Source: Tookawa Investment Review
Author: Sun Ran

Investors have not given up on trying to find the next Tesla in emerging markets.

On August 15, “Vietnam Tesla” VinFast entered the US stock market. On the first day, it soared 250%, and the market capitalization of 86 billion US dollars overwhelmed Mercedes-Benz and quickly became the fifth largest car company in the world. After just ten short trading days, VinFast experienced back and forth like a roller coaster, then back slashed, doubled, and doubled again. As of August 25, VinFast's market capitalization had reached an astonishing $140 billion. It's really speculating on IPOs; the NASDAQ is much worse than A's.

Coincidentally, at the end of 2020, with an increase of 12 times a year, the fifth largest car company in the world also briefly belonged to NIO with a market capitalization of over 82 billion dollars.

Established in 2014, NIO, along with Ideal and Xiaopeng, founded in 2015, is also known as a new first-generation car builder. The term “new car building force” means that when the new forces were founded, it was to build electric vehicles, without all the shackles of traditional car companies. At the beginning of everything, disruptors more or less had a sense of storytelling in their bodies.

Today, Wei Xiaoli is already past the age of storytelling. If he wants to win the favor of investors, he needs to come up with something real.

Against the backdrop of weak demand in the global market, new energy vehicles can be considered one of the few places that are still resilient, and have become a type that many fund managers are still heavily allocating. Judging from the sales report card, the performance of the new forces is not bad either. Although there is still a clear gap in sales volume with BYD, the biggest player in the industry, the advantages shown by new car builders in terms of intelligence and the product ability to mass-manufacture popular models all make it difficult for the secondary market to ignore.

Since NIO is listed on the US stock market, although it also entered the Hong Kong Stock Exchange last year, it was not included in the Hong Kong Stock Connect, so for public funds, only a small number of QDII funds can participate. Therefore, in the second quarter of 2023, fund managers' popularity in the new car building sector was still focused on Ideal and Xiaopeng.

This article will try to analyze the differences and consensus of fund managers on buying Lian and Xiaopeng.

01 Ideal: Extended Range of Friends

It used to be ridiculed as a “go on the train, take off your pants and fart” add-on program, but now it hits many people in the face with the results of sales. In the first half of 2023, Ideal sold 139,000 vehicles, far exceeding the total of 54,000 NIO and 41,000 Xiaopeng vehicles. Friends and merchants such as Enjie, Zero Run, Rantu, and Changan have followed their ideals and launched extended-range models.

In the second quarter of 2023, ideal revenue was 28.65 billion yuan, an increase of 52.5% month-on-month, with positive month-on-month growth for the fourth consecutive quarter; net profit of 2.3 billion yuan, positive net profit for two consecutive quarters. Ideal Auto was founded the latest in Wei Xiaoli, but with its excellent cost control capabilities, it is expected to be the first to achieve annual profit. Compared to the single-digit gross profit margins of NIO and Xiaopeng, the ideal gross margin of 21.8% even exceeds that of Tesla during the same period.

The stock market is often criticized as a big casino that is not effective enough, but it has sunk to the bottom of logic, and financial reports will always have their weight.Ideal Auto, which has excellent performance, prides itself on all listed car companies in A/H with an increase of more than 100% against the backdrop of Hong Kong stocks at the bottom of the global performance. The market value of 43.5 billion US dollars even exceeds that of NIO and Xiaopeng combined.

As can be clearly seen, there has also been an obvious change in the allocation of public funds: the ideal number of public funds with heavy holdings almost doubled in one quarter — from 59 in the first quarter of 2023 to 101 in the second quarter, there are quite a few active fund managers.

People who are keen to line up have begun to debate whether it is now “Li Wei Xiao” or “Li Xiaowei,” and there is even a saying that “Wei Xiaoli is only reasonable.” No wonder that in the eyes of some fund managers, BYD and Ideal have become the only leading companies in the NEV vehicle sector. For example, Qu Shaojie of the Great Wall Fund, which is “led by investing in leading stocks,” the only new energy vehicle stock that appeared in the top ten positions was BYD and Ideal.

In addition to “new power leader,” another ideal label is “high growth, high prosperity.” Ye Song and Lu Xiaofeng of Changxin Fund, which greatly increased their positions in the second quarter, wrote in the second quarter report, “In terms of combined operations, we controlled positions in the procyclical sector due to retracement control considerations, on the one hand, we controlled positions in the procyclical sector, and on the other hand, concentrated more on weak alpha industries and targets.”

As an industry that still maintains a high growth rate, how long new energy vehicles can remain strong is always a short-term concern. In response, Ye Song and Lu Xiaofeng analyzed, “The core of the high-growth sector is the economy. Despite the large increase in the early period, we think the end of the high-growth sector is often not due to valuation, but because of the inflection point of prosperity.”

Looking at the present, a profitable business is bound to be better than one that is not profitable, but when measuring the value of an enterprise, it is never just the current level of operation.

This year, Ideal Auto's operations and stock price performance certainly came out on top in China's automotive sector. But looking at global capital markets, the real crown in 2023 belongs to the “arms dealer” in the field of artificial intelligence — Nvidia. On August 22, a company whose main business is printing lottery tickets was linked to Nvidia and actually became the first A-share AI concept ten times its share.

However, Xiaopeng, who is deeply collaborating with Nvidia in the field of autonomous driving, has naturally left more room for investors to imagine.

