By Michael Elkins
Morgan Stanley has decided to cut earnings forecasts and price targets on Chinese electric vehicle companies, Nio Inc. (NYSE:NIO), Li Auto (NASDAQ:LI), XPeng (NYSE:XPEV), and BYD (SZ:002594) after Tesla's (NASDAQ:TSLA) price cuts in the country triggered broader price competition. The price cuts, along with weaker YTD sales post-stimulus, have pressured the Chinese EV segment's 1H23 sales margin.
Carmakers continue to join the price competition by either lowering the MSRP directly, offering more aggressive promotions/discounts, or providing free spec upgrade packages to boost sales. MS analysts believe hefty margin pressure amid a price war could inflate the market's concerns over sector profitability and cash flow, especially NEV heavyweights like BYD and Tesla China, who are capable of initiating another round of price cuts in 2Q. This, together with weaker YTD sales post-stimulus exit, could dampen EV names' 1H23 sales volume and margin.
Looking towards 2H23, the analysts believe investor focus will gradually shift to the potential upside to NEV sales and penetration. Morgan Stanley estimates major NEV makers' battery costs will drop 20-25%, implying a 6-10ppt saving in BoM as key components and raw material costs keep trending down. They believe EV makers who can take full advantage of this will enjoy margin relief and also have more flexibility to price their models with a lower price tag.
Morgan Stanley cut total shipments volume forecasts for Nio in 2023 by 10%, to 230k units, reflecting tepid sell-through in 2M23. For XPeng, 2023 total shipments volume forecast for 2023 was cut by 26%, to 155k units, and Li Auto by 2%, to 255k units.
MS analysts wrote in a note, "Cuts to our forecasts for EV names reflect greater sales/price headwinds. We think YTD stock corrections should have discounted competition risks but underrate the cost-driven upside to EV margin/volume in 2H. We expect the EV trio to fend off the downturn and stand out as winners post-reshuffle."
Morgan Stanley cut 2023 volume and margin forecasts for the "EV trio" (NIO, LI, and XPEV) and BYD to reflect slowing demand YTD and increasing price pressure. They reiterated Overweight ratings on the trio for valuation, a solid balance sheet, faster innovation, and model iteration. Trough valuations imply reduced market expectations for the EV startups' operational performance and financial resilience amid the current downturn, making marginal improvements in sales a meaningful stock catalyst. Li Auto leads with superior execution but the risk-reward increasingly favors XPeng and NIO after the sharp selloff YTD.
Morgan Stanley maintained an Equal Weight rating on BYD, reflecting concerns around investors' high expectations based on BYD's outperformance in 2022. However, compared to EV startups, MS analysts believe that BYD could be a safer alternative for long-only investors as a core EV holding.
Shares of NIO, XPEV, LI, and TSLA are down 1.69%, 5.32%, 3.32%, and 1.04% respectively in pre-market trading on Monday.