Xiaomi EV's impact on EV startup shares may be relatively minor at this point, as more meaningful volume upside still comes from internal combustion engine vehicle replacement, Morgan Stanley said.

(Image credit: Xiaomi EV)

Morgan Stanley said the disruptive force of the Xiaomi EV is unfolding, with the first model, the SU7, seeing extraordinarily strong sales in its early days on the market, and explains how it could have an impact on other local electric vehicle (EV) startups.

"We raise Xiaomi's price target on the back of upbeat EV sales performance. We believe its disruptive force is unfolding but Xiaomi needs to deliver more to convince investors," analyst Andy Meng's team wrote in an April 11 research note.

Xiaomi officially launched the SU7 on March 28 and said the model received 88,898 firm orders in the first 24 hours. The model is offered in three variants with starting prices of RMB 215,900 ($29,840), RMB 245,900, and RMB 299,900, respectively.

Deliveries of the SU7's limited Founders Edition began on April 3, with Xiaomi founder, chairman, and CEO Lei Jun saying at the time that the model had garnered more than 100,000 firm orders, with more than 40,000 locked-in orders.

In the note, Morgan Stanley said that the Xiaomi SU7 was reasonably priced and has shown positive surprise on sales, with orders for 88,898 units close to their bull case.

"We believe the popularity implies that end-users are satisfied with Xiaomi's vehicle design and 'Smartphone + EV + AIoT' concept," the team said.

Xiaomi's disruptive force is unfolding as Xiaomi EV arrived later than its competitors, but has received very positive market feedback thanks to its customer-oriented innovations, the team said.

Production, delivery and service will be key factors in the near term, while continued innovation in ADAS (Advanced Driver Assistance System) and smart cockpit features will be long-term value drivers, Morgan Stanley said.

Morgan Stanley expects Xiaomi EV to have a base case intrinsic value of RMB 89 billion and an average selling price of RMB 250,000 in 2024-2025.

The team sees a higher probability of a bull case for Xiaomi EV, which would generate a higher value of RMB 110 billion.

Morgan Stanley raised its price target on Xiaomi's Hong Kong-traded shares to HK$20 from HK$17.50 previously, implying a 25 percent upside.

For other EV startups, Morgan Stanley believes that Xiaomi EV will have a limited impact on their share prices, but these startups will face an inevitable battle.

"Valuation-wise, Xiaomi's EV peers like Nio's and Xpeng's share prices have already corrected substantially YTD (down 40-50 percent vs. HSI +1 percent YTD); hence, actual impact to EV startups' share prices could be relatively minor at the moment, as more meaningful volume upside still comes from ICEV replacement in our view," the research note said.

Several of Xiaomi's EV peers have noticed an increase in store traffic over the past few weeks, Morgan Stanley said, citing their channel checks.

Similar to the success of Huawei's Aito M7, the disruption brought about by Xiaomi EV goes beyond the product itself and stems from an effective combination of successful marketing, branding, and to a greater extent, an established ecosystem, the team said.

"Thus, competing with tech veterans appears to be an uphill, but inevitable, battle for auto OEMs. Though on the bright side, we are confident in startups' rapid adaptability to the ever-changing competitive landscape," the report reads.

While most of the models most often compared to the Xiaomi SU7 are EV models, such as the Tesla Model 3, Nio ET5, and Xpeng P7i, internal combustion engine vehicles are ultimately net sales losers, especially for JV brands, the team said.

"In particular, luxury brands' entry level models and mass market brands' C-segment sedans could come under pressure, as the SU7's superior spec and pricing could serve as an attractive alternative for young couples/families looking for mid/large-size sedans," Morgan Stanley said.

($1 = RMB 7.2363)

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