China’s EV Rally: Should Investors Chase, Avoid, or Buy the Dip?

Key Points

• China's newly announced stimulus measures have sparked a significant rally in EV stocks, with XPeng, Li Auto, and NIO seeing notable gains.
• XPeng surged 38% this month, bolstered by bullish analyst sentiment and the upcoming P7+ model.
• Despite steady deliveries and a $1.9 billion cash infusion, NIO lags behind its peers and faces less optimistic analyst ratings.

After years of economic headwinds, China is making a comeback, with the government's newly announced stimulus measures igniting a significant rally across Chinese equities. Among the sectors benefiting from this momentum are electric vehicle (EV) automakers, which have surged in the wake of this economic boost. Following the stimulus announcement, designed to revive the sluggish economy, major Chinese EV players like Li Auto, NIO, and XPeng have seen impressive gains. Li Auto has surged 37% this month alone, NIO has climbed over 11%, and XPeng is up a remarkable 38%.

This raises a fundamental question for investors: Should they chase the rally, avoid it altogether, or hold off for a potential pullback? Let's take a closer look at each automaker to see whether substance is behind the recent rally.

XPeng Outperforms and Analysts Turn Bullish

XPeng Inc. NYSE: XPEV has been one of the standout beneficiaries of the renewed optimism in Chinese stocks, surging over 38% this month. The company, which designs and manufactures smart electric vehicles in China, has attracted significant attention, and analysts remain bullish on its future prospects.

Tim Hsiao of Morgan Stanley recently reiterated his Buy rating on the stock with an $11.70 price target. Hsiao highlighted the upcoming P7+ model as a potential game-changer for the automaker, particularly due to its spacious interior and advanced smart cockpit features, which are expected to resonate with family users.

According to Hsiao, the P7+ offers interior space comparable to SUVs and MPVs, with more room and trunk capacity than some luxury models. This, combined with its tech-forward design, positions it as a major volume driver for XPeng through the end of the year and into 2025. Alongside the P7+, the recently launched MONA M03 is also expected to contribute to XPeng’s growth, with production ramping up to meet a target of 25,000 to 30,000 units by December.

Ahead of its upcoming earnings report on November 20, XPeng is consolidating at recent highs, bolstered by record-high September deliveries. As the company strategically prepares for mass deliveries, it looks well-positioned to continue its upward trajectory, though investors may want to watch for any post-earnings volatility.

Li Auto Records Record Sales in September but Risks Losing Steam

Li Auto Inc. NASDAQ: LI has been riding the wave of optimism surrounding Chinese stocks, surging over 37% this month. The company, which operates in China’s premium smart electric vehicle market, specializes in multipurpose vehicles (MPVs) and sport utility vehicles (SUVs). Li Auto has benefited from favorable tailwinds following the Chinese government’s recent stimulus measures, adding to the momentum with solid sales figures, 53,700 units sold in September, a 49% year-over-year increase.

Analysts remain bullish on the stock, with a consensus Moderate Buy rating and price targets forecasting over 20% upside. However, Macquarie analysts have recently maintained a more cautious stance, reiterating a Neutral rating with a $33 price target. They pointed out that while Li Auto’s current lineup, especially the L series, continues to perform well, the absence of new model releases for the rest of the year could pose challenges. The company may face pressure from price competition, which could impact margins, and a potential shift in demand away from extended-range electric vehicles (EREVs) to fully electric models.

Despite these risks, Macquarie acknowledges that if Li Auto can maintain its sales momentum and successfully introduce a BEV SUV in 2025, it could outperform expectations. The analysts see a modest upside for now, but investors will need to weigh the risks of slowing momentum against the company’s longer-term potential.

NIO’s Deliveries Steadily Grow Amidst Cash Infusion

NIO Inc. NYSE: NIO, one of China's leading EV manufacturers, has seen its stock rise over 11% this month, trailing behind rivals like XPeng and Li Auto. However, NIO has consistently delivered over 20,000 vehicles for the past five months, including 21,181 in September, a 35% year-over-year increase. This includes the first deliveries from its new affordable sub-brand, Onvo.

For Q3 2024, NIO set a record with 61,855 vehicle deliveries, marking an 11.6% growth year-over-year. Additionally, the company secured a $1.9 billion investment from a group of strategic investors, bolstering its financial position as it gears up for further growth.

This funding will help NIO continue expanding its services and technology as it works to scale in the competitive EV market.

Despite the recent cash infusion and steady vehicle deliveries exceeding 20,000, analysts are less optimistic about NIO than its peers. The stock holds a consensus Hold rating, with price targets indicating potential downside.