1 China ESG Stock That Growth Investors Will Love

June 23, 2021

Last year saw huge gains for many stocks, globally, which seems rather counterintuitive given we were going through a global pandemic.

However, many of these “winners” in the stock market were growth stocks. That’s because many of the megatrends which these growth stocks are exposed to were actually accelerated by Covid-19.

One megatrend that you wouldn’t think would have been a key winner was clean/renewable energy. Yet there has been a shift in the mindset of individuals towards environmental, social and governance (ESG) investing – with particular emphasis on the “environmental”.

Obviously, we’ve all heard of the likes of Tesla Inc (NASDAQ: TSLA) shooting up in 2020 as the electric vehicle (EV) trend really started to take off.

What most investors perhaps don’t realise is that Chinese growth stocks – particularly environmentally-related ones – also had an incredible 2020.

With China’s government also getting serious about climate change and its carbon emissions plans, here’s one Chinese ESG stock that growth investors can buy for the long term.

China’s Tesla

For all the headlines that EVs are taking in the US stock market, it’s the sheer number of cars in China that is making investors sit up and take notice of Chinese EV producer NIO Inc (NYSE: NIO).

The company, which has backing from Tencent Holdings Ltd (SEHK: 700), has come back from the dead having nearly gone bankrupt in 2019.

From a share price of US$1.50 in late 2019, NIO shares now sit at around US$44. In 2020, NIO shares soared by around 1,300%.

NIO managed to salvage itself by securing new funding in late 2019 from a provincial government in Anhui, tied to an agreement on EV production in its key city of Hefei.

Since then, it has been a turnaround story for investors as it has benefitted from being one of the few EV makers in China (out of a barely believable 635 EV startups in 2019) that is actually producing vehicles – and not merely saying it will at some point in the future.

Growth in China EVs

The market for growth in China is clearly huge. China’s market for EVs was already growing before Covid-19 hit.

In 2020, according to research from Canalys, 1.3 million EVs were sold in China which represented a stonking 41% of global EV sales.

That still only made up a small portion of the near-20 million in overall passenger vehicle sales in China last year. Going forward, that proportion is expected to grow strongly (see below).

China EV market

Leading the China pack with a unique model

For NIO, it represents a huge untapped opportunity. The estimated numbers for EVs by 2025 above may, in the end, actually prove conservative given how fast the sector is growing in China.

As mentioned before, NIO already produces cars and that’s beginning to show up in the numbers.

In its most recent first-quarter 2021 earnings report, it announced deliveries during the quarter of 20,060 vehicles – up 422.7% year-on-year from the first quarter of 2020 and also up 15% sequentially from the final quarter of 2020.

There’s also the fact that NIO has a unique business model where, rather than charging its batteries, it relies on swapping them out instead to save consumers time on the recharging wait.

As a result, NIO is committed to building out a comprehensive nationwide network of exchange stations.

Buying future growth

For long-term investors, NIO is part of a massive growth industry in China. However, given the steep rise in its share price recently, it’s also sporting an “expensive” valuation of around 16x forward price-to-sales.

Yet for those of us who can look past valuation and think over years (or even decades) then investors could be getting a leading Chinese EV maker for a steal when we look back in 10 years’ time.

Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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