Missed out on Tesla? Morgan Stanley picks 3 electric car stocks that could bring double-digit returns

Published Mon, Feb 1 20214:23 AM ESTUpdated Mon, Feb 1 20215:10 AM EST

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Key Points

Morgan Stanley predicts double-digit gains for China's electric car stocks given strong growth as the industry moves rapidly toward tech upgrades.
"The NEV (new energy vehicles) market is attaching greater importance to tech software and hardware features in 2021," Morgan Stanley said in a report dated Jan. 28

Watch out, Tesla . Morgan Stanley is expecting double-digit gains for China's electric car stocks given strong predicted growth as the industry moves rapidly toward tech upgrades. "China's EV (electric vehicle) competition will be more of a tech battle in 2021," the analysts said. For the market of new energy passenger cars the analysts raised their forecast by about 200,000 vehicles to 1.7 million in sales in China this year, about 41% growth from a year ago. NEVs, or new energy vehicles, include plug-in hybrids and electric vehicles. "The NEV market is attaching greater importance to tech software and hardware features in 2021," Morgan Stanley said in a report dated Jan. 28. All three U.S.-listed stocks in China's booming electric vehicle sector are expected to power ahead and bring returns of at least 40% in the next 12 to 18 months. Analysts at the U.S. investment bank initiated coverage of Xpeng with an "overweight" rating and raised their price targets on Li Auto and Nio, according to the report. Here's why Morgan Stanley loves China's electric carmakers. Li Auto: 'Stands out vs peers' Out of the three start-ups, Morgan Stanley predicts the most gains on a percentage basis for Li Auto with a new price target of $49 a share, a raise from its previous target of $26. The new target would be a nearly 52% increase from Friday's close of $32.25 per share. Li Auto "stands out versus (its) peers," the analysts said. Its extended-range system alleviates consumers' primary concern about electric cars running out of battery power with no charging station in sight, they said. The company's first and only model so far, the Li One SUV, has a fuel tank that can charge the car's battery and extend the driving range to 800 kilometers (497 miles), far beyond the previous 180 kilometers. Xpeng: Develops own self-driving software Morgan Stanley expects Xpeng to climb to $70 — up 45% from Friday's close of $48.18 a share. What stands out is the company's in-house developed autonomous driving software. "It retains a leading position on this front and is one of the only two EV makers that possess and have commercialized the sensing capability, with the other one being Tesla ," the report said. "We believe Xpeng's committed investments in autonomous driving could give it a long-term advantage with ongoing revenue sources such as autonomous driving services." In January, Xpeng announced it was starting to roll out new software that will allow its P7 sedan to automatically perform some complex driving tasks, such as changing lanes and entering and exiting highways. However, Morgan Stanley pointed out that Xpeng's gross margin is the lowest among the other start-ups, at 1.9% — that's compared to 7.6% for Nio and 15.5% for Li Auto. The analysts added that Xpeng is making almost all its profits from the sales of the P7 sedan, rather than the older G3 model. The G3 isn't selling as well as the P7, and has also run into technical problems. On Jan. 29, China's State Administration for Market Regulation announced a recall for nearly 14,000 G3s over a defect that might cause the battery to lose power while the car is driving or parked. The recall applies to vehicles produced between March 29, 2019, and Sept. 27, 2020. Nio: Optimism in subscriber service Morgan Stanley is optimistic on Nio 's push into subscription services, whether for battery power or autonomous driving. Under this pricing model, customers pay a lower price for the car and then monthly rates for additional features such as battery power. The analysts raised their price target from $33 a share to $80, up 40% from Friday's close of $57 a share. "We expect the autonomous driving adoption rate to start at 15% in 2021 and to increase to 60% by 2030," the report said, adding the annual fee will likely go up in price from 3,900 yuan ($600) to about 11,000 yuan when Nio delivers its new et7 sedan next year. The company currently only sells SUVs. In January, Nio announced the sedan and new self-driving technology features it claims can surpass those of Tesla. The company delivered the most cars last year among the three electric car start-ups. Morgan Stanley analysts predict Nio will nearly break even this year with net income of 6 million yuan. "Tesla's success in China has also attracted fund flows for EV makers, which we think bodes well for NIO's long-term R & D investment capability and growth potential," the report said.

Beijing auto show in 2020

Evelyn Cheng | CNBC

Watch out, Tesla.

Morgan Stanley is expecting double-digit gains for China's electric car stocks given strong predicted growth as the industry moves rapidly toward tech upgrades.

"China's EV (electric vehicle) competition will be more of a tech battle in 2021," the analysts said.

For the market of new energy passenger cars the analysts raised their forecast by about 200,000 vehicles to 1.7 million in sales in China this year, about 41% growth from a year ago. NEVs, or new energy vehicles, include plug-in hybrids and electric vehicles.

"The NEV market is attaching greater importance to tech software and hardware features in 2021," Morgan Stanley said in a report dated Jan. 28.