Chinese driving company DiDi Global (NYSE: DIDI) has had an eventful public debut – its shares have fallen by 20% just days after it completed its initial listing. The warehouse crashed after Chinese regulators ordered DiDi’s app removed from the app stores and asked the company to discontinue new user registrations while reviewing its data collection practices.
But DiDi is hardly alone in coming under the control of officials in Beijing. The Chinese government is also reportedly considering new rules that would allow it to block Chinese companies from listing abroad and increase its regulatory oversight of their business activities.
Wall Street hates uncertainty, so it is not surprising that a large number of Chinese companies trading in US markets sold these headlines.
A strong operator in a sector that China is determined to grow
Lou Whiteman (Li Auto): Li Auto is one of a generation of young China-based electric car (EV) companies, and its offerings are differentiated to suit the specific needs of Chinese consumers. Li’s vehicles have built-in petrol-powered generators that allow recharging when no charging stations are available. This is important in China – a fast-growing market for electric cars, but also one where it can be difficult to find charging stations outside big cities.
Li Auto is focused on SUVs, a part of the market that tends to be higher margin.
The company is not yet profitable as management still prioritizes growth, but recent results came in better than expected and it is pushing further models and updates to its existing fleet forward. In the first quarter of 2021, Li Auto delivered 12,579 vehicles, and management’s forecasts are that it will deliver 10,000 per vehicle. Month before September. It is quickly building the infrastructure it needs to make it happen, with 65 retail stores and 135 service centers so far.
Li Auto was still unable to escape the DiDi-inspired sales. The stock is down 11% for the month.
Here’s another reason to like Chinese carmakers: Based on recent reports, there seems to be tension between those in the Chinese government trying to promote and grow Chinese companies and those concerned about data collection and control. these data. DiDi got into trouble in part because its data on ride pickups could be used to track the movement of officials, for example, to show which departments put in longer working hours and which ones close the store early.
A natural compromise between these factions would be to favor manufacturing companies over technology and information companies and promote brands for which the data is not the product. Although cars are becoming more digital, electric vehicles still seem likely to do well in China if its government policy tilts in favor of industrial companies where data is less worrying. And given that the Chinese government has already made electric cars an important part of its push to go green – it has set a target for electric cars to account for 20% of all passenger cars sold there by 2025 – this sector are less likely than others to be slowed down by regulatory headwinds.
China’s best EV manufacturer is for sale – but probably not for long
John Rosevear (NIO): NIO was another US-traded Chinese stock that had a tough week in the wake of the DiDi mess and lost approx. 8.8% of its value through Thursday’s closing. But the business remains an exciting bet, so this could be one of those moments where you buy.
Here are a few reasons why I think NIO stands out from the crowd of Chinese electric vehicle manufacturers.
- The demand is great. NIO delivered nearly 22,000 vehicles in the second quarter, which is more than twice as large as the year before. The company has done much to build and maintain relationships with its growing army of loyal fans who have returned the service by placing many orders on its stylish electric vehicles.
- The balance is strong. The NIO was in real trouble in early 2020, when the pandemic hit just after a year in which it had made major investments to support its growth. But last summer’s stock price rise gave the company a chance to raise extra cash, and it did not waste the opportunity. On March 31, NIO had about $ 7.3 billion in cash on its books – an ample reserve to cope with the next big storm, if and when it arrives.
- NIO is still investing in growth. The company will add two sedan models to its current SUV series next year and fill its coverage of the premium car market. And in May, it signed a new agreement with its manufacturing partner, which will increase its factory’s production to 20,000 vehicles per year. Month (from about 8,000 to 10,000 now) – so it will have the capacity to deliver as the order book continues to expand.
All the growth-focused investment explains why NIO is not yet profitable, but it is on the right track. The company’s losses in the first quarter were narrower than Wall Street had expected, and although its production in the current quarter has been limited somewhat by the ongoing global semiconductor shortage, the problem should ease over the next few months.
Long story short: With strong allies in the home government, a growing base of enthusiastic fans, China’s rapidly rising share of electric cars and great rival Tesla faltering, NIO looks set to deliver good growth over the next few years.
This giant security just got cheaper
Rich Smith (Alibaba Group): There is no doubt that the DiDi stock has hit and other Chinese high-flyers have also lost a lot of ground. But if your goal is to take full advantage of the DiDi sale and pick up cheap Chinese stocks while other investors are panicking, why limit yourself to money-losing companies in the traditionally low-margin automotive industry?
Instead, you could invest in something that is obviously worth owning: a profitable, free cash flow-positive business like the Alibaba Group.
Sure, investors buying shares in Chinese Amazon are now not getting as big a discount as they would on DiDi or Nio shares: Alibaba has only fallen 8% since the end of June. But when you crush the numbers, Alibaba shares still look like an incredibly good trade.
According to the company’s latest financial report, released in May, it generated $ 35.5 billion. Dollars in net income last year and 26.4 billion. Dollars in positive free cash flow. Weighed against its market value of $ 576 billion, giving it a P / E ratio of 16.2 and a P / FCF ratio of 21.8.
Are these valuations cheap? Imagine that analysts surveyed by S&P Global Market Intelligence expect Alibaba to grow its profits at an annual rate of 38% over the next five years. That would give the stock a 0.6 price-to-FCF ratio and a PEG ratio of only 0.4. (Hint: Value investors generally consider any ratio below 1.0 to be “cheap.”)
And the Alibaba shares could be an even better deal than these figures suggest, given that last quarter e.g. The company grew its sales 78% year over year. Granted, the possibility of interference from Chinese regulators will always pose a risk to Alibaba – but then again, that’s part of the reason why its shares fell for the first time.
If you can digest the risk of investing in Chinese stocks, Alibaba looks like one of those who will most likely reward it.
This article represents the author’s opinion that may disagree with the “official” recommendation position for a Motley Fool premium advisory service. We are motley! Questioning an investment dissertation – even one of our own – helps all of us think critically about investing and make decisions that help us become smarter, happier and richer.