As we make our way into 2021, big things could be in store for the new energy vehicle (NEV) space. In the year ahead, NEV volume growth in China is set to reach 32% year-over-year, from 9% year-over-year in 2020. However, the competition is also expected to intensify, putting pressure on automotive service providers (ASPs).5-star analyst Kelvin Lau, of Daiwa Capital, commented, “We see 2021 being a big year for new smart car and NEV launches… Leading players should be well placed due to their established brand equity, and some have obtained local government support, which should lessen their risk of running into financial distress. But we don’t expect the enthusiasm of local governments to extend to every new-generation auto start-up, and hence we foresee more small brands closing down.”Lau further explains that although it will take time for new-generation auto makers to differentiate themselves from the traditional names, the focus on design, advanced driver-assistance systems (ADAS), in-vehicle infotainment (IVI) and vehicle-to-everything (V2X) systems will ultimately set them apart.To this end, the top analyst recommends a specific pair trade to play the NEV space: buy NIO and sell Xpeng. Running both tickers through TipRanks’ database, we wanted to find out what makes one a must-have and the other a must-avoid.Nio (NIO)Electric car maker Nio has taken a similar approach to EV leader Tesla in that it has started by targeting the higher-end market, where competition is anticipated to be less intense and customers are more willing to pay for smart-car technology and after-sales service. Shares have already soared 920% year-to-date, but Lau thinks shares still have room to run.Citing its ES6 launch in mid-2020, Lau argues “NIO has proven its ability to compete with models from international brands such as Tesla, even at a price point CNY100k higher than for Tesla’s Model 3.”Expounding on this, the analyst stated, “Although Tesla plans to bring the Model Y to the Mainland market in 2021, which would be more direct competition for the ES6, we believe NIO will be able to maintain decent sales, backed by its after-sales service, which includes battery swapping, mobile charging, and maintenance services.”Based on the company’s models, it delivered sales-volume growth of 111% year-over-year to 36,700 units for 11M20, making it one of the top 10 best-selling NEV makers in China. Additionally, given the strong demand for luxury cars in China “with scope for a rise in sales of popular BEVs” and its innovative model specifications, such as its NIO Pilot, NOMI (AIbased in-cabin assistant), 4.5-second 100m acceleration speed and over 415- 615km driving range, this growth is only set to continue, in Lau’s opinion.The Nio critics, however, will point out that the company hasn’t turned a profit yet. That said, Lau estimates sales volumes of 140,000 units for 2023E, from 43,000 units for 2020E, reflecting a 2020-23E CAGR of 48%. He also expects gross margin to increase to 20% for 2023E, from 11% for 2020E, due to an acceleration in BEV sales volumes. To this end, Nio could reach profitability by 2023, according to Lau.All of the above prompted Lau to join the bulls, with the analyst initiating coverage with a Buy rating and $59 price target. This target puts the upside potential at ~37%. (To watch Lau’s track record, click here)Looking at the consensus breakdown, 8 Buys and 4 Holds have been assigned in the last three months. So, Nio gets a Moderate Buy analyst consensus. At $49.84, the average price target implies ~16% upside potential. (See Nio stock analysis on TipRanks)Xpeng (XPEV)Moving on to Xpeng, since its IPO this summer, shares of this EV maker have climbed 136% higher. However, Lau believes that its valuation isn’t connected to the company’s true value.Lau acknowledges that Xpeng is a “pioneer in China in providing customers with advanced ADAS and auto connectivity services (SOTA and FOTA).” However, he points out that as a start-up which relies on in-house development, it could take time for it to get to the same level as the top smart-car players, with the company also potentially needing more funding to support its R&D from both debt and equity financing, as its near-term profitability is weak.What’s more, competition in China’s NEV market is likely to get fiercer in 2021 as more players crowd the space, and Lau thinks Xpeng lacks a competitive edge.“VW, GAC, SAIC, Changan, Dongfeng, Geely and BAIC are all ready to strengthen their NEV brands/platforms and capture market share, not to mention Tesla, which is due to deliver its Model Y in 2021 at a likely discounted price given its lower production costs, thus potentially squeezing out competitors. Xpeng’s car is priced at CNY150-300k, a price range that positions it in the most crowded market segment,” the analyst explained.Calling the valuation “demanding,” Lau compared the PSR of Xpeng to other OEMs, and found that Xpeng’s PSR is now 63% higher than that of Tesla, 12x that of the weighted average of Chinese OEMs and 30x that of the weighted average of global OEMs.Bearing all of this in mind, Lau kicked off his coverage of Xpeng with a Sell rating and a $32 price target. Should this target be met in the year ahead, shares will have shed 35% of their value.Turning now to the rest of the Street, 7 Buys, 1 Hold and 1 Sell have been received in the past three months. This means that the analyst consensus is a Moderate Buy. However, with the average price target clocking in at $41.75, shares could fall 15% in the next twelve months. (See XPEV stock analysis on TipRanks)To find good ideas for EV stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.