The Lex Newsletter: China’s electric vehicle stocks hit the curb

Dear reader,

One of the best investment bets in China in recent years has been local electric car stocks. Aggressive carbon neutrality goals made the sector a haven amid government crackdowns spanning everything from tech to private tutoring.

On the surface, the numbers from these electric car makers are impressive. Total sales more than doubled this year. China is the world’s biggest and fastest-growing market for electric vehicles. Carbon goals and strict electric car production quotas mean the market will keep growing at a rapid pace. But investing in the sector can be more complicated than it seems.

Investor favourites in the region are split between two main camps. Chinese automobile giant BYD — the world’s second-biggest electric car maker after Tesla — is top of the class. BYD shares have returned nearly 500 per cent in the five years to its June peak this year.

Chasing behind are a trio of fast-growing start-ups: Nio, XPeng and Li Auto. These companies sold a combined 90,000 vehicles last year, rapidly expanding local market share.

Sales are strong. BYD’s global sales of new energy vehicles, which include battery electric cars and plug-in hybrids, more than tripled in the first half of the year. Nio, known locally as the Tesla challenger, recorded a more than 60 per cent increase in sales last month.

There is a strong home ground advantage. Local brands are popular in China, accounting for more than four-fifths of the market. Tesla, whose Shanghai factory expansion was completed this week, is still the only foreign brand that has made significant inroads into China’s electric car market.

There is potential for export and overseas production. Japan’s relative lag in the shift to electric cars and demand for small, low-cost vehicles make Chinese electric options a natural choice. BYD will start selling three electric models in Japan in January.

Yet stocks are suffering. Shares of BYD have fallen sharply in recent months after filings showed Warren Buffett’s Berkshire Hathaway trimmed its stake in the company. They trade at 39 times forward earnings, down from more than 100 times at the end of June.

Shares of US-listed XPeng are down more than two-thirds this year; Nio and Li Auto are down more than a fifth. These reflect several risks, including concerns of delisting, rising battery costs and research and development expenses required to keep up with changing technologies.

Profitability and margins have been weak. Nio posted a net loss in the first half, adding to three straight years of losses since 2019. Li Auto and XPeng also posted net losses this year.

Competition is fierce. There are more than 400 local electric car makers in China. Cash-rich state-owned traditional carmaker GAC Group has launched its own electric brand Aion. Geely Auto has set up electric group Zeekr to join the fray.

But the biggest challenge comes from outside the sector. The technology to make cars run on batteries is simple enough. But most companies lag behind in software capabilities, such as autonomous driving features, that give Tesla an edge.

That makes the recent entry of tech companies such as smartphone maker Huawei and internet search giant Baidu into the smart-car industry a significant threat. The first car to run with a Huawei operating system, the Aito M5, was launched this year. Baidu has launched a concept robocar using its intelligent driving software.

These companies have cash buffers from their traditional businesses to fall back on. If one takes over a local Chinese electric car maker, then significant disruption to sector rankings could be in the works.

In other Asian news: Electric vehicle maker Zhejiang Leapmotor Technology seeks the biggest Hong Kong initial public offering of the year. Unhedged asks how worried the world should be about China’s problems. Do Kwon, the co-founder of collapsed cryptocurrency operator Terraform Labs, claims he’s not on the run — despite South Korea asking Interpol to issue a red notice against him.

Enjoy the rest of your week,

June Yoon
Lex Asia editor