Hot wheels, hot topic

When the British philosopher and statesman Sir Thomas More coined the term Utopia in the early sixteenth century he was describing a fictional society inhabited by near-perfect people.

Right now the world’s equity investors seem to be caught up in ‘Cartopia’, a world populated by near-perfect, self-driving electric vehicles (EVs). But the question is whether this is as much of a fantasyland as More’s novel.

The valuations of some of the world’s leading car companies depend on the answer. For when it comes to stock market performance, there has been no bigger success story this year than the EV sector – and particularly China’s leading start-ups.

Tesla’s share price has risen almost sevenfold since the beginning of the year but that’s the slow lane compared to NIO, which has come roaring back from the brink of bankruptcy after a cash infusion from state-backed entities in the Anhui city of Hefei (see WiC505).

The New York-listed stock is up 13.5 times from $3.72 on January 2 to $50.3 on December 1.

Fellow start-ups Li Auto and XPENG Motors have executed highly successful New York listings over the summer and enjoyed spectacular secondary performance ever since. The former’s share price has tripled and the latter has done even better, with a quadruple gain.

All three are trading on valuations that rely on a spectacular scaling up of sales volumes next year.

Given that none are yet profitable, the simplest valuation yardstick is a price to sales ratio. On this basis, Li Auto is the cheapest: trading at 11.85 times the (mean) Rmb16.6 billion ($2.53 billion) sales forecast that analysts expect for 2021, according to S&P Global Market Intelligence data.

NIO sits in the middle of the three on 15 times its forecast Rmb30 billion 2021 sales, with XPENG at 19.9 times its estimated Rmb13.7 billion in sales next year.

Both NIO and XPENG are trading at higher valuations than Tesla, which is currently valued at 12.2 times its $44.28 billion forecast 2021 sales.

Do the Chinese troika deserve to be trading at a premium to Tesla, as well as most of the world’s more established car manufacturing firms? Such has been the share price surge that NIO’s $68.7 billion market capitalisation puts it fifth in the global rankings behind Tesla ($538 billion), Toyota Motor ($188 billion), VW ($89 billion) and Daimler ($72.17 billion).

At $42 billion, XPENG is also now almost on a par with China’s most established automaker, SAIC, which commands a $47 billion market capitalisation.

The Chinese challengers are being propelled by better than expected third quarter sales, improving gross profit margins per car and positive management guidance on manufacturing capacity.

NIO, for example, reported third quarter revenues of Rmb4.53 billion, up 146% year-on-year. It also said that its manufacturing capacity of 5,000 vehicles a month in October would rise to 7,500 by January.

Investors in NIO have been particularly impressed with its BaaS (battery-as-a-service) programme, which around a third of NIO customers have signed up to. This allows them to lease their batteries rather than own them outright. Instead of charging their cars overnight, they also have the option of going to one of the company’s 158 stations and getting the battery swapped out in three minutes.

Leasing reduces the cost of NIO’s ES6 sport-utility vehicle from about $52,200 to $41,600, reports the Wall Street Journal “although customers would then pay a $150 monthly fee to rent a battery”.

Customers can also upgrade when NIO launches new battery designs, as it did at the beginning of November. Its latest 100kWh battery, developed in association with Contemporary Amperex Technology (CATL), has a driving range of 615km (382 miles) and has 37% higher energy density.

XPENG’s current valuation is underpinned more by investor perception of its progress in autonomous driving. The stock shot up in November when the company announced that it would be the world’s first auto manufacturer to install lidar technology into its cars, starting next year. Lidar uses spinning lasers to perform 360 degree scans by bouncing lasers off objects and measuring the return times to calculate distances and shapes.

Most of the world’s EV manufacturers are planning to use lidar with one major exception: Tesla. Elon Musk has described the technology as a “fool’s errand” and Tesla has just launched a beta version of a rival approach in its Full Self Driving (FSD) programme, part of the Autopilot driver-assistant system. This deploys cameras and ultrasonic sensors to relay information to a computer, which is built on neural networking technology. Musk believes the approach has an edge because the computer learns as it goes along, in the same way a human brain does. Theoretically this should enable it to differentiate between objects that pose no danger (a dog on a kerb) versus those that might (a dog running on to the road).

XPENG says it is happy to deploy its lidar-based approach, believing it will deliver a “nearly tenfold increase in computing power” and “centimetre-level accuracy”. But Musk was similarly scathing in responding to XPENG’s announcement on lidar, reigniting claims that the Chinese firm had tried to get access to an earlier version of its Autopilot technology.

Tesla and XPENG have a history of bad blood, with Musk’s firm suing its Chinese rival on allegations that a company engineer stole the Autopilot’s source code prior to starting his employment at the Chinese automaker. XPENG refuted this (see WiC495 for more details).

The latest outburst from Musk prompted a similarly frank response from XPENG’s founder, He Xiaopeng, who told his weibo followers that his autonomous driving system would beat Tesla in the China market in 2021. “It seems that we’ve upset someone in the West who’s still talking out of his arse,” he said. “You should be prepared for us to beat you out of your mind in self-driving in China next year,” he warned his rival. “As for international [markets], we will soon meet each other.”

Tesla is now on course to sell as many Model 3 cars each month in the Chinese market as Audi, BMW and Mercedes Benz do of their combustion engine models. In October, it sold 12,143 vehicles, according to Clean Technica figures. The Germans have been averaging about 15,000 units.

In the 10 months to the end of October, Tesla had sold 94,492 Model 3s and will almost certainly have broken through the 100,000- mark when November’s figures are published. That’s three times more EVs than those produced by domestic brands GAC, BYD and Baojun.

One of the lesser known challengers to Tesla’s crown in China is a car at the other end of the price spectrum, the Wuling HongGuang Mini EV. This micro electric car, produced by the SAIC-GM-Wuling joint venture, only costs about $4,000 and runs on a small 9.2kWh battery. But analysts believe the brand has the potential to revolutionise city transport and for the past two months it has surpassed the Model 3 in unit sales. In October, it registered sales of 20,631, an all-time EV record for a single model.

Urban mobility is one area where competition is likely to be even more intense in 2021. One of the other contenders is ride-hailing firm Didi Chuxing, which has teamed up with BYD to produce an electric ride-sharing car called the D1.

The new model was unveiled by Didi President Liu Qing at the company’s open day in mid-November. The avocado green car will initially be distributed via Didi’s leasing partners in Hunan’s capital city Changsha this month, before being rolled out in other cities next year. The South China Morning Post reports its comes with enhanced security features such as a police-alarm button and an electronic sliding door to “address the roughly 20,000 disputes [between drivers and passengers] annually that Didi said arise from opening and closing of traditional car doors”.

Last month, the Chinese government unveiled another EV development plan, setting a 20% EV target for new car sales by 2025, up from 5% currently. But the local media also reports that the authorities are looking at ways of taking some of the steam out of share prices in the sector. In particular, the NDRC is asking local authorities for details of EV-related investments and land holdings dating back to 2015. It is reported to have specifically mentioned two well-known property groups with aspirations to dominate the sector: Shenzhen-based Baoneng and China Evergrande.

The latter has ploughed billions into the EV sector, but has run up spectacular debts in the process.

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