor and has a computing power of 2.5 Tops. Based on NIO’s current AD development, EC6 supports AD features at the L2.5 level.

As we think Mobileye’s solution cannot support redevelopment through base-layer algorithm, we believe Mobileye’s solution had limited NIO’s AD optimization for localization environments in China. NIO is turning to full-stack AD development based on NVIDIA’s Orin processor from the next BEV model, the ET7. In 2020, NIO set up an independent R&D team for AD hardware, which is called "Smart HW (Hardware)". In Oct 2020, market news revealed that NIO would develop its own self-driving chip, led by CEO, Mr. Li Bin.

We believe that NIO ET7 will significantly enhance NIO's competitiveness in AD. NIO ET7 is equipped with the latest NIO Autonomous Driving (NAD) technology, namely the NIO Aquila hypersensing system, which includes 33 high-performance sensing hardware including eleven 8 megapixel HD cameras (4 forward, 3 backward, 4 round-looking), 1 ultra- long range high-precision LiDAR, and 5 millimeter-wave radars; 12 ultrasonic sensors, 2 high precision positioning units. The LADAR pending to use by ET7 is developed by NIO and Innovusion collaboratively. It has an ultra-wide viewing angle of 120 degrees, an ultra- high resolution equivalent to 300 lines, an ultra-long detection ranges up to 500m, and a focus feature that allows it to distinguish more details. The LADAR uses a 1550 nanometer laser, which avoids the sensitive wavelength of 900 nanometers of the human eye, improving its performance while taking better care of the safety of others.

In terms of computing power, ET7 will carry the NIO Adam supercomputer platform. The platform is powered by four NVIDIA Drive Orin chips with 48 CPU cores, 256 matrix operations units, and 8,096 floating-point operations units, supporting a total of 68 billion transistors and a computing power up to 1,016 TOPS.

NIO plans to kick off its brand new “AD as a service (ADaS)”, the NAD service, through a monthly subscription business model with the ET7. The subscription fee for NAD is RMB 680 per month. We believe NIO is leading in New Forces for its monetization of software services, and we think the subscription fee for NAD's autonomous driving service will be very attractive to NIO’s users.

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16 Apr 2021

Figure 70: NIO Aquila Super Sensing

Source: Company data, Youtube, CMBIS

Figure 71: NIO ADAM super computing

Source: Company data, Youtube, CMBIS

Smart cockpit In 2017, NIO released the world's first mass-produced in-car AI system, “NOMI”, which means "know me". Based on powerful on-board computing capability and cloud computing platform, it integrates voice interaction system and intelligent emotion engine to create an interactive combination of full LCD instrument +10.4-inch vertical central control screen +HUD. Also, unlike virtual assistants, NIO is equipped with a small robot with rich expressions that can perform a variety of operations.

In 2021, with the release of ET7, NIO will launch a second-generation smart cockpit based on the third-generation Qualcomm Snapdragon Car Digital Cockpit Platform and Qualcomm Snapdragon Car 5G Platform. In terms of communication methods, NIO ET7 will have 5G, C-V2X, Bluetooth 5.0, WiFi-6, UWB and other vehicle-mounted communication methods, so that users can enjoy the interconnection experience of high broadband and low latency. The ET7 smart cockpit will be centered on NOMI, with hardware configuration such as 12.8-inch AMOLED central control screen, 10.2-inch digital

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16 Apr 2021 instrumentation, rear HDR multi-function control screen, and HUD enhanced head-up display system.

Figure 72: 2020 Top 5 smart models in China Model Ranking NIO ES8 - new version 1 WEY VV7(Tech model) 2 LI ONE 3 XPEV P7 4

Hongqi H9 5 Source: Cheyun.com, CMBIS

Figure 73: NOMI

Source: Company data, CMBIS

Battery swap NIO has all series products support battery swap solutions. The core idea of battery swap is to realize the separation of vehicle and power battery, which provides a convenient solution to resolve users' range anxiety.

NIO also provides battery rental services as an option for vehicle purchase, namely “Battery as a Service (aka. BaaS)”. User can rent battery with a monthly/yearly installment. We believe that BaaS mainly has the following advantages:

1) Reduce the initial purchase cost of consumers. 2) Improve the convenience of power refill. Compared with the charging mode, the power swap service can realize power refill within three minutes. 3) Foster new business model for battery swap market.

In Aug 2020, NIO led the establishment of a battery asset management company with shareholders including NIO (Anhui) Holdings, CATL, Guotai Junan and Hubei Science and Technology Investment Group.

NIO’s BaaS business model operates in simple steps. When NIO’s customer chooses to purchase vehicle with BaaS option, the customer pays only for the vehicle (battery exclusive) and a monthly BaaS charge of RMB 980/RMB 1,480. Once the BaaS service is

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16 Apr 2021 initiated, NIO will sell the user subscription asset to the battery asset management company.

Under this business model, NIO realizes the divestitures of heavy battery assets, and the revenue stream from the power swap service is shared between NIO and the battery asset company.

To date, according to NIO management’s disclosure, BaaS penetration rate has reached around 55% since the Company launched the service. We believe that the expansion of NIO's power swap network will bring a non-linear positive effect, that is, the gradual improvement of the power swap network layout will enhance convenience and support the continuous increase of auto sales volume.

Figure 74: Price with BaaS Purchase discount One-off discount BaaS Subscription/mo Subscription/yr equivlant to on vehicle price subscription life （RMB） （RMB） （RMB） （years） 70 kWh 70,000 980 11,760 5.95 100 kWh 128,000 1,480 17,760 7.21 Source: Company data, CMBIS

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16 Apr 2021

Sales foracast We expect NIO's sales to continue to rise in the short term, mainly based on 1) the continuous improvement of brand awareness; 2) the increasing recognition of NEV models by consumers; 3) the continuous expansion of sales network. The Company plans to increase the number of stores to 366 in 2021E. 4) Network expansion of battery swap station; 5) propagation effect brought by existing users. At the same time, one new model per year will continue to support overall sales growth in the future.

We are optimistic about the Company's positioning in luxury brand and service as core. We expect it will have a total of seven models in production by the end of 2025E. Given that, we estimate that the sales volume of NIO will reach 298k units by 2025E with a CAGR of 50.8% in 2020-2025E. Due to NIO's positioning as a luxury brand, it will take over the market share of high-end popular brands. Specifically, we expect NIO's market share in luxury NEV market will reach 33% in 2025E.

Figure 75: NIO’s auto shipment forecast and YoY Figure 76: Sales volume forecast: by model change

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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16 Apr 2021

Financial Analysis

Revenue

The Company generates revenue through vehicle sales and other sales and services. In 2020, revenue from vehicle sales increased 106% YoY to RMB 15.2bn, whereas revenue from other sales and services increased 135% YoY to RMB 1.1bn, both can be attributed to strong growth in vehicle delivery.

We expect the Company will continue to expand its market share through channel expansion and new model rollout. Therefore, we forecast the vehicle sales revenue will maintain a growth rate at 101.7% in 2021E while other sales and services will have an even faster growth rate at 127.8% in 2021E.

In terms of ASP, we expect overall pricing to stay in close range with gradual declining trend as we expect future NEW BEV model will tend toward mid-high range with lower price.

 Vehicle sales revenue

Figure 77: ASP forecast Figure 78: Vehicle sales revenue forecast

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

 Other sales and services

Other sales and services primarily includes BaaS service, NIO Life sales, double-credit revenue and possible future NAD subscription revenue. At present, the penetration rate of NIO Pilot (full package + simple package) is about 50%, which reflects that NIO’s luxury car customer has high recognition and willingness to pay for its self-driving function. Therefore, we have confidence in the penetration rate of ADaaS (AD as a service) function.

We also expect a gradual increasing take rate in BaaS given 1) the expansion of battery swap station; and 2) increasing customer satisfaction as the battery swap station 2.0 is setting up at national wide. Given that, we estimate that the other sales and services revenue will maintain a growth rate at 127.8% in 2021E to RMB 2.45bn.

