Nio and Tesla’s share price: Who to back as China’s luxury EV market grows?

Nio’s [NIO] share price reflects the Chinese electric carmaker's reversal of fortunes.

After years burning through cash and the very real prospect of going bust, the stock has gained 633% over the past 12 months, eclipsing even Tesla’s [TSLA] 220% acceleration in the same period (as of 15 June’s close).

Yet in 2021, the gains have turned into losses, with Nio and Tesla’s share prices both down since the start of January. While Nio’s share price has revived somewhat recently, gaining 44% since 14 May, it's still off the $63.10 intraday high seen 8 February, closing Tuesday’s trading at $45.5.

Tesla’s share price, meanwhile, has gained circa 8% since mid-May, closing 15 June at $599.36 — well off the $763 the stock hit in intraday trading on 13 February.

  

Each is competing in China’s lucrative luxury electric vehicle market — the biggest EV market on the planet. According to Bloomberg, EV sales in the country will reach 2 million this year and 6.2 million in 2025. Last year, 1.3 million EVs were sold in China, representing 41% of global sales, according to data from Canalyst.

Fuelling this growth is government investment and early adopters in China’s biggest cities, who are opting for the luxury rides offered by Nio and Tesla. Tesla’s midsize SUV Model Y targets these customers, as does Nio’s ES6 — a vehicle that is described as “a sophisticated and high-tech mobile living space” on the Nio website.

 

Is a resurgent Nio worth backing?

William Li, Nio’s billionaire CEO, ditched his trademark t-shirt and jeans for a grey suit to glad-hand customers at a recent gala dinner hosted by the carmaker in Shanghai, according to a report in Bloomberg’s Hyperdrive column. The report adds that this is typical of Li and Nio’s focus on the customer — Li also responds personally on Twitter [TWTR] and takes trips across China to visit customers on his day off.

Yet in early 2019, Li was overseeing a company on the brink, having racked up $5bn in losses in its first four years in existence — Tesla took 15 years to hit that number. Over-running costs, government subsidies drying out and a product recall created a perfect storm, which led to the carmaker losing $4m every day in the second quarter of 2019.

A lifeline came at the start of 2020, when the municipal government in Hefei offered Li an RMB10m cash injection in exchange for using government-owned Jianghuai Automobile Group Co., or JAC, to make its cars in Hefei.

Now Nio has been revitalised, so much so that it could start justifying its nickname as the “Tesla of China”. In the first quarter of 2021, Nio delivered 20,060 vehicles, up 422.7% from the 3838 delivered in the same quarter last year. The ES6 was its bestseller, with 8088 vehicles delivered.

  

Nio has also seen its revenue accelerate, pulling in RMB7.9bn ($1.2bn) during the first quarter, up 481.8% from the same period last year. Net loss for the first quarter came in at RMB451m (US$68.8m), a 73.3% decrease from the same quarter last year, and 67.5% from the fourth quarter.

The narrowing losses should reassure investor concerns after several years stuck in the red.

 

Why Tesla’s share price?

While Tesla can’t rely on state help like Nio, it has been at pains to get along with Beijing. In March, Elon Musk appeared on state television applauding the government’s emission targets. Tesla is also building a data centre in the country to comply with new requirements from China’s regulators on how information is collected and stored.

However, Tesla has come under increased scrutiny. China’s military have deterred personnel from driving Teslas on national security grounds. There have also been PR disasters, notably when a customer climbed aboard a Model 3 at the Shanghai Auto Show complaining about a brakes issue the company had failed to address. The resulting video went viral, leading to a surge in complaints.

  

However, talk of Nio overtaking Tesla in China remains premature. Elon Musk's company is still dominant in China’s electric car market, with the Model 3 being the top-selling EV in the country last year at 139,925 deliveries. According to a filing with the Securities and Exchanges Commission, Tesla made $3bn in sales in China during the first quarter, well up on the $900m in the same period last year.

In the first quarter alone, Tesla’s Shanghai gigafactory produced 450,000 Model 3s and Model S vehicles in the first quarter, with Tesla saying it expected to increase quarterly production through the year. For comparison, Nio delivered 36,721 cars in 2020, up 11.1% year-on-year.

 

Where next?

Of course the battle for China’s luxury EV market isn’t limited to just Tesla and Nio. China’s biggest car brand, Geely, is gearing up to launch a direct competitor to Tesla and Nio.

Under a separate entity called Lingling Technologies, Geely plans to manufacture high-end EVs under the brand name Zeekr, with the vehicles available at the end of the third quarter 2021. Geely already has some expertise in the area, owning Volvo which makes the sporty Polestar model and being the majority owner of Lotus, which is also developing an electric vehicle.

That’s not the only competition these EV firms will face. Alongside local rivals like XPeng [XPEV] and Li Auto [LI], there’s Volkswagen [VWAGY] — owner of high-end brands Audi, Porsche and Lamborghini — General Motors [GM], Ford [F] and other established automobile manufacturers who are pumping billions into transitioning to EVs. China is a big market for all of them, and they will want to compete at both the high and low ends of the market.

As it stands, Tesla’s share price has an average $652.52 price target from the analysts tracking the stock on Yahoo Finance — hitting this would see an 8.9% upside on 15 June’s close. Nio has a $52.84 price target, which would drive a 17% gain.