CMBIS Research
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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$, mn) FY21E Tesla TSLA US Model 3, Model Y 499,550 738.85 709,188 49,475 14.3 NIO NIO US ES6, EC6, ES8 43,728 35.66 58,430 7,173 8.1 Xpeng XPEV US G3, P7 27,041 31.40 24,803 2,925 8.5 Li Auto LI US ONE 32,624 19.68 17,803 3,354 5.3 Source: Company data, Bloomberg, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1 MORE REPORTS FROM BLOOMBERG: RESP CMBR <GO> OR http://www.cmbi.com.hk 16 Apr 2021 Contents China NEV market outlook ...................................................................... 3 Luxury cars are gaining market share ................................................... 4 NEV market has enormous growth potential ......................................... 6 NIO, XPEV and LI are leaders in auto electrification development .... 10 Differentiated development path .......................................................... 12 Competition with Tesla .......................................................................... 27 MCU supply shortage may be a short term risk .................................. 28 Sales and breakeven outlook ................................................................ 29 Valuation & Sector pick ......................................................................... 32 Risk factors ............................................................................................ 35 NIO (NIO US, BUY, TP US$: 46.32) ........................................................ 36 XPeng (XPEV US, BUY, TP US$: 43.12) ................................................ 36 Li Auto (LI US, BUY, TP: US$ 37.73) ..................................................... 36 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 16 Apr 2021 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 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 16 Apr 2021 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 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 4 16 Apr 2021 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 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 5 16 Apr 2021 NEV market has enormous growth potential We see enormous growth potential of the NEV market in China under the background of energy structure transformation.