02 Xiaopeng: Evaluation is more than hardware

Like other players in the new car building force, Xiaopeng clearly fell short of ideal in terms of earnings reports. In 2022, the Xiaopeng G9, which carries the hope of the whole village, was severely affected by sales in Waterloo due to complicated SKUs and internal consumption of sales channels. The 2025 operating profit correction target set by He Xiaopeng at the beginning of the year still seems unattainable [1].

However, entering 2023, Xiaopeng opened up a more imaginative situation: on July 26, Volkswagen and Xiaopeng officially announced their cooperation, dropping a big bomb on the automobile industry. According to Xiaopeng, in this cooperation, Xiaopeng charges a “technical service fee” to provide intelligent driving systems, the public provides engineering design capabilities and supply chains, and the two sides share a larger database [2].

Unlike other new-power car companies that focus on “building cars for the people” and cost performance, Xiaopeng has a sexier label on his body, autonomous driving. Wu Xinzhou, the soul figure of the Xiaopeng Autonomous Driving Center, has expressed the view that “Xiaopeng's intelligent driving is number one in China” on various occasions. However, the recent news that Wu Xinzhou has been extorted by Nvidia has also been interpreted by many people as adding credit to this view with a restrained expression.

Nvidia and Xiaopeng have maintained a cooperative relationship since 2001, when the Xpilot 3.0 of Xiaopeng's intelligent driving system used Nvidia's computing chips. On August 24, Wu Xinzhou and He Xiaopeng's microblogs showed that compared to digging corners, Wu Xinzhou's current job move was more like a friendly exchange of talents between the two sides.

Xiaopeng's potential in the field of autonomous driving is imaginable. Despite poor current operating data, technological breakthroughs could bring explosive growth in corporate value to this company at any time. This has also caused many fund managers to choose “I want everything” between “making money now” and “I can look forward to the future.”

Among them, the most representative ones are Xiong Yuzhou of Harvest Fund and Li Bo from Cinda Australia and Asia.

Xiong Yuzhou is very optimistic about smart cars. In the second quarterly report, he wrote, “Based on our judgment on the valuation status and profit trends of different assets, we have focused on deploying smart cars and related industry chains around the world. For some leading companies with high recognition but significantly high valuations, we tend to wait first.”

The top five heavily-traded stocks of Harvest Global Innovation Leading Stock (QDII) under its management are Xiaopeng, Tesla, Ideal, NIO, and Ningde Era. Basically, they are all in the top tier.

The Xinao New Energy Selection Group, managed by Cinda Australia and Asia's Li Bo, is equipped with Ideal and Xiaopeng. Since it is not a QDII fund, it is impossible to allocate NIO, which is not included in the Hong Kong Stock Connect. Li Bo's opinion is very clear. He told the author, “I'm optimistic that new forces will occupy the middle and high-end markets through mature electrification and leading intelligence.”

There are also fund managers who don't buy ideals and only buy Xiaopeng. Compared to just buying the ideal, this strategy is slightly offbeat.

Yan Anqi of the Nord Foundation is optimistic about the marginal improvement in the field of intelligent driving. In the second quarter report, he wrote, “In the second quarter study, we found obvious marginal changes in the field of intelligent driving. Previously, due to the 'price war', intelligent driving became the main direction for reducing the allocation of models. However, it is important to note that price reductions have brought equal rights to intelligent cars, as evidenced by the fact that 200,000 to 250,000 models are beginning to be equipped with advanced driving assistance systems, and it is possible that 150,000 to 200,000 models will also appear in the future.”

Liu Yang, who significantly increased Xiaopeng Motor's holdings in the second quarter, wrote in the second quarter report, “It is expected that some companies will reach an inflection point in their operations and move towards a virtuous cycle of positive cash flow,” wrote in the second quarter report.

03 End

In the secondary market's institutional investor methodology, the “good industry” is a dimension that everyone likes to talk about.

Short-term investors define a “good industry” as a high level of prosperity, because “high growth rate” is the best margin of safety. It doesn't need to carefully prove the final winner among many participants. As long as the company is still on the cusp, both mules and horses can rise to heaven.

Long-term investors define a “good industry” by looking at a competitive pattern, because only when the market share of the leader is stable enough can the DCF model use more sustainable assumptions. No one likes to gamble on their future and that of their customers in a chaotic pattern of “being king everywhere, short and brilliant.”

Over a long period of time, the automotive industry left investors with this kind of chaotic attitude: the industry pattern was sometimes concentrated and sometimes scattered, but even when the leaders were clearest, the CR3 market concentration did not exceed 30% [3]. As a result, almost all automakers have to fluctuate with the economic cycle, making it difficult to break out of their independence.

However, in the era of new energy vehicles, the narrative has fundamentally changed. People expect it to be like a smartphone in the mobile internet era, break away from the fate of a chaotic industry pattern, and achieve winner-take-all changes by combining software and hardware.

Tesla has fulfilled the American version of this prophecy, and Vietnam's Tesla is also staging its own thrilling story. China's public fund managers are also each betting on the growth path of China's new energy vehicles.

Reference materials

[1] He Xiaopeng: Xiaopeng Motor aims to improve operating profit by 2025, with sales volume exceeding 1.2 million vehicles by 2027, Surging News

[2] Xiaopeng Auto: Cooperation with Volkswagen will generate revenue from technical service fees to provide intelligent driving systems, Surge News

[3] Huawei Inside Auto, China's Tier 1 rise, while industrial chain restructuring is underway, Everbright Securities

Editor/Somer