China's popular EV companies enter crucial earnings season

A raft of earnings from China's electric vehicle (EV) makers will be heavily scrutinised by investors seeking evidence on whether the sector's stock price rally can be revived.

Investors will parse reports from Nio, XPeng and Li Auto for clues on whether margins are set to improve after months of pressure wrought by elevated raw material costs and supply chain disruptions. Valuations for the shares may be at risk if there are no signs of a recovery, according to fund managers.

China's EV makers are looking for a second wind as a months-long buying frenzy loses steam amid worries over high valuation and a slowing economic recovery. The shares may get a new lease on life if traders spot signs of profitability improving, especially as demand for cleaner cars is expected to climb to a record this year.

"The nice trend will be their margins bottoming out and productions getting higher," said Andy Wong, fund manager at LW Asset Management Advisors. "If their margins keep narrowing, indicating they will need longer time to become profitable, this could affect their valuations in the medium to long term."

Of the 3 EV makers, Li Auto is expected to report the highest gross profit margin at 21 per cent in the second quarter, versus 22.6 per cent in the previous 3 months, according to analysts' estimates compiled by Bloomberg. XPeng's margin probably shrank to 9.6 per cent from 12.2 per cent while Nio's likely narrowed to 12.3 per cent from 14.6 per cent. All 3 are expected to have posted net losses in the 3 months through June.

The auto manufacturers are wrestling with higher raw material costs after supply struggled to keep pace with a boom in demand. Runaway costs are fuelling a "ridiculous" increase in the price of batteries for electric vehicles, Li Auto chief executive officer Li Xiang had said in March.

The pressure is especially pronounced for smaller manufacturers which have less economies of scale and limited bargaining power when dealing with suppliers, according to Qi Wang, chief executive officer of MegaTrust Investment.

"Investors are already selling" and "the Chinese EV sector is still trading at a pretty high valuation, against a backdrop of strong sales but not so strong earnings", said Wang.

To be sure, some investors have been handsomely rewarded by betting on China's EV market, which is the world's largest. This includes Shenzhen Co-Power Capital Management which is positioning for more gains on expectations that the sector will see higher valuation.

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EV stocks had jumped earlier as China unveiled policies to revive the auto industry after consumption dried up during the nation's Covid lockdowns. Even though the rally faltered in July, the broader outlook for the sector is solid as it's expected to be a key beneficiary of Beijing's push to foster green energy and high-tech manufacturing.

New-energy vehicle sales rose 117 per cent in July, according to the China Association of Automobile Manufacturers, while the China Passenger Car Association estimates EV purchases will hit a record 6 million this year.

Li Auto is slated to report earnings after the close of the market Monday (Aug 15), while XPeng will announce its profits on Aug 23. Nio has yet to confirm a date. BLOOMBERG