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16 Apr 2021

Figure 79: Other sales and services Figure 80: Revenue mix: vehicle sales to account for the majority of revenue

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

GPM We expect significant improvement on NIO’s overall GPM. As vehicle sales volume continues to climb, economies of scale will gradually materialize. Furthermore, given the gradual increase in the proportion of other sales and services, which has higher margin than that of vehicle sales, we expect GPM to improve further. Specifically, we believe that NIO’s will improve to 16.2% in 2021E from 11.5% in 2020.

R&D and SG&A expenses NIO intends to accelerate R&D expenses to spend more efforts and resources for new vehicle development, AD, and smart cockpit. Management guided 2021E R&D expenses to exceed RMB 5bn, doubling the amount in 2020. For SG&A expenses, given NIO’s premium services provision with increasing retail distribution network plan, we expect SG&A expenses to increase to RMB 4.9bn in 2021E.

Figure 81: R&D and SG&A expenses outlook Figure 82: R&D vs. SG&A ratio as % to revenue outlook

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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16 Apr 2021

Net profit

Since NIO is determined to increase R&D and SG&A expenses in 2021E, we expect net loss will shrink at 0.5% to RMB 5.7bn in 2021E. According to our sales and expense projections, we expect NIO to reach breakeven in 2024E. In 2021-23E, we expect NIO to maintain loss making status. We are not concerned about the potential losses, since NIO had abundant cash reserve of RMB 42.5bn by end-2020. We think NIO has a strong balance sheet to support its expenses and future expansion.

Figure 83: Net profit forecast Figure 84: NIO’s cash reserve distribution in 2020

Source: Company data, CMBIS estimate Source: Company data, CMBIS estimate

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16 Apr 2021

Valuation

Initiate with TP US$ 46.32 (29.9% upside)

We adopt the SOTP method to evaluate NIO’s value, given the Company’s diverse business segments. We also divide NIO’s business segments into two groups, namely

 Vehicle sales - generating revenue and earnings from sales of different EV models and attached basic self-driving hardware/service; and  Streaming revenue - containing other sales and services include BaaS service, NIO Life sales, double-credit revenue and possible future NAD subscription revenue.

We are optimistic about NIO's performance in the luxury car segment market, and believe that its market share in China's luxury NEV market will exceed 20% in 2025E. Therefore, we use valuation multiple of 6x PS ratio for vehicle sales and 25x PS ratio for streaming revenue segment. Furthermore, we use discount rate of 18% to reflect the cost of equity. We estimate the vehicle sales will worth US$ 32.41 per ADS share in FY21E and the overall streaming revenue group will worth US$ 13.91 per ADS share in 2021E.

Figure 85: 2021E SOTP valuation summary 2021E 2022E 2023E 2024E 2025E NIO Vehicle sales volume (unit) 87,175 124,501 167,591 241,155 341,094 Total revenue - RMB mn 33,069 47,224 63,329 89,575 121,691 Vehicle sales 30,619 43,524 58,047 81,655 110,327 Others and services 2,450 3,700 5,282 7,921 11,364 Net profit (5,740) (4,479) (2,040) 1,632 4,823

Share number - mn 1,639 Current price - US$ 35.66 Discount years 1 2 3 4 Discount factors 84.7% 71.8% 60.9% 51.6% Market cap - US$ mn 46,608 53,650 65,117 75,889 Vehicle sales - 6x 2025E P/S 53,100 Others and services - 25x 2025E P/S 22,789 2021 TP - US$ 28.45 32.74 39.74 46.32 Vehicle sales 32.41 Others and services 13.91 Upside -20.2% -8.2% 11.4% 29.9% PE - 2025E 256.6 101.2 2021 P/S 14.8 2022 P/S 10.3

Source: CMBI estimates

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16 Apr 2021

Figure 86: Valuation proportion in 2021E

Source: CMBIS estimates

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15 Apr 2021

Financial Summary

Income statement Cash flow YE 31 Dec (RMB mn) FY19A FY20A FY21E FY22E FY23E YE 31 Dec (RMB mn) FY19A FY20A FY21E FY22E FY23E Revenue 7,825 16,258 33,069 47,224 63,329 Profit before tax (11,288) (5,298) (5,382) (4,265) (1,915) Vehicle sales 7,367 15,183 30,619 43,524 58,047 Interest payment 210 259 93 149 175 Other sales 458 1,075 2,450 3,700 5,282 Depreciation and amortization 999 1,109 1,212 1,362 1,512 Change in working capital 1,298 3,807 1,971 2,122 1,970 Cost of sales (9,024) (14,385) (28,078) (40,089) (52,729) Taxation (8) (6) (5) (4) (2) Gross profit (1,199) 1,873 4,991 7,135 10,601 Others 67 2,080 411 549 99 O perating Cash Flow (8,722) 1,951 (1,699) (88) 1,840 R&D exps (4,429) (2,488) (5,034) (5,267) (5,408) SG&A exps (5,452) (3,932) (4,926) (5,769) (6,990) Change in investments 3,405 (4,591) (5,168) (1,112) (1,113) Other operating profit/(loss) - (61) (60) (60) (59) Others (23) (481) - - - EBIT (11,079) (4,608) (5,030) (3,961) (1,856) Invest ing Cash Flow 3,382 (5,071) (5,168) (1,112) (1,113)

Interest income 160 167 354 321 328 Equity raised (1,429) 42,177 - - - Interest expenses (371) (426) (447) (470) (503) Change of debts 5,126 (494) 500 1,000 1,000 Share profit (64) (66) (40) (24) (14) Dividend paid - - - - - Investment income - - - - - Others (602) (326) 0 0 0 Other income/(loss) 66 (365) (219) (131) 130 F inancing Cash Flow 3,095 41,35 500 1,000 1,000 Pre-tax profit (11,288) (5,298) (5,382) (4,265) (1,915) 7 Net change in cash (2,245) 38,237 (6,367) (200) 1,728 Income tax (8) (6) (5) (4) (2) Cash at the beginning of the yr. 3,224 990 38,545 32,178 31,978 Accretion on NCI value (127) (312) (358) (215) (129) Restricted cash 127 120 131 139 149 Minority interests 9 5 5 5 6 Exchange difference 10 (682) - - - Net profit (11,413) (5,611) (5,740) (4,479) (2,040) Cash at the end of the yr. 863 38,426 32,047 31,839 33,557

Balance sheet Key ratios YE 31 Dec (RMB mn) FY19A FY20A FY21E FY22E FY23E YE 31 Dec FY19A FY20A FY21E FY22E FY23E Non-current assets 9,654 8,435 8,490 8,391 8,151 Sales mix (%) Fixed asset 5,533 4,996 4,901 4,655 4,259 Vehicle 94% 93% 93% 92% 92% Right-of-use assets 1,998 1,350 1,418 1,489 1,563 Other 6% 7% 7% 8% 8% Long-term investments 115 300 300 300 300 Total 100% 100% 100% 100% 100% Others 2,008 1,788 1,871 1,948 2,028 Profit & loss ratios (%) Current assets 4,928 46,207 47,237 49,427 53,493 Gross margin -15% 12% 15% 15% 17% Cash 863 38,426 32,047 31,839 33,557 Pre-tax margin -144% -33% -16% -9% -3% Trade receivables 1,352 1,083 2,204 3,147 4,220 Net margin -146% -35% -17% -9% -3% Inventory 890 1,082 2,111 2,814 3,437 Effective tax rate 0% 0% 0% 0% 0% Short term investments 111 3,951 8,000 8,000 8,000 Others 1,713 1,666 2,875 3,628 4,278 Balance sheet ratios Current ratio (x) 0.5 3.3 2.4 2.0 1.8 Current liabilities 9,499 13,976 19,497 24,390 29,086 Quick ratio (x) 0.3 3.1 2.2 1.8 1.6 Short-term borrowings 886 1,550 1,674 1,874 2,074 Cash ratio (x) 0.1 2.8 1.6 1.3 1.2 Trade payable 3,112 6,368 11,231 15,234 18,982 Debtors turnover days 484 481 458 482 474 Current portion of LT borrowings 322 381 418 468 518 Inventory turnover days 190 100 83 90 87 Accruals and other liabilities 4,217 4,604 5,064 5,571 6,128 Creditors turnover days 197 109 73 83 85 Others 962 1,073 1,109 1,243 1,383 Total debt / equity ratio (%) -167% 24% 30% 43% 53% Net debt / equity ratio (%) Net Cash Net Cash Net Cash Net Cash Net Cash Non-current liabilities 9,905 8,803 10,107 11,786 12,954 Borrowings 7,155 5,938 6,277 7,495 8,295 Returns (%) Operating lease 1,598 1,015 1,148 1,206 1,266 ROE -171% -10% -5% -5% -2% Othersliabilities 1,152 1,850 2,682 3,085 3,393 ROA -67% -15% -10% -8% -3%

