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China EV ‘honeymoon’ is ending, Jefferies says; XPeng stock downgraded

The “honeymoon stage” for electric vehicles in China is coming to an end, analysts at Jefferies said in a note Monday, highlighting EV makers BYD Auto Co. Ltd. and Li Auto Inc. as their top picks and downgrading their rating on XPeng Motors shares.

Next year will be “challenging” for new-energy vehicles in China, the Jefferies analysts, led by Johnson Wan, said in a note Monday.

See also: A Tesla bear raises his rating on the stock

There’s plenty of growth, but also plenty of competition, with no fewer than 84 new models coming to market, compared with about 50 this year, and internal-combustion auto makers and tech giants “joining the EV race,” they said.

Moreover, the EV market in 2023 also faces slower economic growth in China and the expiration of stimulus measures, they said.

Despite the challenges, however, the analysts see a 31% year-on-year rise for sales of all of China’s new-energy vehicles, which includes fuel-cell, all-electric and hybrid models.

Related: GM’s EV roadmap is ‘ambitious,’ but Wall Street doesn’t give it full credit just yet

That would drive China’s new-energy vehicle penetration to up to 39% for 2023, the analysts said. Cheaper vehicles, or those sold between RMB100,000 and RMB200,000 (between $22,000 and $45,000), are the most attractive segment, they said.

Top pick BYD
1211,
+5.32%

is likely to be the winner in that “sweet spot” price and a pioneer exporter in Europe in 2023, the analysts said. Li Auto
LI,
+1.37%
,
for its turn, is “our favorite (new-energy vehicle) startup,” enjoying a first-mover advantage in the hybrid market and operational efficiencies, they said.

The Jefferies analysts downgraded their rating on XPeng shares to hold, from the equivalent of buy, saying that the company made “recent missteps in product and pricing strategy,” leading to market-share loss. Its new G9 electric SUV also experienced a “weak” reception, they said.

XPeng “faces tough competition with existing models reaching the end of their life cycles and a weak product pipeline that will likely continue to drag sales into 2023” and lead to price cuts and weaker margins, the analysts said.

XPeng remains a leader in advanced driver-assistance systems, but commercialization of its XPilot system may take years to materialize. XPeng models also face increased competition with offerings from newer and cheaper models from Nio Inc.
NIO,
-0.49%
,
BYD, Tesla Inc.
TSLA,
+0.03%
,
and others, the analysts said.

American depositary receipts of XPeng have lost 86% this year, compared with losses of around 16% for the S&P 500 index
SPX,
-1.54%
.
Nio Inc.’s and Li Auto’s ADRs are down 67% and 47% in the same period.

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