Recently, the Chinese EV space has been beset by several worrying developments. Morgan Stanley’s Tim Hsiao counts “geopolitical tensions, pervasive Covid curbs and ADR de-listing risks” which have further impacted EV start-ups already struggling with operational challenges such as disruptions to the supply of chips, batteries and other elements.
Rising EV manufacturing costs which will result in higher prices could also mean EV sales will take a hit. However, given the “continuous innovation,” in the space, Hsiao sees this headwind fading over time.
Additionally, China’s policies toward EVs are highly favorable with the sector forming a big part of the 5%+ GDP growth the country has targeted.
As such, while Hsiao thinks smaller EV players might not be able to survive against the “gloomy macro backdrop,” bigger well-funded companies such as Nio (NIO) should be able to whether the current headwinds. Furthermore, the recent secondary listing in Hong King also helps mitigate the worry of a US delisting.
That said, based on the latest developments, there are several adjustments to Hsiao’s model. Mainly based on the macro slowdown which could put some pressure on the sale of luxury vehicles, the analyst’s volume estimate for 2022 is slashed by 8% to 165,000 units.
Additionally, with legacy OEMs accelerating the move to hybrid offerings (both HEV and PHEV), that could potentially delay the “holistic BEV transition,” Hsiao has also cut his longer-term volume estimates (towards 2030) by 3-7%.
Also, to account for a more “cautious view on emerging markets as well as the consumption slowdown,” Hsiao has increased the China equity risk premium from 2% to 4%. “Our risk premium assumption is on par with our assumption for other traditional OEMs despite the ADR de-listing overhang, as we believe this is largely hedged by the H-share listing,” the analyst explained.
The result of all the above is a reduction to the price target, which drops from $66 to $34. Nevertheless, there’s still upside of 56% from current levels. Hsiao’s rating stays an…