Equity Research

Equity research is the study of a business and its environment in order to make a buy or sell decision about investing in its shares.

Chinese Electric Vehicle Companies to Consider

Our Analysis: 06-Jun-2022

XPeng (XPEV) is one of the fastest growing EV companies based in China. Europe is currently the largest EV market globally, with China quickly catching up, and XPeng’s international expansion plans will be a key growth driver for the company. Exemplifying this, XPeng delivered as many as 42,000 vehicles during the fourth quarter (Q4) 2021.

XPeng recently posted quarterly results on March 28, beating analysts’ estimates. Its revenue increased by 200 percent year-over-year, reaching $1.3 billion. Although XPeng did not post a profit during this quarter (that was expected), the net loss was reasonably lower than analysts’ estimates.

As of close 06-Jun-22, XPEV ($25.21) is trading at fair value according to our DCF stock valuation. The DCF model calculated a target price of 16.84 – 29.85 per share. Using ±3% from the lower and upper limits, the fair value range is between 16.34 – 30.74 per share. The stock is down 32 percent from 1-year ago (04-Jun-21, 37.11) and down 50.68 percent year-to-date (03-Jan-22, 51.12).

Li Auto (LI), founded in 2015, manufactured and rolled out its first SUV in 2019, and currently is ramping up production capacity to release its second model. Since 2019, it has delivered over 110,000 vehicles, with the expectation to deliver another 31,000 vehicles during Q1 2022.

During its Q4 2021 earnings report, the company beat analysts’ estimates. It posted sales worth $1.67 billion, which is a 156% increase year-over-year. Additionally, Li reported a solid 11 cents of earnings per share.

As of close 06-Jun-22, LI ($29.07) is trading at a discount according to our DCF stock valuation. The DCF model calculated a target price of 37.62 – 42.05 per share. Using ±3% from the lower and upper limits, the fair value range is between 36.51 – 43.30 per share. The stock is up 13.53 percent from 1-year ago (04-Jun-21, 25.64) but down 11.84 percent year-to-date (03-Jan-22, 33.02).

Nio (NIO) focuses on key markets in Hong Kong, China, Germany, the U.S., and the U.K. Accordingly, Nio is a more international play as far as China-based electric vehicle stocks go. In Asian markets, however, Nio is among the leading pure-play EV makers in China. If the Chinese government is looking for a poster child for innovation, Nio would likely win this accolade.

There’s a lot to like about Nio stock, including the company’s global aspirations. This company received impressive accolades, with the European Whole Vehicle Type Approval being bestowed on Nio for its ES8 model. This approval means that Nio can now enter the European market to produce and mass market its vehicles.

As of close 06-Jun-22, Nio ($19.18) is trading at fair value according to our DCF stock valuation. The DCF model calculated a target price of 18.26 – 26.98 per share. Using ±3% from the lower and upper limits, the fair value range is between 17.72 – 27.79 per share. The stock is down 54.27 percent from 1-year ago (04-Jun-21, 41.94) and down 42.78 percent year-to-date (03-Jan-22, 33.52).

The table to the left compares the calculated implied share price for the three Chinese EV makers. Tesla is listed for comparative purposes, i.e., benchmark.

This table compares the year-over-year growth of revenue for our three Chinese EV makers as compared to Tesla during the same period of operations, i.e., the first four years of operations.

Note the growth in the fourth year of operations as compared to Tesla. Is this a function of their ability to execute their respective expansion agendas, or is it that Tesla has paved the way making it easier for others to enter the market? Even more so, is it a reflection of who is backing the Chinese EV makers (i.e., CCP)?

This next table compares the year-over-year growth of net income, again Tesla is listed as a benchmark during the same period of operations.

What’s interesting to note is the pattern that is developing for the EV makers. What’s imperative is Nio’s ability to sustain growth in Net Income over three years (i.e., 2019-2021) versus the other three EV makers. Each firm was able to keep indirect costs (i.e., operating costs) relatively stable from 2020 through 2021, and even their direct costs (i.e., cost of revenue) slightly decreased, but only Nio was able to sustain Net Income growth. This was because while XPeng, Li, and Tesla poured more money into research and development during year four of operation (between 2.4 and 4.8 times 2020 values), Nio did not. As a side note, the provision for income taxes significantly increased between 2020 and 2021, however as a percentage of revenue, it was a minor contributing factor.

Annaly Capital Management, Inc. (NLY)

Our Analysis: 31-Oct-2021

Based on financial models, the market has undervalued Annaly Capital Management (NLY). As of close 29-Oct, NLY is 8.46 per share, down 0.11 per share from yesterday. implied share price is between $9.14 - $9.33 per share; which is $0.72 - $0.88 over market value (2020 year-end and 2021 third-quarter ending, respectively).

However, after reviewing their annual report and Q3 8K, they do not give me very much confidence they can turn things around. For instance, their investment portfolio is comprised of, literally, 99-percent residential real estate (0.11% commercial real estate). Also, over 85-percent of their revenue relies on mortgage-backed securities which isn’t necessarily bad, but...

Moreover, they rely heavily on interest rate swap contracts, and as a firm that relies heavily on one strategy they aren’t very good at it. NLY basically “bet” wrong on virtually all their swap contracts in2020, attributing to a $3.0 billion loss. For reference, they had a $526 million gain in 2018, a $2.3 billion loss in 2019, and currently for Q3 2021, they are positive $130 million. Additionally, interest rate swap contracts, obviously, are greatly affected by interest rates. Depending on which side of the contract NLY is on (either the buyer or receiver) the firm can lose a lot of money with even very little change in interest rates. Inflation, COVID, and the Fed will all be pushing rates all over the place in 2022 and there is little certainty and a lot of risk with these contracts. We see evidence of this with the almost $5.3 billion loss NLY has over the last two years.

What is really weighing heavily on NLY, is their accumulated deficit of $10.7 billion. This deficit is attributed to:

Net losses over the past two years totaling $3.1 billion
Preferred stock dividends: -$408 million
Common stock dividends: -$4.3 billion

Based on our research and analysis, NLY is not a good buy, even though they technically are trading at a discount.