Total net assets (4,822) 31,862 26,122 21,643 19,604 Per ADS share EPADS (RMB) (11.1) (4.7) (4.4) (3.4) (1.5) Minority Interest 22 2 2 3 3 DPS (RMB) - - - - - Mezzanine Equity 1,456 4,691 4,691 4,691 4,691 BVPADS (RMB) (4.68) 26.94 20.11 16.50 14.80 Shareholders equity/(deficit) (6,300) 27,169 21,428 16,949 14,909 Source: Company data, CMBIS estimates

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CMB International Securities | Equity Research | Company Initiation

XPeng (XPEV US )

Leading in the race of autonomous driving BUY (Initiation)

Target Price US$ 43.12 XPEV is a market leader in autonomous driving. The Company is positioned Up/Downside +37.3% as a middle/high-end NEV brand, committed deliver cost-effective intelligent EV Current Price US$ 31.40 featuring autonomous driving technology and smart cockpit. XPEV has two models in production, namely G3 and P7, and launched a new compact sedan, the P5 equipped with LiDAR pending to be delivered in 4Q21E. In 2020, XPEV China NEV Sector delivered 27,041 units of vehicles, ranking No. 3 among NEV New Forces. Robin Xiao Supported by leading AD technologies, we expect XPEV to sustain strong growth (852) 3900 0849 momentum in the coming few years. We initiate XPEV with BUY rating. Our TP [email protected] for XPEV is US$ 43.12. Jack Bai  Launched a compact sedan, the P5. XPEV launched the P5 on 14 Apr (852) 3900 0835 2021. The P5 is equipped with two “HAP” LiDAR produced by Livox, which [email protected] help extend XPEV’s NGP service (through XPilot 3.5) from highway to city Stock Data road. XPEV announced the P5 will start delivery from 4Q21E, and pricing Mkt Cap (US$ mn) 24,803 and detail configurations will be released in Shanghai Auto Expo on 21-28 Avg 3 mths t/o (US$ mn) 777.7 Apr 2021. We expect the P5 will be priced in a range of RMB180k-200k. 52w High/Low (US$) 74.49/15.00 Total Issued Shares (mn) 486  Leading in autonomous driving development pace. XPEV adopts in- Source: Bloomberg house full-stack R&D from the beginning of perception, which helps them Shareholding Structure seize leading position in road and traffic data accumulation and utilization, He Xiaopeng 25.0% and understand road condition better than peers and foreign rivals such as Simplicity & Respect entities 22.3 Tesla. We believe XPEV's AD function can provide better-localized user Alibaba 12.3% Source: Bloomberg experience. Other than AD, we also believe XPEV received high praise for its automatic parking and smart cockpit interaction. Share Performance Absolute Relative  Strong sales growth to continue in 2021-25E. We believe distribution 1-mth -11.2% -14.9% channel expansion will be one of the foundations to boost XPEV’s auto sales 3-mth -34.3% -39.2% in a near-term outlook. In the long run, we think XPEV’s auto sales will 6-mth 41.7% 18.2% Source: Bloomberg depend on the competitiveness of its NEV models and its brand recognition. We expect the Company to deliver 48.5k units in 2021E. We project XPEV 12-mth Price Performance to have 309k units auto sales in 2025E, reflecting a 2021-25E CARG of US$ 58.9%. We also expect XPEV to gain market shares from 2.0% in 2020 to 80.0 XPEV US CCMP (rebased) 70.0 5.0% in 2025E. 60.0 50.0  Initiate BUY with a TP of US$ 43.12. We adopt the SOTP method to 40.0 evaluate XPEV’s value based on 5x/20x 2025E P/S multiple on vehicle and 30.0 20.0 services sales revenue and discount back with a 18% discount rate. Our TP 10.0 for XPEV is US$ 43.12, reflecting 2021/22E P/S multiple of 20.5/13.4x. We 0.0 8/2020 12/2020 initiate XPEV with BUY rating. Source: Bloomberg Earnings Summary (YE 31 Dec) FY19A FY20A FY21E FY22E FY23E Auditor: PwC Zhong Tian LLP Revenue (RMB mn) 2,321 5,844 10,694 16,320 28,055 YoY growth (%) 23,815.3 151.8 83.0 52.6 71.9 Net income (RMB mn) (4,654) (4,890) (4,116) (3,641) (2,160) EPADS(RMB) (26.6) (13.0) (5.3) (4.6) (2.7) YoY growth (%) N/A (51) (60) (13) (41) Consensus EPS (RMB) NA NA (5.0) (3.5) (2.3) P/E (x) NA NA NA NA NA P/S (x) 68.7 27.3 14.9 9.8 5.7 Yield (%) - - - - - ROE (%) na (35) (13) (13) (8) Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, Bloomberg, CMBIS estimates

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Company background

A market leader in autonomous driving XPEV (XPEV), founded in 2015, is a leading intelligent EV designer and manufacturer in China. XPEV is positioned as a middle/high-end EV brand, committed to becoming a cost-effective intelligent EV featuring autonomous driving technology and smart cockpit. In 2020, XPEV delivered 27,041 vehicles, ranking No. 3 among NEV new forces.

The Company has a slogan, “To make smart cars that understand China better (做更懂中国的智能汽车)”, reflecting its emphasis on making smart vehicles that suit China’s local environment. XPEV has been deeply engaged in the Chinese market and has established its core competitiveness through in-house R&D for excellent user experience. The Company released its L3 level autonomous driving features through Navigation Guide Pilot (NGP) update on its P7 vehicle model in Jan 2021. Comparing with overseas enterprises, we believe XPEV has already accumulated certain advantages in autonomous driving which fit China’s local traffic environment and other aspects such as smart cockpit.

Model planning XPEV has two models in production, namely G3 and P7.  The G3, a compact SUV, achieved mass production/delivery at end- 2018 and has a price range of RMB 146.8-199.8k. XPEV plans to release an interim facelift version of G3 in 3Q21E.  The P7, a mid-size sedan, achieved mass production/delivery in Jun 2020, with a price range of RMB 229.9k-409.9k.

XPEV launched a brand new compact sedan called P5 on 14 Apr 2021. The P5 is developed based on “David-Platform”, same as the G3, and equipped with two “HAP” LiDAR produced by Livox. The P5 will extend XPEV’s NGP service (through XPilot 3.5) from highway to city road with the supports from the two LiDAR. XPEV announced the P5 will start delivery from 4Q21E, and pricing and detail configurations will be released in Shanghai Auto Expo on 21-28 Apr 2021. We expect the P5 will be priced in a range of RMB180k-200k.

In terms of future model planning, we expect the fourth model will be a B-class SUV on the same platform as the P7 and installed with the latest XPilot 4.0 system. XPEV is also expected to launch its fifth model based on a brand new platform. We believe the fourth and fifth models will widen the current price band, while remain in the middle to high-end segment.

