NIO, BABA, or DIDI—NIO Looks a Good Buy as Crackdown Subsides

Chinese tech stocks have been among the worst-performing asset class in 2021. The country’s crackdown on its tech giants under the guise of national security, antitrust, and wealth inequality took a toll on stocks. However, Chinese stocks like NIO (NIO), Alibaba (BABA), and DiDi Global (DIDI) have recovered from their 52-week lows. What’s the forecast for Chinese stocks and which of these stocks should you buy now?

It's worth noting that along with the macro-sell-off in Chinese stocks, company-specific factors have also been at play. For example, NIO has been facing a chip shortage. It delivered fewer-than-expected electric cars in August and also toned down the third-quarter guidance citing the global chip shortage.

DIDI stock was trading over 5 percent higher in the early price action on Sept. 3. Bloomberg reported that China is considering taking a stake in the company and could also consider bringing it under state control. However, it isn't clear how much stake the government intends to take in the ride-hailing company.

Another aspect worth considering would be that DIDI could face increased scrutiny in the U.S. if China takes a stake in the company. Also, the company might not be able to enjoy the rich valuations that other ride-hailing companies like Uber and Lyft enjoy.

Markets could still see the move as positive since it would help clear the uncertainty surrounding the company amid the crackdown in China.

The forecast for DIDI stock is positive except for the regulatory crackdown in China. DiDi Global trades at a significant discount to Uber and Lyft, which reflects the higher perceived risk. If the company can settle the issues raised by China, without impacting its business model much, it could deliver good returns in the long term.

Alibaba is arguably the poster boy of China’s crackdown on its tech giants. While the troubles mainly started in 2021, BABA stock has been under pressure since the third quarter of 2020. Its co-founder Jack Ma made critical comments about the regulators and then wasn’t seen in public for months.

China also banned Ant Financial’s IPO where BABA holds a third of the stake. Eventually, the company agreed to pay a $2.8 billion fine, the largest in China, to settle the antitrust case. If you think that the tech crackdown is over in China, BABA stock would appear attractive. The stock’s forecast is positive considering the strong secular growth trends in both e-commerce and cloud markets that it serves.

NIO’s woes are different from that of other tech companies. China hasn’t and in all probability wouldn’t target its EV (electric vehicle) companies. The country wants to lead in the EV race and has put great strategic importance on the industry.

The EV industry is also part of China’s “Make in China 2025” program. However, NIO has been facing issues related to the chip supply. The company sold fewer cars than Xpeng Motors and Li Auto in August for the second consecutive month.

The sell-off in NIO stock has been largely due to the negative sentiments towards pure-play EV companies. Most of these companies started to look bloated after the steep rise in 2020. After the steep fall, the valuations look much more reasonable.

NIO trades at an NTM EV-to-sales multiple of 8.6x. The corresponding multiples for Xpeng and Tesla are 7.9x and 12.2x, respectively. NIO’s current multiples are near the lowest that we’ve seen over the last year.

After the massive 2021 underperformance, NIO looks like a good Chinese stock to buy. The chip shortage is taking a toll on the earnings but the long-term growth story remains intact. NIO would also benefit from the launch of new models and expansion into new markets.