E Some Reasons NIO And XPeng Could Be Good Buys

The EV industry offers multiple different investment options, from established manufacturers to components suppliers and miners. In China, NIO and XPeng XPEV both look to have high growth potential as the two differentiate themselves from competitors.

The EV frenzy earlier in the year has started to dwindle down, with many established companies and SPACs seeing some hefty valuation crunches. In China, EV adoption and government support remain high, and the consumer market is highly fragmented with heavy competition, leaving room for major and minor players alike to grow. With expected EV sales growth of 40% to 1.8 million units for 2021 (although the chip shortage could impact this) and high expected growth rates through 2025, NIO and XPeng, two of the stronger startups in China, could find impressive runways to growth as the two have worked to separate themselves from the rest through holistic approaches to product offerings and technological advancement.

NIO: Stronger Financials and Improved Product Offerings

NIO is quickly climbing the ladder and establishing itself as a dominant Chinese and potentially global EV manufacturer, finally reaching the 100,000th delivery milestone in April. The company could be set to reach another quarterly delivery record, as Q2’s guidance offers some small upside, +4.7% to +9.7% q/q to 21,000 to 22,000 units. Guidance and growth at this degree would imply continuation of a 7,500-unit production limit incurred by the chip shortage, but still representing strong demand to reach over 40,000 units in 1H.

Q1's financials were strong, as NIO recognized +20.2% revenue growth q/q as deliveries were just +15.6%. Higher ASPs and higher deliveries relative to Q4, stemming from an expanded sales network and a better product mix, aided revenue growth. Revenues from the 100kWh permanent upgrade in BaaS were strong, with over half of vehicles delivered in Q1 electing for one of the BaaS subscriptions. Even so, the stronger pieces of the report surfaced within NIO's margin profile, aided by uptake of BaaS battery upgrades and NIO Pilot. Vehicle margin expanded 400 bp q/q to 21.2%, the highest margin that NIO has reached in its lifetime and the highest between Li and XPeng. Gross margin expanded as well, up 230 bp q/q to 19.5, enhancing operating leverage down the lines: gross profit increased 36.2%, operating loss narrowed 68.2%, and adjusted net loss narrowed 73.3%.

Leverage from continual delivery growth and higher ASPs (whether that remains with high BaaS uptake and related discounts is yet to be seen) should drive NIO to profitability as the margin profile continues to improve. NIO lost only RMB0.23 (US$0.04) per share for Q1 (excl. accretion on non-controllable interests), and keeping a high margin profile of this sort, above 17%, could see NIO reach profitability as early as Q4 this year if chip shortages do not severely impact operations and high seasonal demand in 2H is exhibited.

Aside from an improved financial picture, NIO has a few important positive developments that can pave the way for future success: increasing customer utility and building out a holistic infrastructure and product/service offering.

NIO’s Power segment primarily provides a "power service system with chargeable, swappable, and upgradable batteries," but has expanded its offerings to include home chargers and on-the-road functions. Power Home 2.0 and Plus offer remote charge scheduling, real-time charging status, multi-user ability, FOTA upgrades, and more. The 20kWh Plus charges 100kWh battery from 20% to 90% in 3.5 hours, while the 7kWh takes longer. Although this does not necessarily compare to superchargers, with a 10-hour charging duration for the 7kWh station, the value proposition within Power services and BaaS offset that.

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Disclosure: I am long XPEV. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this ...

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Kurt Benson 1 week ago Member's comment

Thanks for the share, a worthwhile read.

Edward Simon 1 week ago Member's comment

Interesting. I am wary of safety in the EV market in China. We have seen accidents with EVs in the US which were discussed and companies put on notice. I don't see this happening in China. Safety first. This is still a risky market. But one supposes there is money to be made here, just as their is money to be made trading Dogecoin.

Trinity Sinclair 1 week ago Member's comment

EVs are the future!

Andrew Armstrong 1 week ago Member's comment

Good read, thanks.