We believe that XPEV’s model planning covers the middle to high-end market, which has the highest overlap with Tesla China among the new forces. Compared with NIO's current positioning in the luxury car market, we believe XPEV's product positioning reflects its overall strategy, that is to ramp up delivery and accumulate large scale user base for collecting user driving data to support its autonomous driving algorithm iteration.

Since XPEV is building autonomous driving and smart cockpit as key competitive features for its EV models, we think intelligent hardware are compulsory configuration in its EV models. We believe that makes further reduction in XPEV’s new model price to a low-end market level barely possible.

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16 Apr 2021

Figure 87: Monthly sales Figure 88: Price range vs Tesla

Source: CPCA, CMBIS Source: Autohome, CMBIS

Figure 89: XPEV P5 Figure 90: XPEV P5 adopts 2 additional sensing equipment – the Livox HAP LiDAR

Source: Company data, CMBIS Source: Company data, CMBIS

Atonomous driving The autonomous driving value chain can be divided into three major categories: perception (front-end), decision (mid-end), and execution (back-end). Compared with peers using Tier 1 suppliers ADAS solution package, XPEV adopts in-house full-stack R&D from the perception sensing end, so that the Company can realize early access of sensing data and accumulate data usage advantages.

Since XPEV is leading in utilizing road condition and traffic perception data, we believe XPEV had accumulated sizable data and understands the traffic and road condition in China better than peers and foreign rivals such as Tesla. We believe XPEV’s AD function can provide better localized user experience.

Take the P7 as an example, it is equipped with XPilot 3.0 autopilot assistance system with hardware solution includes 14 cameras, 5 millimeter-wave radars, and 12 ultrasonic sensors, which constitutes the industry's only 360-degree dual- sensing fusion system. XPilot 3.0 will be used to provide China domestic users with autonomous driving solutions best suit China's road scenarios. In Jan 2021, XPEV enabled the “NGP” function for its XPilot 3.0 system, which supports the P7 EV for realizing L3 level autonomous driving assist in highway.

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16 Apr 2021

For the upcoming P5, XPEV adopts 2 LiDAR as a vision technology support, which is different from Tesla’s autonomous driving solution. The new model will use Livox’s HAP LiDAR.

Livox has completed a series of customizations for XPEV using its Horiz sensor (automotive-grade version of Livox Horizon), with its final mass-produced version boasting a range of industry-leading features. For instance, the detection range of Horiz will be increased to 150m from the 90m of the public sample version Horizon (for objects at 10% reflectivity). This will enable XPILOT autonomous driving system to detect any remote obstacle much earlier with absolute ease on both highways and urban roads. Meanwhile, the Horiz also doubles resolution than its public sample version, with the new ROI (Region Of Interest) point cloud density increased to 144 lines equivalently at 0.1 second without the need for adding extra laser transmitters. The increased point cloud density enables faster detection of tiny objects on the road surface, including pedestrians, bicycles or even traffic cones. The horizontal FOV (Field Of View) of Horiz has also been expanded to 120° from the 81° of Horizon. This greatly enhances the smart driving experience by resolving many persistent challenges faced by drivers, including the removal of blind spots against cut-in vehicles.

Figure 91: Livox’s HAP LiDAR and its configuration Figure 92: Point cloud Horiz vs Horizon details

Source: Livox, CMBIS Source: Livox, CMBIS

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16 Apr 2021

According to our channel check with a few XPEV consumers, we found that XPEV earned high reputation for its automatic parking function (including forwarding parking and autonomous memory parking) of Xpilot 3.0 from some consumers, which forms its differentiated competitive advantage in our view.

Figure 93: XPILOT Safety

Source: Autohome, CMBIS

Figure 94: XPILOT Parking

Source: Autohome, CMBIS

Smart cockpit For smart cockpit, the latest models of P7 and G3 are equipped with Xmart OS 2.0 vehicle-mounted intelligent system. The system adopts Qualcomm 820A chip and has operating memory and storage space upgraded to 4GB and 128GB respectively. Both models support OTA upgrades for more functions. Meanwhile, the UI design of Xmart OS 2.0 is more concise with simpler interaction which enhances user experience. The Company plans to upgrade Xmart OS to 3.0 version to support more advanced voice control functions with the newly launched P5.

We believe XPEV has its own bright spots in the intelligent cockpit, especially in the field of HMI. XPEV could achieve continuous dialogue through advanced voice recognition. In-vehicle App also adopts an open model in order to foster its own APP ecology. XPEV announced to have strategic cooperation with Alipay in May 2020. According to the corporation details, XPEV will fully integrate the millions of mini-program from Alipay into its vehicles.

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16 Apr 2021

We believe XPEV’s smart cockpit system provides excellent user experience. With the supports from the open-end ecosystem, we expect increasing customer number will provide XPEV opportunities to form new business model in the near future.

Figure 95: Xmart 2 OS 2.1.0 OTA All-scenario voice interaction (全场景语音交互)

Source: Autohome, CMBIS

Figure 96: Xmart OS 2.5 QA mode Navigation

Source: Autohome, CMBIS

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16 Apr 2021

Sales forecasts In a near term outlook, we believe distribution channel expansion will be one of the foundations to boost XPEV’s auto sales. At the current stage, XPEV's retail stores are mainly concentrated in the first and second tier cities. We expect the Company's future channel development will mainly focus on 1) expanding the number of stores in the core business areas the first and second-tier cities to enhance brand awareness; and 2) relying on the franchising of some dealers to rapidly expand sales channels in lower tier cities with high NEV recognition. According to the management, XPEV plans to have 300 stores, covering 110 cities by end-2021.

In the long run, we think XPEV’s auto sales will depend on the competitiveness of its NEV models and its brand recognition. Given XPEV’s lower price range than new forces peers, we believe XPEV reaps high recognition from younger generation, and has higher-than-peers female consumer supports. We are optimistic about the Company's positioning in the smart cockpit and autonomous driving.

Based on our sales projection for XPEV’s various EV model, we expect the Company to deliver 48.5k units in 2021E, reflecting a YoY growth of 79.4%. In a medium term outlook, as we expect XPEV’s AD function to become increasingly popular, we expect auto sales to maintain high growth rate. We project XPEV to have 279k units auto sales in 2025E, reflecting a 2020-25E CARG of 59.5%. We also expect XPEV to gain market shares from 2.0% in 2020 to 4.5% in 2025E.

Figure 97: XPEV’s auto shipment forecast Figure 98: Sales volume forecast: by model

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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16 Apr 2021

Financial Analysis

Revenue

The Company generates revenue through vehicle sales and other sales and services. In 2020, revenue from vehicle sales increased 155%YoY to RMB 5.5bn, whereas revenue from other sales and services increased 98% YoY to RMB 298mn. Both can be attributed to solid growth in vehicle delivery.

We expect the Company will continue to expand its market share through channel expansion and new model rollout. Therefore, we forecast the vehicle sales revenue will maintain a growth rate at 82% in 2021E while other sales and services will maintain a growth rate at 99% in 2021E.

 Vehicle sales revenue We believe the vehicle sales volume will be driven by 1) channel network expansion, 2) increasing brand recognition, 3) new model rollout, etc. We expect XPEV’s total sales volume to increase by 79.4% in 2021E to 48.5K units based on our auto-shipment forecast. We assume the ASP to be broadly stable as we do not expect any significant price cut. The aggregate ASP will stay at RMB 208k in 2021E. We estimate the vehicle sales revenue will grow to RMB 10.1bn, a growth rate of 82% YoY in 2021E.

Figure 99: ASP forecast Figure 100: Vehicle sales revenue forecast

Source: Company data, CMBIS estimate Source: Company data, CMBIS estimate

 Other sales and services Other sales and services include ride-hailing service, finance lease, supercharging service, and maintenance service. We expect Xpliot 3.0 or future optional package to be recorded as part of “Other sales and services”. We expect a gradual increase of take rate in Xpilot given 1) overall increase of AD service penetration rate in China; and 2) OTA upgrade of Xpliot to enhance customer satisfaction. Besides, we estimate that financial service, supercharging service, and maintenance service will outpace vehicle sales given 1) rising financial penetration rate; and 2) accumulated customer base for supercharging and maintenance service. Given that, we estimate that the after-sales service revenue will maintain a growth rate at 99% in 2021E.

