CITIC Securities says NIO, XPeng, Li Auto severely undervalued, calls for new valuation metrics

In a research note released today, CITIC Securities analyst Yin Xinchi's team argues that the fundamentals and stock price performance of these three new car makers have diverged badly in 2021 due to a systematic correction in the stock prices of Chinese companies listed outside China.

They are currently in an accelerating period of improving profitability, with large R&D investments causing them to remain at strategic losses in the near term, but rising gross profit per vehicle has shown their ability to approach the break-even point in the future, the team said.

"In the context of tightening liquidity, the PS valuation system is being questioned. We are proposing a comparable valuation of car companies using a 'market cap/gross profit' valuation approach and believe that all the three are currently at very attractive valuations," the team wrote.

As a result of their increased scale effect in manufacturing, the three companies' combined gross margins reached 20.3 percent, 23.3 percent and 14.6 percent, respectively, in the third quarter of 2021, an improvement of 7.4, 3.5 and 10 percentage points compared to the third quarter of 2020, according to the team.

In contrast, NIO, Li Auto and XPeng's share prices in the US fell 60.7 percent, 9.0 percent and 23.8 percent, respectively, last year, significantly underperforming the Nasdaq's 1.3 percent gain due to the systematic correction of Chinese companies listed abroad.

As seen in Tesla's sales expansion journey over the past 10 years, car-making newcomers tend to see losses widen before entering a phase of accelerating earnings improvement and finally breaking through the break-even point when quarterly sales reach 70,000 units, the team said.

At quarterly sales of 30,000-50,000 units, new carmakers tend to be in a state of low sales and high expenses, mainly because they need to invest more in all aspects of plant, equipment and personnel before launching hot products.

And, to improve the company's product performance, and long-term competitiveness, they also have to invest heavily in research and development, especially for autonomous driving and smart cockpits, as well as invest in channel construction, according to CITIC Securities.

"We believe that all three of these new car makers are currently in the middle stage of development, and it is commercially logical for the necessary investments that result in strategic losses," the team said.

If NIO, Li Auto and XPeng are evaluated only in terms of vehicle manufacturing, they have actually achieved gross profit per vehicle of RMB 64,000, RMB 62,000 and RMB 29,000 respectively in the third quarter of 2021, better than many traditional Chinese car makers.

NIO, Li Auto, and XPeng's average SG&A costs per vehicle were RMB 75,000, RMB 41,000, and RMB 60,000, respectively, and average R&D costs per vehicle were RMB 49,000, 35,000, and 49,000, respectively, all with room for significant declines, according to the team.

"Using Tesla's break-even data as a reference and taking into account the financial data of these three new car makers, we believe they are expected to rapidly approach the break-even point in the coming year," CITIC Securities said.

Since the three new car makers are not yet profitable, the capital market is mainly using a PS valuation system for them, which is unreasonable in CITIC Securities' view.

In 2021, the range of PS valuation multiple changes for NIO, Li Auto and XPeng are 4.8~15.1, 4.3~8.0 and 4.3~11.5 respectively, which are basically comparable to the Tesla valuation multiple in 2016-2018.

In the context of tightening global liquidity, the foundation of the PS valuation system is no longer solid. However, as to what valuation method should be used, there is not yet a unified consensus in the current capital market, as noted by CITIC Securities.

Mainstream investors are more tolerant of car companies' investment in areas such as intelligence and channel construction, while the profitability requirements for the manufacturing side are more demanding, so using the valuation multiple of market value/gross profit is a more comparable valuation indicator, the team said.

The current valuation multiples of market cap/gross profit for NIO, Li Auto and XPeng are 31, 26 and 62, respectively, and 18, 18 and 27 for 2022E, respectively, CITIC Securities said, adding that this is extremely attractive compared to the valuations of other local car companies listed in the A-share and H-share markets.

The competition among car companies on intelligence has also just begun, and the intelligence premium of these three new car makers is worth being bullish, the team said.

On the smart car platform, car companies have the opportunity to participate in the full lifecycle of vehicle operations, services, and therefore will also receive other innovative revenue in addition to one-time hardware revenue.

For example, car companies can learn the data returned from vehicles, iterate on assisted driving features, and eventually launch software systems that make driving easier, thus gaining the potential for fees, according to the team.

When the user base is large enough, the value of the smart cockpit's traffic portal will be highlighted, and car companies can realize the realization of user stickiness, the team said.