Investing.com -- Shares of Chinese EV makers XPeng (NYSE:XPEV) and Nio (NYSE:NIO) are pricing in high expectations following a recent rally, according to a note from UBS on Wednesday.
The investment bank said the broader China auto sector has surged 30-50% over the past month, driven by a series of monetary and fiscal policy loosening measures.
As a result, Chinese automakers now represent 13% of the global car market capitalization, up from 9% just two months ago, though still moderate compared to their 20% share of the global car market and 60% share of the EV market, explains UBS.
However, the bank’s analysts caution that XPeng and Nio, both rated Neutral, are trading at high valuations.
XPeng is priced at 1.5x 2025E price-to-sales (P/S), while Nio is at 1.1x. According to UBS, these valuations assume that both companies will gain significant market share and achieve high-single-digit net margins in the coming years, without the need for further equity refinancing.
"While such a scenario is possible, we think it will be difficult to achieve, especially considering fierce competition from larger and more cost-efficient companies, such as BYD (SZ:002594) and Li Auto (NASDAQ:LI)," UBS wrote.
UBS remains bullish on other Chinese automakers like CATL and GWM, which they believe offer more attractive valuations.
CATL, trading at 20.7x 2025E price-to-earnings (PE), is seen as well-positioned to benefit from Europe's accelerating electrification, while GWM, at 7.9x 2025E PE, has growth potential from domestic premiumization and international expansion, says the bank.
UBS advises investors to be selective within the Chinese auto sector, with CATL and GWM as their most preferred stocks. They remain on the sidelines when it comes to XPeng and Nio due to their high valuation expectations.