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16 Apr 2021

Figure 101: Other sales and service revenue Figure 102: Vehicle sales will account for the majority of revenue stream

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

GPM We expect significant improvement in XPEV’s overall GPM. As vehicle sales volume continues to climb, economies of scale will gradually materialize. Furthermore, given the gradual increase in the proportion of other sales and services, which has a higher margin than vehicle sales, we expect GPM to improve further. Specifically, we believe that XPEV’s GPM will improve to 9.3% in 2021E from 4.6% in 2020.

R&D and SG&A expenses XPEV intends to accelerate R&D expenses. During the 4Q20 results briefing, management guided a significant increase in R&D expense in 2021E with autonomous driving, internationalization, and fourth generation XPoilot technologies. For SG&A expenses, XPEV plans to expand its retail stores’ coverage from 160 in 2020 to 300 in 2021 to cover 110 cities. We expect distribution channel expansion will also bring significant increment to SG&A expense.

Figure 103: R&D and SG&A expenses outlook Figure 104: R&D vs. SG&A ratio as % to revenue

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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16 Apr 2021

Net profit

We expect XPEV’s bottom-line performance to improve continuously as auto sales ramp up to boost overall operating leverage. Based on our sales projection pace, we expect XPEV to reach breakeven in 2023-24E, and its overall profitability will turn strong after that. We believe the market is not too concerned about XPEV’s short-term loss-making status. After IPO and share placement in 2020, XPEV held more than RMB 35bn cash reserve, enough to sustain its R&D expenses and distribution channel increment.

Figure 105: Net profit forecast Figure 106: XPEV’s cash reserve composition

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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16 Apr 2021

Valuation

Initiate with TP US$ 43.12 (37.3% upside)

We adopt the SOTP method to evaluate XPEV’s value, given the Company’s diverse business segments. We also divide XPEV’s business segments into two groups, namely

 Vehicle sales - generating revenue and earnings from sales of different EV models and attached basic self-driving hardware/service; and  Streaming revenue - containing other sales and services include primarily including ride-hailing service, finance lease, supercharging service and maintenance service.

We are optimistic about the performance of XPEV in the middle and high-end market. Its smart vehicle + high cost-performance ratio will help it grab market share. We use valuation multiple of 5x 2025E PS ratio for vehicle sales and 20x 2025E PS ratio for streaming revenue segment. Furthermore, we use discount rate of 18% to reflect the cost of equity. We estimate the vehicle sales will worth US$ 30.80 per ADS share in FY21E and the overall streaming revenue group will worth US$ 12.32 per ADS share in 2021E.

Figure 107: 2021E SOTP valuation summary 2021E 2022E 2023E 2024E 2025E XPEV Vehicle sales volume (unit) 48,499 73,468 121,980 193,558 278,954 Total revenue - RMB mn 10,694 16,320 28,055 45,668 66,674 Vehicle sales 10,101 15,344 26,252 42,090 60,612 Others and services 592 977 1,802 3,578 6,061 Net profit (3,445) (3,269) (2,143) (447) 2,255

Share number - mn 789 Current price - US$ 31.40 Discount years 1 2 3 4 Discount factors 84.7% 71.8% 60.9% 51.6% Market cap - US$ mn 12,685 18,687 26,693 34,035 Vehicle sales - 5x 2025E P/S 24,310 Others and services - 20x 2025E P/S 9,724 2021 TP - US$ 16.07 23.67 33.82 43.12 Vehicle sales 30.80 Others and services 12.32 Upside -48.8% -24.6% 7.7% 37.3% PE - 2025E - 384.2 97.0 2021 P/S 20.46

2022 P/S 13.41 Source: CMBIS estimates

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16 Apr 2021

Figure 108: Valuation proportion in 2021E

Source: CMBIS estimates

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14 Apr 2021

Financial Summary

Income statement Cash flow YE 31 Dec (RMB mn) FY19A FY20A FY21E FY22E FY23E YE 31 Dec (RMB mn) FY19A FY20A FY21E FY22E FY23E Revenue 2,321 5,844 10,694 16,320 28,055 Profit before tax (3,636) (2,620) (3,568) (3,198) (1,832) Vehicle sales 2,171 5,547 10,101 15,344 26,252 Interest 138 256 293 319 344 Other sales 150 298 592 977 1,802 Depreciation and amortization 1,706 (213) 509 (1,985) (3,533) Change in working capital (0) (0) 0 0 0 Cost of sales (2,879) (5,578) (9,703) (14,326) (23,744) Taxation (1,771) (1,380) (608) (505) (390) Gross profit (558) 266 990 1,994 4,311 Others (3,563) (3,958) (3,373) (5,369) (5,410) O perating Cash Flow R&D exps (2,070) (1,726) (3,020) (3,322) (3,655) (685) (2,738) (174) (136) (110) SG&A exps (1,165) (2,921) (2,941) (3,118) (3,624) Change in investments 1,425 (1,000) - - - Other operating profit/(loss) 12 87 - - - Others 740 (3,737) (174) (136) (110) EBIT (3,781) (4,294) (4,971) (4,447) (2,968) Investing Cash Flow 2,725 37,181 - - - Interest income 89 133 610 520 420 Equity raised 970 (352) 500 500 500 Interest expenses (32) (22) (62) (77) (92) Change of debts - - - - - Fair value gain 27 1,362 200 200 200 Dividend paid (102) - - - - Other income/(loss) 4 90 107 163 281 Others 3,594 36,829 500 500 500 Pre-tax profit (11,288) (5,298) (7,185) (3,956) (1,452) F inancing Cash Flow 771 29,134 (3,048) (5,005) (5,021) Income tax (0) (1) - - - Net change in cash 1,632 2,408 31,542 28,494 23,489 Accretion on NCI value (961) (2,158) - - - Cash at the beginning 461 2,332 2,565 2,822 3,104 Net profit - GAAP (4,654) (4,890) (4,116) (3,641) (2,160) Restricted cash 5 - - - - Net profit - Non-GAAP (4,653) (3,893) (3,616) (3,141) (1,660) Exchange difference 1,947 29,209 25,929 20,667 15,364 Cash at the end (3,636) (2,620) (3,568) (3,198) (1,832)

Balance sheet Key ratios YE 31 Dec (RMB mn) FY19A FY20A FY21E FY22E FY23E YE 31 Dec FY19A FY20A FY21E FY22E FY23E Non-current assets 4,291 5,028 5,356 5,738 6,104 Sales mix (%) Fixed asset 3,230 3,082 3,322 3,537 3,727 Vehicle 94% 95% 94% 94% 94% Right-of-use assets 440 461 466 470 475 Other 6% 5% 6% 6% 6% Finance lease receivables 110 397 581 814 1,058 Total 100% 100% 100% 100% 100% Others 511 1,087 987 916 844 Profit & loss ratios (%) Current assets 4,961 39,679 38,299 35,845 34,763 Gross margin -24% 5% 9% 12% 15% Cash 1,947 29,209 25,929 20,667 15,364 Pre-tax margin -486% -91% -67% -24% -5% Trade receivables 539 1,129 1,604 2,122 3,367 Net margin -200% -84% -38% -22% -8% Inventory 454 1,343 1,711 2,611 3,367 Effective tax rate 0% 0% 0% 0% 0% Short term investments 408 2,821 2,821 2,821 2,821 Others 1,613 5,177 6,235 7,625 9,845 Balance sheet ratios Current ratio (x) 1.5 5.1 3.7 3.2 3.0 Current liabilities 3,298 7,837 10,273 11,112 11,561 Quick ratio (x) 1.0 4.7 3.3 2.7 2.3 Short-term borrowings 420 128 232 282 332 Cash ratio (x) 0.7 4.1 2.9 2.2 1.7 Trade payable 954 5,112 6,951 7,397 7,512 Debtors turnover days 296 794 908 731 458 Current portion of LT borrowings 60 45 70 85 100 Inventory turnover days 158 235 230 220 184 Accruals and other liabilities 1,756 2,256 2,595 2,854 2,997 Creditors turnover days 88 87 74 65 58 Others 108 296 426 494 622 Total debt / equity ratio (%) 74% 5% 7% 10% 13% Net debt / equity ratio (%) Net Cash Net Cash Net Cash Net Cash Net Cash Non-current liabilities 3,091 2,440 3,068 3,798 4,792 Borrowings 1,690 1,645 2,017 2,452 2,887 Returns (%) Lease liabilities 361 353 372 390 410 ROE na -35% -13% -13% -8% Others 1,039 442 680 956 1,496 ROA -54% -18% -8% -7% -4% Per ADS share Total net assets 2,863 34,430 30,314 26,673 24,513 EPADS (RMB) (26.6) (13.0) (5.3) (4.6) (2.7) Mezzanine Equity 9,693 - - - - DPADS (RMB) - - - - - Shareholders’ equity (6,830) 34,430 30,314 26,673 24,513 BVPADS (RMB) 4.7 44.3 38.4 33.5 30.4 Source: Company data, CMBIS estimates

