Chinese EV makers' Tesla-like stock rally leaves market watchers puzzled

A METEORIC rise by Chinese electric-vehicle (EV) stocks that disrupted market-value rankings and left some industry observers scratching their heads is showing signs of fizzling.

After reaching record highs, EV makers NIO Inc, Xpeng Inc and Li Auto Inc have each lost more than 10 per cent over the past week. A dramatic drop by giant Tesla Inc - amid intensifying competition and the company missing out on being included in the S&P 500 Index - has some investors questioning the prospects of smaller Chinese contenders.

The stocks' surge was based on investors betting that Tesla will help broaden the appeal for electric cars and leave room for smaller marques to thrive too. But Tesla is profitable even as it spends on ambitious global expansion. By contrast, the Chinese companies are losing money even though they are only focusing on their home market for now.

"Valuation is an art, and if you just look at their books, these are frothy," said Chen Da, executive director at Anlan Capital. "But a bubble won't always pop - often the way growth stocks digest high valuations is through sideways moves as they wait for earnings to catch up."

Until that point, some things investors should keep in mind include, for example, a valuation dilemma as NIO, Xpeng and Li Auto are unprofitable and currently only deliver a few thousand vehicles a month, so valuing them is based entirely on future potential. And that makes it largely guesswork.

The companies trade at about five to seven times estimated 2021 revenue - close to what Tesla was valued at about five years ago, when it was in a similar development stage.

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Meanwhile, some Chinese makers of gas guzzlers that have remained profitable even during the Covid-19 pandemic - such as the giant SAIC Motor Corp and BAIC Motor Corp, which combined sell millions of cars every year - are valued at significantly less than one time their estimated 2021 revenue.

While electrification is an irreversible trend, the shift is slow. Although the Chinese government has spent billions of dollars nurturing its electric-vehicle industry over the past decade, 95 per cent of cars sold in the nation are still fossil-fuelled. Consumers are concerned the driving ranges and charging infrastructure aren't yet reliable enough to meet their needs, and that's a fair assessment.

Teething problems such as battery-explosion incidents are undermining other motorists' confidence in the new technology. New-energy vehicle (NEV) sales will fall about 9 per cent this year to 1.1 million units, the China Association of Automobile Manufacturers predicts, in what would be the second straight annual drop.

Meanwhile, China's central government, which started funding new-energy vehicle purchases in 2009, has been gradually winding back incentives before a scheduled policy exit at the end of 2022.

Subsidies on NEVs have been slashed by more than 70 per cent from what they were in 2015.

Rather, Beijing has shifted its focus towards building infrastructure and stimulating development of key technologies.

Elon Musk's global electric-car leader started deliveries from its multi-billion-dollar Shanghai plant around the start of the year and has quickly grabbed a top position in the Chinese market. Registrations of Tesla vehicles in China topped 50,000 in the first half.

The US manufacturer is also preparing to start building its Model Y crossover in Shanghai - a product that directly competes with the SUV offerings of NIO and Xpeng. The intensifying competition may result in price competition as the local contenders try to challenge Tesla's brand cachet.

Then there are the giants, global behemoths including Volkswagen AG, Toyota Motor Corp and General Motors Co which are all accelerating electric-car rollouts. At the same time, they have room to cut prices of their petrol cars. Both moves are set to make life more difficult for EV startups just as they're trying to attract buyers and maintain their prices to work towards profitability.

Meanwhile, Reuters reported that NEV sales in China surged 26 per cent on year to 109,000 units in August for their second consecutive month of gain, a promising sign for carmakers that have invested heavily in the world's biggest market for EVs.

NEVs include battery-powered electric, plug-in petrol-electric hybrid and hydrogen fuel-cell vehicles.

"The sales rebound was fuelled by rural NEV sales promotion events and local governments' support," said senior CAAM official Chen Shihua.

EV makers from home-grown NIO Inc and Xpeng Inc to US leader Tesla Inc are expanding manufacturing capacity in China where the government heavily promotes greener vehicles as a means of reducing chronic air pollution.

"There was a new-car effect in August, as a new mini EV model from GM's local venture and Tesla's Model 3 both sold well," said senior LMC Automotive analyst Alan Kang. "Sales at EV startups like NIO and Xpeng were stable too." NEV sales in coming months will be around same as in August, Mr Kang said.

China's overall vehicle sales in August rose 11.6 per cent to 2.19 million vehicles from the same month a year earlier, the fifth consecutive month of gain as China comes off lows hit during the Covid-19 lockdown in the first few months of the year.

Sales are still down 9.7 per cent for the first eight months of the year at 14.55 million vehicles, CAAM said.

Sales of trucks and other commercial vehicles, which constitute around a quarter of the market, surged 41.6 per cent, driven by government investment in infrastructure and as buyers upgraded to comply with tougher emissions rules.

Sales of passenger vehicles rose 6 per cent.

Vehicle makers that reported sales growth in August include Geely Automobile Holdings Ltd and Toyota Motor Corp. The main local joint ventures of Nissan Motor Co Ltd and General Motors Co, however, saw sales slide last month. BLOOMBERG, REUTERS