(Bloomberg) — The biggest debate among sell-side analysts covering Chinese stocks these days centers around the $31 billion question: What’s the outlook for Xpeng Inc.
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The Chinese electric-vehicle maker has the widest price target gap among members of the MSCI China index, according to data compiled by Bloomberg, with analysts predicting the stock could rise to HK$196 – or HK$18 – in the next 12 months. That’s a 169% gain, or a 75% decline in shares at Friday’s close. Between June and July, the shares rose nearly 180% before falling 30% over the next three weeks.
The stock is likely to face further volatility following the EU’s move to protect Chinese EV imports with tariffs. While that may hurt its share in the sector in the short term, the automaker faces more problems at home.
Depreciation in the industry this year has hurt margins, and analysts are concerned about the benefits of Volkswagen AG’s recent $700 million investment in Xpeng. That left a gap in market value of about $31 billion between the two extremes of the company’s price target in Hong Kong, underscoring uncertainty amid the economy’s slowdown.
“There is fragmentation in the market in Xpeng’s view given the intense price war in China. According to Steven Ling, managing director of UOB Kai Hian Hong Kong Limited, this dispute has widened Xpeng’s relationship with VW.
The uncertainty is one reason the Guangzhou-based company is currently the third-most volatile Chinese stock after debt-laden Country Garden Holdings Co. and its services arm, according to Bloomberg data.
For the bulls, analysts say the company’s efforts to develop autonomous driving software and its recent deal to partner with Volkswagen AG are helping boost confidence in future performance. A revision in HSBC Holdings Plc last month should boost its prospects.
“Given the leading edge of revenue contribution from the smart driving and software business, we think Xpeng should enjoy a high valuation multiple comparable to Tesla,” Soochow Securities Co. said. Analysts including Xili Huan wrote in a note earlier this month. Huang has the highest target price on the street.
There are some reasons to be cautious though. Stocks are rising after a short-selling move in early July. According to data from IHS Markit, short interest accounts for about 43% of outstanding US depository receipts in the US.
Investors may be wary of Xpeng as the company is known for selling low-cost models at a profit. According to UOB, Xpeng should continue to incur losses until 2025 due to its negative gross margin and additional cost pressures putting pressure on the model.
Currently, investors believe that the company’s fortunes and fate depend on several key measures, which are based on the margin and production outlook. These fundamentals may be the best way to determine where stocks are headed.
Andy Wong, fund manager at LW Asset Management Advisors Ltd, said: “Until Xpeng overcomes its production bottlenecks and improves its operating margins, my stock target will be in the very optimistic lower range.”
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