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CMB International Securities | Equity Research | Company Initiation

Li Auto (LI US)

Differentiated NEV solutions BUY (Initiation)

Target Price US$ 37.73 Li Auto (LI) is a pioneer taking differentiated EREV NEV solutions. The Up/Downside +91.7% Company launched its first EREV model, the Li ONE, a six-seat, large premium Current Price US$ 19.68 electric SUV in Nov 2019. LI has precise market positioning targeting multi- person family users, which helps the Company realize successful auto sales. In 2020, LI delivered 32,624 units of Li ONE, ranking No. 2 among NEV new China NEV Sector forces. The Company is planning to launch two new vehicle models for each year Robin Xiao from 2022. We initiate coverage on LI. Given LI’s successful market position and (852) 3900 0849 outstanding cost control, we expect the Company to sustain rapid growth [email protected] momentum. We initiate LI with BUY rating. Our TP for LI is US$ 37.73. Jack Bai  Precise market positioning boost auto sales. Li ONE is precisely (852) 3900 0835 designed for the multi-person family with large-size and sense of space in [email protected] the appearance and interior design. The SUV had won the favor of family users, and realized successful sales record in 2020. In 2021, we expect the Stock Data good momentum to continue, as the Company delivered 12,579 units of Li Mkt Cap (US$ mn) 17,803 Avg 3 mths t/o (US$ mn) 484.9 ONE in 1Q21, higher than Company guidance during 4Q20 briefing. 52w High/Low (US$) 47.70/14.31 Total Issued Shares (mn) 727  New model planning: to launch two models per year from 2022. LI Source: Bloomberg expects to launch two new models in 2H22, and one of which will be a full- size SUV (with internal code “X01”). Mgmt. disclosed the full-size SUV which Shareholding Structure is equipped with L4 level hardware and enables autonomous driving through Li Xiang 19.7% Wang Xing 21.6% FOTA. In respect of BEV pipeline, LI is developing its pure electric platforms Amp Lee Ltd. 19.7% route based on fast-charging on high-voltage solutions, aiming to charge 80% Source: Company data battery capacity in 10-15 minutes and support 500km mileage. Share Performance  Outstanding costs control a highlight. Based on unique extended range Absolute Relative powertrain system and precise market positioning, Li ONE could save 1-mth -24.0% -27.1% 3-mth -39.6% -44.1% significant costs from less power battery-equipped and overall components 6-mth -4.0% -19.9% with lighter weight, while maintaining its premium image with pricing in luxury Source: Bloomberg vehicle range. LI exhibited rapid gross profit margin growth in the past few

quarters and realized an overall GPM of 16.4% in 2020, the highest among 12-mth Price Performance New Forces. US$  Initiate BUY with TP of US$ 37.73. We expect annual shipment to increase 50.0 LI US CCMP (rebased) to 292k units by 2025E, reflecting a CAGR of 55.0 % in 2020-25E. We expect 40.0 auto sales growth to continue to boost the Company’s operating leverage 30.0 and push towards breakeven in 2024E. Based on 5x/15x 2025E P/S multiple 20.0

for vehicle sales/other services segment and discount back with 18% costs 10.0

of equity, we derive our TP for LI at US$ 37.73. Initiate BUY rating. 0.0 7/2020 11/2020 3/2021 Earnings Summary (YE 31 Dec) FY19A FY20A FY21E FY22E FY23E Source: Bloomberg Revenue (RMB mn) 284 9,457 16,564 21,583 40,356 YoY growth (%) N/A 3,225 75 30 87 Auditor: PwC Zhong Tian LLP Net income (RMB mn) (3,261) (792) (1,472) (1,318) (536) EPADS(RMB) N/A (1.82) (1.63) (1.44) (0.58) YoY growth (%) NA NA NA NA NA Consensus EPS (RMB) NA NA (0.33) 0.87 2.27 P/E (x) NA NA NA NA NA P/S (x) 402.09 12.09 6.90 5.30 2.83 Yield (%) - - - - - ROE (%) (71.2) (2.7) (5.1) (4.7) (1.9) Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, Bloomberg, CMBIS estimates

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Company background

Leading player taking differentiating solution through EREV

LI is a pioneer to commercialize extended-range electric vehicles in China successfully. The Company designs, develops, manufactures, and sells premium smart electric vehicles. The Company provides families with safe, convenient, and refined products and services through innovations in product, technology, and business model. LI launched its first EREV model, Li ONE, a six-seat, large premium electric SUV equipped with a range extension system and cutting-edge smart vehicle solutions in Nov 2019. By Mar 2021, LI delivered 57,935 units of Li ONE. The Company leverages technology to create value for its users. It concentrates its in-house development efforts on its proprietary range extension system, next-generation electric vehicle technology, and smart vehicle solutions. Beyond Li ONE, the Company aims to expand its product line by developing new vehicles, including BEVs and EREVs, to target a broader consumer base.

Model planning and user profile

LI has differentiated EV model plans compared with other New Forces peers. Currently, LI has only one SUV on sale called the Li ONE. Li ONE adopts an extended-range powertrain system to solve the pain points of consumers’ mile range concerns with the most cost-effective solution based on the current imperfect charging network. The EV-only range is 180km, and quick charge/slow charge takes 0.5 hours/6 hours. Supported by fuel and power generation through range extender, Li ONE has reached a NECD mile range beyond 800km.

Li ONE is precisely designed for multi-person family, with large size and sense of space in the appearance and interior design. Li ONE had won the favor of family users. Li ONE achieved mass production and delivery in Nov 2019, and has a unified standard configuration with pricing of RMB 328k. Li ONE is equipped with an L2 ADAS hardware system.

According to LI’s 4Q20 briefing, the Company plans to launch two new models each year from 2022. For the year 2022, the Company expects to launch both new models in 2H22, of which a full-size SUV (LI internal code with “X01”) is highly visible. We expect the full-size SUV to have premium positioning compared with Li ONE, and the new model will be equipped with L4 level hardware and enables autonomous driving through FOTA. We expect the full-size SUV will have significantly higher pricing than Li ONE.

With respect to the BEV pipeline, LI is currently developing its pure electric platforms route based on fast-charging on high-voltage solutions, aiming to charge 80% battery capacity in 10-15 minutes and support 500km mileage. The Company is developing two BEV platforms, namely “the Whale platform” and “the Shark platform”. The Whale platform will focus on space, targeting family users, while the Shark Platform will focus on performance, targeting younger age group users.

We expect LI to maintain its high-end and premium position in the short term, lean towards the luxury car market in first and second-tier cities and family users.

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The Company plans to expand market coverage to mass market and lower-tier cities in a longer-term perspective. The Company’s long-term pricing range will cover RMB 150k-500k.

