A Chinese investment bank said in a recent report that the new energy vehicle industry will be a golden track for the next 15 years, but the valuation is more likely to go down from a 12-month time horizon, thus giving a "sell" rating in its first coverage of the new energy vehicle industry.

SPDB International, the offshore investment bank wholly-owned by Shanghai Pudong Development Bank, said it is bullish on Nio, Xpeng, Li Auto, Tesla, and BYD as the key players in the new energy vehicle industry. However, capital market enthusiasm has driven the industry to over-valuation.

The report argues that China's new energy vehicle market has entered a period of explosive growth after experiencing a major subsidy rollback in 2019 and the Covid-19 blow in early 2020. Both the policy, demand side, and the supply side of vehicle companies are ready for the explosion of new energy vehicles.

China's new energy vehicle sales penetration is expected to reach 20 percent, 40 percent and 50 percent in 2025, 2030 and 2035, roughly in line with the Chinese government's target, which means China's new energy vehicle sales will grow at a compound rate of 11 percent over the next 15 years, the report said.

And China's new energy passenger car sales will grow at 71% and 36% in 2021 and 2022. So, "we think this industry is at the beginning of a golden decade."

The report argues that China's auto sales will further improve year-over-year as the country's economy recovers, stepping into the upward phase of the cycle in 2021.

However, auto company valuations will peak before sales year-on-year. Currently, the auto industry has entered an upward valuation channel, driving overheated market sentiment, the report said, adding that auto industry valuations will start to pull back when the industry transitions from a recovery period to a growth period.

Currently, new energy vehicle companies are over-valued, with price-to-sales ratios between 11x-17x, including Nio, Xpeng, Li Auto, Tesla and BYD all at extremely high values in their own histories, the report said.

The report argues that the main problem in the current new energy vehicle industry is that capacity expansion cannot keep up with demand growth, meaning that valuations will not be supported next year when these companies' monthly sales hit saturation capacity.

As a result, the investment bank analysts gave Nio, Xpeng, Li Auto, Tesla and BYD a target price to sales ratio of 6.0x for new energy vehicles, implying a large potential downside for the target price in 2021. The report has a "sell" rating on all of these companies.

According to the report, Nio's 31,000-plus units ranked No. 1 among China's new car makers in terms of cumulative sales from January to October 2020.

The sales lead helps to better build its own user base. In addition, the OEM model of cooperation with JAC Motor also protects Nio manufacturing, the report said.

The report expects Nio's annual vehicle sales to grow 125 percent and 69 percent year-over-year in 2020 and 2021, respectively. However, "excessive market enthusiasm driving a sharp rise in the company's valuation has us concerned about the company's share price performance over the next 12 months."

The report gives Nio a 6.0x automotive revenue price-to-sales ratio and a 30x service sales price-to-sales ratio, giving Nio a $34.6 price target for 2021, a potential 23% downside.

The report also estimates a $158.7 price target for Nio in 2025, which corresponds to a 3x automotive revenue price-to-sales ratio and a 30x service revenue price-to-sales ratio, due to the positive long-term trend for Nio.

Analysts say they like Xpeng's investment in automotive intelligence such as autonomous driving. And the official delivery of the P7 this year has put Xpeng's car sales on a fast track.

The report expects Xpeng's car sales growth to be in the triple digits in both 2021 and 2022.

But the report gives Xpeng a price target of $23.20, a potential 48% downside, which corresponds to 8.8x 2021 price-to-sales ratio.

Currently, market enthusiasm is driving Xpeng's valuation at a high level, so there is more pressure on the stock in the near term, the report said.

The report also mentions that it is bullish on Xpeng's long-term growth, estimating Xpeng's 2025 price target at $158.8, a potential upside of 261%.

Li Auto has the shortest time to achieve 20,000 deliveries among China's new car makers. It believes Li Auto's extended-range technology, ability to build popular products and cost control will set it up to enjoy the rapid growth of China's new energy vehicle market over the next five years, the report said.

However, analysts believe the market has become too enthusiastic about the new energy sector in the past two months, so they have given Li Auto a target of $21.40 for 2021, a potential 34% downside, after giving Li Auto a 6x price-to-sales ratio on automotive revenue and a 30x price-to-sales ratio on service and other revenue.

The report also says it is bullish on Li Auto's future performance in the new energy market, giving it a 2025 target price of $109.4.

BYD is an early starter in China's new energy vehicle sector and ranks first or second in global new energy vehicle sales from 2016-2019. Therefore, BYD is expected to fully enjoy the explosive growth of the new energy vehicle market in 2020-2021, the report said.

However, investors also need to calmly see that the entire new energy vehicle market is currently in an overheated state, both in terms of valuation and trading volume, according to the analysts.

Therefore, the report maintains concerns about BYD's share price in 2021, giving BYD a 2021 A-share target price of 126 RMB (a potential 26% drop) and a Hong Kong share target price of 149 HKD (a potential 15% drop).