NIO (NIO) is a a speculative play on China’s fast-growing electric vehicle market, explains international expert Carl Delfeld, editor of Cabot Emerging Markets Investor.

The Shanghai-based company founded just four years ago which came public in the U.S. last September, three months after starting deliveries of its first model, the ES8 sport utility vehicle that seats seven people.

While speculative stock, I see major upside potential, given that the Chinese government is firmly behind electric vehicles. NIO announced that one of China’s state-owned funds, E-Town Capital, would likely invest in the company. The move could help NIO since the Chinese government’s subsidies on electric cars are phasing out.

I was a classic skeptic about electric vehicles (EV) but a deep dive last year convinced me that the industry is on a growth path that is very likely to accelerate.

Global EV sales were up 68% for 2018, reaching a global market share of 2% and UBS predicts that the global market for electric vehicles by 2025 could be 10 times bigger than in 2018.

The most important reason is China, followed by steady advancements in technology. Electric vehicles are a winning proposition for China because they help solve two big problems.

First, the mandarins in Beijing have a powerful incentive to push EVs due to political pressures to reduce smog in major cities. Second, EVs can generate significant jobs and help the country capture the commanding heights of the global economy, the key goal of the China 2025 strategic plan.

Already, China’s share of the global electric vehicle production has gone from 1.2% in 2013 to 22.6% in 2017. And China has a huge advantage over America that Japan never had—tremendous scale due to its population of 1.4 billion people.

EVs are still at a relatively low base but the consensus is that the rate of adoption of this technology is strong and momentum will accelerate as costs fall and market acceptance increases. Nearly 5 million electric cars have been sold so far — with more than half of global sales in China.

In addition, although new auto sales overall in China have been very weak, EV sales in 2019 have been a bright spot.

NIO recently launched the ES6, a five-seat SUV. The company claims that the ES6 base model has a range of up to 255 miles while the high-end model has a range of up to 317 miles on a single charge.

And if that’s not enough, in January NIO announced the opening of its battery swap network along the G2 Expressway in China so NIO vehicle owners can make the trip from Beijing to Shanghai without needing to charge their cars.

This is an aggressive investment for sure, but I like the rapid growth, the huge potential, the apparent strong support of the government and the backing of influential shareholders.

The lead shareholder is William Li, the founder of BitAuto Holdings (BITA), an Internet marketing, content and transaction company for the Chinese auto market.

Tencent (TCEHY) holds the second-largest stake and the third-largest investor is the well-respected investment management firm Baille Gifford. Interestingly, both firms have a stake in Tesla.

At the current market price, the company has deflated down to $2.67 billion in market value. Relative to sales, the stock trades at roughly 3x revenues, extremely low for what is considered a growth stock.

Keep in mind that NIO does not expect to become profitable until 2020, and there are certainly other companies in China making electric cars, but NIO has great backing and a U.S. stock listing.

This is a speculative idea and as a low-priced stock, you should expect volatility. Start small. In addition, I recommend a 20% trailing stop loss for NIO.

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