Figure 109: Monthly sales Figure 110: Li One – exterior design

Source: Company data, CMBIS Source: CPCA, CMBIS

Figure 111: Li ONE - interior design Figure 112: Li ONE adopts extended-range powertrain system

Source: Autohome, CMBIS Source: Company data, CMBIS

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Autonomous driving and smart cockpit LI adopts Intel's Mobileye EyeQ 4 vision processor and 12 ultrasonic radars, 5 high-definition cameras, and 1 millimeter wave radar solution to realize mainstream L2 ADAS features. The Company signed a tripartite strategic agreement in Sep 2020 with NVIDIA and Desay SV (002920 CH), NVIDIA's partner in China, to launch its full-stack autonomous driving R&D. LI plans to adopt NVDIA's Orin chips for its full-size EREV SUV to be launched in 2022. Together with LiDAR support, NVIDIA's Orin solution could support L4 grade autonomous driving. Based on LI's autonomous driving R&D progress, we expect the Company to launch L3 grade FOTA for eligible models in 2H22-2023. We believe LI's autonomous driving development pace is slightly slower than XPEV.

Concerning smart cockpit, Li ONE's four-screen user interface design and excellent voice interaction are widely recognized by the market. The Company's well-designed control system provides an outstanding user interactive experience that can identify user needs in different places in the car and perform convenient gestures and voice control. We expect LI to maintain its leading position for its smart cockpit in its new EV models.

Figure 113: Four-screen user interface is a key feature differentiates Li ONE’s smart cockpit

Source: Company data, CMBIS

Figure 114: Full vehicle voice interaction can accurately identify user needs of different locations

Source: Company data, CMBIS

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Distribution network and sales outlook Accelerating sales network expansion LI adopts direct sales channels only. The Company has significantly less retail stores than New Forces peers, which also sustained its higher sales efficiency in 2020. By Jan 2021, LI had 60 retail stores covering 47 cities in China. The Company plans to expand its retail channel to 200 stores by end-2021, and extend coverage to 100 cities. Based on LI’s current user profile, the Company’s retail stores mostly cover 1st and 2nd tier cities. In view of increasing EV models targeting broader consumers, we expect LI to expand its sales and distribution channel to lower-tier cities. In a longer-term outlook, management guided 1,000 retail stores by 2024 for its sales and distribution network planning.

Market share to expand to 4.8% by 2025E In view of LI’s EV launching plan with precise user positioning and pricing range, we expect LI’s sales volume growth to increase continuously. We expect annual shipment to increase to 292k units by 2025E, reflecting 2020-25E shipment CAGR of 55.0%. We also expect LI’s EV market share to increase from 2.4% to 4.7% during the period.

Figure 115: LI’s shipment & market share Figure 116: Li ONE will be important in 2021-22E, projection: We expect 2025E shipment volume to while future sales growth will be driven by new surge to 296k units with market share of 4.7% model EV model launching

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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Outstanding costs control and overall efficiency We think outstanding cost planning capability is a key highlight of LI. Based on its unique extended-range powertrain system and precise market positioning, Li ONE was able to save high costs from less power battery-equipped and overall components with lighter weight while maintaining its premium image with pricing range of luxury vehicle grade. We believe the Company has clear cost path, as LI was the first to realize a positive gross profit margin since 1Q20, leading ahead of new forces peers.

LI exhibited rapid gross profit margin growth in the past few quarters as Li ONE delivery ramped up. Gross profit read a short-term peak in 3Q20 due to a one-off supplier rebate. In 2020, the Company realized an overall GPM of 16.4%, and management guides overall GPM to reach 19-20% in 2021E. In a longer-term outlook, LI aims to target GPM at 25%. In the coming few years, we expect LI’s overall GPM to stay around 18.5%-19.8% in 2021-25E. We think GPM fluctuation would be mainly driven by new EV model delivery ramp up cycle.

Figure 117: Gross profit performance was a highlight of LI in 2020, and we expect the good GPM performance to continue

Source: Company data, CMBIS estimates

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16 Apr 2021

Financial Analysis

Revenue

LI generates revenue through vehicle sales and other sales and services. In the first fiscal year realizing full-year sales of Li ONE, vehicle sales, and other sales and services read RMB 9.3bn and RMB 173mn respectively in 2020. Strong revenue growth was mainly attributed to vehicle delivery.

We expect the Company will continue to expand its market share through channel expansion and new model rollout. Therefore, we forecast the vehicle sales and other sales and revenue to increase 70%/64% YoY in 2021E, respectively.

 Vehicle delivery growth will be a key driver

We think LI’s vehicle sales volume will be driven by 1) channel network expansion, 2) increasing brand recognition, 3) new model rollout, etc. Based on our sales projection, we expect LI’s sales volume to increase 70% YoY to 55.5k units in 2021E, and sales volume to maintain rapid growth in the following years as more new models launch.

Based on LI’s high-end EV positioning in 2021-23E, we expect the Company to have New EV model with a price range to stay above RMB 300k. As the new full- size SUV with luxury image and premium function ramp up delivery with a significantly higher price than the current Li ONE model, we expect ASP excluded VAT to increase in 2022-23E. We expect the overall ASP trend to decline in 2024- 25E as LI launches more new vehicle models facing the mass consumer market with lower prices. Overall, we expect LI’s VAT excluded ASP to stay in a relatively stable range of RMB 278k-293k in 2021-25E.

Figure 118: We expect ASP to stay around RMB Figure 119: Vehicle sales revenue forecast 280k-290k in 2021-25E

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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 Other sales and services

Other sales and services primarily includes charging stalls, vehicle internet connection services, FOTA upgrades, and extended lifetime warranties for initial owners and standalone Li Plus Membership. Since Li ONE is offered at standard configuration without additional services and charging options such as further upgraded advanced autonomous driving functions, we expect other sales and services revenue to be accounted for a fixed fraction of vehicle sales ranging from 1.8%-2.6% with a gradual increasing trend. We had not yet factored in software services potential in our financial model. We estimate other sales and services revenue to increase 68.4% YoY to RMB 293mn in 2021E and maintain rapid growth in the following years.

Figure 120: Other sales and services revenue Figure 121: Revenue mix: other sales and services only accounts for tiny proportion to total sales

Source: Company data, CMBIS estimate Source: Company data, CMBIS estimate

Gross profit to reach RMB 3bn in 2021E We expect LI’s GPM to reach 18.8% with a GP of RMB 3,106mn in 2021E, up 100.4% YoY. We think GP will have a higher growth pace than revenue as the Company realizes improving operating leverage as well as component costs with the increasing auto shipment.

R&D and SG&A expenes LI’s R&D expenses were moderate compared with peers. The Company spent RMB 0.8bn/11.7bn/11.0bn for R&D in 2018-20. Management planned to accelerate R&D expenses in the coming few years for 1) new EV model and platforms; 2) autonomous driving development and smart cockpit innovation; and 3) high-voltage supercharging technologies. The Company announced a new R&D center in Shanghai with a mirrored confederation as Beijing R&D Center with an employment target of 2,000 people. Management also guided R&D expenses to accelerate to at least RMB 3bn in 2021E.

SG&A expenses are associated with retail stores and marketing costs. We think LI took a restrained approach in its early phase of development. SG&A expenses were RMB 337mn/698mn/1,119mn in 2018-20. As Li ONE is gaining market recognition and the Company is expanding its distribution network, we expect the SG&A expenses to double in 2021E and expand with decelerating pace in 2022- 25E.

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Figure 122: R&D and SG&A expenses Figure 123: R&D and SG&A expenses as % to revenue

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Breakeven to come in 2023-24E

Based on our financial model forecast, we expect LI to reach breakeven in 2023- 24E, likely to be the first among New Forces. Once crossed the breakeven line, we expect the Company to turn profitable on the back of outstanding costs control and continuously improving operating leverage.

