Morgan Stanley recommends buying this trio of Chinese EV makers after 2024 pullback

Published Mon, Mar 11 202411:19 AM EDTUpdated Mon, Mar 11 202412:32 PM EDT

The electric vehicle industry in China could stage a comeback after selling off this year with three standout stocks poised to deliver significant returns, according to Morgan Stanley. Analysts led by Tim Hsiao told clients Sunday that under-owned stocks Li Auto , Xpeng and Nio offer investment opportunities, rating all three of them overweight, while the rest of the sector shakes out. On the other hand, BYD , which is equal weight, will likely face another round of downward revisions from analysts due to market saturation in China, Hsiao wrote. "Although the macroeconomic and operational environment is certainly challenging, we think the negative forces influencing the trio of EV stocks are more or less [already reflected] in stock prices," Hsiao told clients. "While challenges persist, we see green shoots to bring the under-owned autos group back into focus in 2Q," Hsiao said. The auto sector in China has sold off about 30% year to date as companies work through bloated inventory due to seasonal market weakness, Hsiao wrote. EV penetration fell from a peak of 40% in December to 33.5% this year as makers of internal combustion engine cars pushed sales aggressively ahead of the Chinese New Year, according to the analyst. Despite a rough start to the year, Chinese EV makers are expected to launch a record number of new models and accelerate expansion plans in Europe, Latin America and Southeast Asia, at the same time as they're seeing lower battery costs, Hsiao wrote. Li Auto has booked several profitable quarters in a row, demonstrating solid execution of model launches and effective cost management, Hsiao told clients. Morgan Stanley has boosted total sales volume for the company by 12% in 2024 and 8% in 2025, reflecting stronger demand for new models. Hsiao has a price target of $74 for Li Auto's ADR shares, which implies that the company's stock could double in value from its recent close below $36.50. Xpeng has also successfully launched several new models and has a strong pipeline, the investment bank said, with Morgan Stanley expecting monthly sales to accelerate compared to the second half of 2023, according to Hsiao. The price target of $18 for Xpeng's ADRs imply upside of about 90% from its previous close of $9.52. Nio's plan to introduce a mass market brand could lead to upside for the company's vehicle sales volume, according to Hsiao. Morgan Stanley has a price target of $10 for Nio's ADRs, equal to roughly 72% upside from the previous close of $5.80.