"Looking ahead, we could envision a re-rating upward of China EV stocks given the large discount relative to US peers," said Deutsche Bank analyst Edison Yu's team.
The US-China standoff over audits has been one of the key factors in depressed valuations for US-listed Chinese companies over the past year. With growing signs that the factor may be passing, the market appears to be getting optimistic.
Regulators' concessions over the summer could prompt a much-needed upward re-rating of Chinese electric vehicle (EV) stocks, Deutsche Bank analyst Edison Yu's team said in a research note sent to investors Monday.
The research note cited an April 1 Bloomberg report that said Chinese regulators are preparing to give the US full access to the audit papers of more than 200 companies listed in New York, possibly as soon as the middle of this year.
The report mentioned that the China Securities Regulatory Commission (CSRC) and other authorities are drafting a framework that would allow most Chinese companies to retain their listing status in the United States. The exceptions would be some state-owned enterprises and private companies with super-sensitive data.
There is some debate about what constitutes "sensitive," and in Yu's team's view, Chinese EV companies will not fall into this group.
The news follows several reports in recent weeks showing that Chinese regulators are increasingly willing to make concessions to US Public Company Accounting Oversight Board (PCAOB) inspections of audit documents, Yu's team noted.
"Looking ahead, we could envision a re-rating upward of China EV stocks given the large discount relative to US peers. For example, Nio/XPEV are both trading at ~2x consensus 2023E EV/Sales vs. RIVN at 4x and LCID at >10x," the team wrote.
The team said they still wouldn't expect valuation parity because geopolitical friction has permanently damaged valuation multiples for China ADRs.
They did mention, however, that they expect investor focus could potentially revert back to fundamentals, which could surprise to the upside as the year progresses and bring back investors who have been on the sidelines.
Notably, the CSRC released a draft of new regulations on April 2 that hinted at positive surprises on the audit issues.
The draft would revise the rules on confidentiality and file management for Chinese companies listed abroad, originally issued in 2009, and appears to be the new framework mentioned in the Bloomberg report.
Perhaps driven by that new draft regulation, positive investor sentiment has sent Hong Kong stocks sharply higher today, especially for leading Chinese EV stocks that have dual listings there.
By the market close, Nio (NYSE: NIO, HKG: 9866) was up nearly 8 percent in Hong Kong after rising nearly 15 percent at one point. Xpeng Motors (NYSE: XPEV, HKG: 9868) and Li Auto (NASDAQ: LI, HKG: 2015) were both up about 10 percent.