LI recognized a net loss of RMB 792mn in 2020. We expect the Company to incur a net loss of RMB 1,496mn/1,367mn in 2021/22E, respectively. The Company raised more than RMB 21bn through IPO and follow-on placement in 2020. By end-2020, LI held an aggregate cash position of RMB 29.9bn (RMB 10.1bn cash and RMB 19.7bn short-term deposits). In early Apr 2021, LI also announced to issue US$ 750mn convertible bond preparing for accelerating future expenses. We think LI has sufficient cash to support its expansions without financial pressures in the near term.

Figure 124: We expect LI to cross the breakeven Figure 125: LI held c. RMB 30bn cash reserve with line in 2023-24E. following composition

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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Valuation

Initiate BUY with TP of US$37.73 (91.7% upside)

We adopt the SOTP method to evaluate LI’s value, given the Company’s diverse business segments. We also divide LI’s business segments into two groups, namely

 Vehicle sales - generating revenue and earnings from sales of different EV models and attached basic self-driving hardware/service; and  Streaming revenue - containing other sales and services include primarily including, finance lease, supercharging service and maintenance service.

We use a valuation multiple of 5x PS ratio for vehicle sales and 10x PS ratio for the streaming revenue segment in 2025E. Furthermore, we use a discount rate of 18% to reflect the cost of equity. We estimate the vehicle sales will worth US$ 35.86 per ADS share in FY21E, while the overall streaming revenue group will worth US$ 1.86 per ADS share in 2021E.

Figure 126: 2021E SOTP valuation summary 2021E 2022E 2023E 2024E 2025E Li Auto Vehicle sales volume (unit) 57,092 73,710 134,736 250,136 291,956 Total revenue - RMB mn 16,564 21,583 40,356 72,664 83,305 Vehicle sales 16,271 21,160 39,487 70,960 81,194 Others and services 293 423 869 1,703 2,111 Net profit (1,472) (1,318) (536) 1,449 2,319

Share number - mn 908.09 Current price - US$ 19.68 Discount years 1 2 3 4 Discount factors 84.7% 71.8% 60.9% 51.6% Market cap - US$ mn 14,502 23,022 35,196 34,259 Vehicle sales - 5x 2025E P/S 32,565 Others and services - 10x 2025E P/S 1,693 2021 TP - US$ 15.97 25.35 38.76 37.73 Vehicle sales 35.86 Others and services 1.86 Upside -18.9% 28.8% 96.9% 91.7% PE - 2025E 95.0 2021 P/S 13.30

2022 P/S 10.21 Source: CMBIS estimates

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Figure 127: Valuation proportion in 2021E

Source: CMBIS estimates

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Financial Summary

Income statement Cash flow YE 31 Dec (RMB mn) FY19A FY20A FY21E FY22E FY23E YE 31 Dec (RMB mn) FY19A FY20A FY21E FY22E FY23E Revenue 284 9,457 16,564 21,583 40,356 Profit before tax (2,418) (189) (1,472) (1,318) (536) Vehicle sales 281 9,283 16,271 21,160 39,487 Net interest payment 4 (188) (610) (596) (560) Other sales 3 174 293 423 869 Depreciation and amortization 152 442 544 675 779 Change in working capital (187) 1,398 (302) (803) 648 Cost of sales (284) (7,907) (13,458) (17,306) (32,787) Taxation - - (2) (3) (3) Gross profit (0) 1,549 3,106 4,277 7,569 Others 468 3,075 1,099 1,108 1,258 Operating Cash Flow (1,794) 3,140 (743) (936) 1,586 R&D exps (1,169) (1,100) (3,300) (3,795) (4,364) SG&A exps (689) (1,119) (1,920) (2,433) (4,344) Change in investments (2,805) (18,349) 698 608 531 Other operating - - - - - Others 230 (389) - - - EBITprofit/(loss) (1,859) (669) (2,114) (1,951) (1,139) Investing Cash Flow (2,575) (18,738) 698 608 531

Interest income 30 41 144 197 228 Equity raised 5,207 27,035 - - - Interest expenses (84) (67) (96) (106) (122) Change of Debts 307 1,096 7,911 1,770 1,529 Investment income 49 214 561 505 455 Dividend paid - - - - - Share profit/(loss) (163) (3) 2 7 12 Others 142 (4,180) 610 596 560 Other income/(loss) (392) 295 30 30 30 Financing Cash Flow 5,656 24,71 8,521 2,365 2,089 Pre-tax profit (2,418) (189) (1,472) (1,318) (536) 1 Net change in cash 1,287 9,113 8,476 2,037 4,206 Income tax - 23 - - - Cash at the beginning of the yr. 96 1,436 10,173 18,649 20,686 Accretion on NCI value (843) (640) - - - Exchange difference 54 (377) - - - Minority interests - - - - - Restricted cash 140 1,234 1,604 2,086 2,503 Net profit (3,261) (792) (1,472) (1,318) (536) Cash at the end of the yr. 1,296 8,938 17,045 18,601 22,389

Balance sheet Key ratios YE 31 Dec (RMB mn) FY19A FY20A FY21E FY22E FY23E YE 31 Dec FY19A FY20A FY21E FY22E FY23E Non-current assets 4,448 4,982 5,709 6,217 6,514 Sales mix (%) Fixed asset 2,795 2,479 2,618 2,714 2,744 Vehicle 98.8 98.2 98.2 98.0 97.8 Right-of-use assets 510 1,277 1,854 2,248 2,506 Other 1.2 1.8 1.8 2.0 2.2 Long-term investments 126 163 163 163 163 Total 100.0 100.0 100.0 100.0 100.0 Others 1,016 1,064 1,073 1,092 1,101 Profit & loss ratios (%) Current assets 5,066 31,391 39,816 42,200 50,853 Gross margin (0.0) 16.4 18.8 19.8 18.8 Cash 1,296 8,938 17,045 18,601 22,389 Pre-tax margin (850.3) (2.0) (8.9) (6.1) (1.3) Trade receivables 8 116 497 1,079 2,018 Net margin (1,147) (8.4) (8.9) (6.1) (1.3) Inventory 518 1,048 1,988 2,806 5,650 Effective tax rate N/A N/A N/A N/A N/A Short term investments 2,273 19,701 17,731 15,958 14,362 Others 971 1,588 2,555 3,756 6,433 Balance sheet ratios Current ratio (x) 1.1 7.3 5.6 4.8 3.3 Current liabilities 4,680 4,309 7,048 8,722 15,617 Quick ratio (x) 1.0 7.0 5.4 4.5 2.9 Short-term borrowings 239 - 355 392 467 Cash ratio (x) 0.8 6.6 4.9 4.0 2.4 Trade payable 625 3,161 4,710 6,057 11,475 Debtors turnover days 5.3 2.4 6.7 13.3 14.0 Accruals and other liabilities 867 647 828 1,079 2,018 Inventory turnover days 332.5 36.1 41.2 50.6 47.1 Others 2,949 501 1,154 1,194 1,657 Creditors turnover days 617.0 87.4 106.7 113.5 97.6 Total debt / equity ratio (%) 22.2 7.1 8.2 9.3 11.0 Non-current liabilities 253 2,260 9,569 11,524 13,528 Net debt / equity ratio (%) Net cash Net cash Net cash Net cash Net cash Borrowings - 512 2,010 2,222 2,647 Operating lease liabilities 241 1,025 2,101 3,361 4,202 Returns (%) Others 11 724 5,459 5,940 6,679 ROE (71.2) (2.7) (5.2) (4.9) (2.1) ROA (34.3) (2.2) (3.7) (3.1) (1.1) Total net assets 4,581 29,804 28,907 28,171 28,222 Per share Mezzanine Equity 10,256 - - - - EPADS (RMB) N/A (1.8) (1.7) (1.5) (0.6) Shareholders' equity (5,675) 29,804 28,907 28,171 28,222 DPADS (RMB) N/A N/A N/A N/A N/A BVPADS (RMB) 35.93 33.15 31.81 30.64 30.33 Source: Company data, CMBIS estimates

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Disclosures & Disclaimers Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.

CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months

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