 NEV growth to continuously outpace overall market growth and surprise on the upside in 2021e  We raise our 2021e NEV demand growth estimate to 59% (from 41%) on strong EV adoption and conversion  We upgrade NIO to Buy (from Hold) with a new target price of USD69 (from USD54) on better growth opportunities Strong new energy vehicle (NEV) market growth to continue and lower tier city demand is accelerating. We believe NEV (passenger car) demand will continuously outpace the demand of the overall market, with 2021 May YTD showing 236% y-o-y growth vs 38% y-o-y overall market growth in the same period. While demand growth in higher tier cities still remains the majority of the overall mix, demand growth in lower tier cities is accelerating. We see strong EV adoption and conversion supporting continued strong NEV market growth momentum, along with increasing quality model supply.

We raise our NEV demand estimates – again. On a strong EV market and consumer traction, we are increasingly more constructive toward the demand outlook and raise our 2021-22e NEV growth estimates on average by 13%. Generation Z, in our view, is likely the most tangible car buyer group for the coming decade and they are more electric vehicle (EV) friendly. As such, we raise our 2025e and 2030e EV penetration estimates to 22% and 45% from 19% and 39%, respectively. We raise our bull-case scenario estimates for 2025e and 2030e EV penetration to 29% and 71% from 23% and 58%, respectively, on increasing visibility of conversion.

Furthermore, to reflect better volume opportunities and the respective dynamics of our covered EV value chain companies, we raise our 2021-22e revenue estimates of NIO (NIO US, USD46.04, Buy), BYD (1211 HK/002594 CH, HKD225.20/RMB255.09, Buy/Buy), CATL (300750 CH, RMB542.50, Buy) and Yunnan Energy (002812 CH, RMB247.50, Buy) on average by 12% and 21%, respectively.

We upgrade NIO to Buy (from Hold) on strong volume growth momentum. We expect NIO’s volume growth momentum to pick up on strong EV demand and the competitive premium EV proposition and established brand traction. On a higher volume outlook, we raise our DCF-based target price to USD69 (from USD54), implying 50% upside from the current share price. We upgrade the stock to Buy from Hold on the higher revenue growth opportunity. Potential share price catalysts: strong monthly delivery data in 3Q21e; new model debut and backlog building; and increasing visibility on in-house autonomous driving software capabilities. Key downside risks: lower-than-expected volume; higher-than-expected competition and pricing erosion; and lower-than-expected execution on in-house autonomous driving capabilities.