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Forget "Tesla of China" NIO, Buy These 3 Chinese EV Stocks Instead

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NIO Inc. (NIO - Free Report) has had an amazing run on the bourses this year, with its shares skyrocketing 996.1%. Much of the gains can be attributed to the frenzied buying of electric vehicles (EVs) this year. We wonder if this China-based EV stock—often dubbed as the “Tesla of China”— would be able to maintain its blockbuster performance into 2021.

Well, with FOMO-ridden retail investors jumping on the e-mobility hype, valuation metrics of NIO have gotten out of hand.  The company is currently trading at a P/S F12M multiple of 9.82 compared with the industry average of 0.64. The firm’s rising operational expenses and stretched balance sheet also raise a red flag. Rising research and development,and selling, general and administrative expenses are denting the firm’s margins.

Due to its manufacturing arrangement with state-owned JAC Motors, NIO generates lower margins than peers that manufacture their cars. While the company secured funding and managed to stay afloat, thanks to its strong ties with the government, NIO is highly leveraged. The company’s long-term debt was $996 million as of Sep 30, 2020, representing a debt-to-capital ratio of 5.96 against the industry's 0.29.

NIO faces immense competition not only from the U.S.-based EV behemoth Tesla, which dominates the EV landscape of China but also from various new entrants that are emerging in the EV space of late. Competition is only set to intensify, going forward. With NIO having witnessed such meteoric share price gains this year, it’s getting hard to justify its overstretched valuation. So why not look into some other China-based EV stocks that you could place your bets on? But before moving on to the stocks, let us discuss China’s EV market in general.

Booming Prospects of China’s EV Landscape

Amid heightening environmental concerns and stringentemissions norms, China is focusing on the development of sustainable green transportation. The country also plans to decrease its dependence on oil imports, which, in turn, is accelerating the adoption of green vehicles in the nation.

Currently, China is the world’s biggest EV market. But carbon-free transportation still accounts for just around 5% of the country’s total auto sales. The country plans to expand its EV market further in a quest to reduceenergy imports, address its poor urban air quality, and attract foreign investors into its domestic auto industry.

Post coronavirus-led sluggish demand in the first quarter, China's new energy vehicle (“NEV”) industry (consisting of battery-powered electric, plug-in petrol-electric hybrids and hydrogen fuel-cell vehicles) began to recover in the second quarter, backed by government stimulus measures like extended subsidies and tax exemptions to boost the sale of these vehicles. For instance, in April 2020, the China government introduced a 10% service tax waiver for EVs to buoy the demand of the market amid the pandemic. Advancement in EV charging infrastructure in the nation,owing to state-of-the-art technologies, is further driving the demand for green vehicles.

Such favorable initiatives have attracted a lot of customers to purchase EVs in this country, which, in turn, helped China to formulate a robust prospect for growth of the EV market in the country. In fact, the country sold 1.1 million NEVs over the first 11 months of this year, up 3.9% year over year. This has made industry watchers quite optimistic about China’s progress in the transition toward the EV future.

Moreover, China, which produces the maximum carbon emissions, has laid much emphasis on providing clean transportation and plans NEVs to attain a 20% share of total new auto sales by 2025, registering a compound annual growth rate (CAGR) of more than 25% during 2020 to 2025. In fact, per China Association of Automobile Manufacturers (“CAAM”), NEV sales in China are expected to hit 1.3 million units this year, marking a rise of 8% year over year. Per a report by Deloitte, by 2030 China will account for 49% of the global EV market, Europe will account for 27%, and the United States will hold 14%.

3 China EV Players to Keep an Eye on

Given the upbeat projections, there are a handful of China-based EV stocks, which should be on your portfolio. Below we highlight three such stocks namely Geely Automobile Holdings (GELYY - Free Report) , Li Auto (LI - Free Report) and XPeng Inc (XPEV - Free Report) .

Geely Automobile is a subsidiary of Zhejiang Geely Holding Group, a China-based multinational automotive company headquartered in Hangzhou. Being the owner of Volvo, Geely is one of the most renowned China EV manufacturers. But not just Volvo; it also owns other established brands like London Taxi, Lotus, Polestar and almost 50% of the Malaysia-based brand Proton. Through wholly-owned company Polestar, Geely manufactures Polestar 1 hybrid performance vehicles in the city of Chengdu and Polestar 2 volume sedans in Taizhou. Geely is building an EV factory in China to make cars under the premium Polestar brand name.

A few months back, Geely achieved a milestone with the launch of an open-source EV architecture known as Sustainable Experience Architecture (“SEA”). The development of transformative electric-vehicle architecture marks the biggest leap forward for the company. Geely will make its groundbreaking architecture availablefor other rival original equipment manufacturers — which is a huge step for the industry, reflecting the company’s commitment toward zero-emission.

The company currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Li Auto — which debuted on Nasdaq on Jul 30, is the second China-based EV maker to be listed on the U.S. stock market after NIO. The company currently sells a family-sized SUV named the Li One. Li One is equipped with an onboard gasoline generator that supplements battery and acts as a range extender, providing relief to customers when recharging stations are not available. This feature is an added selling point in China, where EV sales are booming but charging infrastructure is not yet very developed. The company sold 4,646 Li ONEs in November, achieving a 25% jump from October. Li Auto continues to capitalize on the growing demand for EVs by expanding its retail store footprint to 45 stores, serving 38 cities, up from 41 stores in October and 35 in September. The company currently carries a Zacks Rank of 3 (Hold).

XPeng, backed by e-commerce giant Alibaba, made its debut on the U.S. stock market on Aug 27. This China-based smart EV company sells premium electric vehicles, including the G3 SUV and the P7 four-door sedan. Xpeng reported strong delivery numbers for November, with deliveries skyrocketing 342% year over year to 4,224 units. Recently, the company started the delivery of G3 Smart EV SUV to customers in Norway, before it introduces the model to other major EV markets in Europe during 2021.

Recently, the company unveiled its next-generation autonomous driving architecture in which its electric cars will be equipped with cameras, radar, ultrasonic sensors and lidar. In fact, XPeng will be the first car company in the world to incorporate lidar as a new hardware component into a production-ready car, beginning with its vehicle lineup for 2021. The company currently carries a Zacks Rank of 3.

Zacks Top 10 Stocks for 2021

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