Electric vehicles and plug-in hybrids are taking over the Chinese auto market. During the first half of April, such vehicles accounted for over 50% of all automobiles sold there. Many companies within the space are also moving quickly into the European market. Chinese automakers’ generally low-cost structures and many years of experience with developing EVs should set them up well in Europe over the longer term. Although the EU is poised to implement tariffs on Chinese EVs, China is likely to make a deal with the bloc that should prevent the duties from badly hurting its automakers’ prospects in Europe. On the negative side, however, Chinese EV makers are currently engaged in a brutal price war that’s likely to cause many weaker players within the sector to struggle mightily. Here are two Chinese EV stocks to buy and one to avoid.
XPeng (XPEV)
First on our list of Chinese EV stocks to buy, XPeng (NASDAQ:XPEV), has reported very strong first-quarter results. In Q1, the automaker’s revenue jumped a huge 62% YOY to $910 million, while its gross margin climbed 12.9%. The latter figure was way above the gross margin of 1.7% that it generated during the same period of 2023.
The automaker is benefiting from multiple strong, positive catalysts. Its large, seven-seater SUV, the X9, has been a big success, as it delivered 10,000 of the EVs in the first four months of the year. Further, I believe that the automaker is getting a big lift from its top-notch, AI-powered Advanced Driver Assistance System (ADAS). Indicating that XPeng’s ADAS is indeed becoming very popular, 82% of its customers used the urban version of the offering in April, according to the firm.
Finally, XPeng’s partnership with Volkswagen (OTCMKTS:VLKAF) is starting to bear a great deal of fruit for the firm. XPeng obtained $140 million of service fees last quarter, with most of the money coming from Volkswagen.
Despite the company’s strong, positive catalysts and very promising outlook, XPEV stock is changing hands at a forward price-sales ratio of well under one.
BYD (BYDDF)
On May 29, BYD (OTCMKTS:BYDDF) announced that it had developed a plug-in hybrid powertrain with a total range of 1,305 miles. Amazingly, consumers will be able to obtain these vehicles for as little as $13,772. Since nobody likes pausing their trips to get gas or charge, and everyone wants to pay as little as possible for their vehicles, I expect the demand for these new plug-in hybrid vehicles to be tremendous in China, Europe and many other markets. The automaker reportedly plans to launch the vehicles immediately.
BYD is already thriving as its net profit soared 81% last year to 30 billion yuan while its sales jumped 42% to 602 billion yuan. In the first four months of 2024, its passenger vehicle unit sales climbed 23.6% versus the same period a year earlier to over 936,400.
Nio (NIO)
On the other end of the spectrum, Nio (NASDAQ:NIO) appears to lack competitive advantages. Indeed, its only major point of differentiation, battery swapping, is not much of a competitive advantage. Moreover, ADAS does not appear to be a competitive advantage for Nio. A Wired reviewer earlier this year found that the system was “unreliable” when it came to preparing to exit highways and failed to react sufficiently to other vehicles.
Meanwhile, Bank of America recently cut its price target on NIO stock to $5.90 from $6.50, citing higher-than-expected operating expenses. Also worrisome for NIO is the bank’s prediction that the automaker’s deliveries will increase by only 6% this year.
And importantly, Nio lost a huge $788 million in Q4 of 2023 alone.
On the date of publication, Larry Ramer held a long position in XPEV. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.