Wednesday, 9 September 2020

 

Investors Question Chinese EV Makers’ Tesla-Like Stock Rally

Bloomberg News
  • Upstarts’ shares are coming back to earth, following Tesla
  • Path to success for NIO, Xpeng, Li Auto is long and difficult
An attendee sits inside the NIO Inc. ES6 SUV on display at the Auto Shanghai 2019.
An attendee sits inside the NIO Inc. ES6 SUV on display at the Auto Shanghai 2019. Photographer: Qilai Shen/Bloomberg

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A meteoric rise by Chinese electric-vehicle 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% 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.

EV Maker Xpeng Said To Guide U.S. IPO At Above Marketed Range
Xpeng P7 electric vehicle outside the New York Stock Exchange in New York, U.S., on Aug. 27. Photographer: Jeenah Moon/Bloomberg

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’re 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, here are five things for investors to keep in mind:

Valuation dilemma

Because NIO, Xpeng and Li Auto are unprofitable and currently only deliver a few thousand vehicles a month, 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.

Meanwhile, some Chinese makers of gas guzzlers that have remained profitable even during the coronavirus 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 times their estimated 2021 revenue.

Electric Surge

NIO, Li Auto and Xpeng among China's most valuable carmakers with limited sales

Source: Bloomberg

It’s a long road

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% of cars sold in the nation are still fossil-fueled. 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 sales will fall about 9% this year to 1.1 million units, the China Association of Automobile Manufacturers predicts, in what would be the second straight annual drop.

Gassed

In a market broadsided by the pandemic, global sales of gas-powered cars and trucks may have already peaked.

Source: BloombergNEF

Government support scaled back

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% from what they were in 2015. Rather, Beijing has shifted its focus toward building infrastructure and stimulating development of key technologies.

Tesla’s big lead

Elon Musk’s global electric-car leader started deliveries from its multibillion-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.

Tesla Hands Over First China-Built Cars to Employees in Shanghai
A Tesla Inc. Model 3 vehicle moves off an assembly line during a ceremony at the company’s Gigafactory in Shanghai in 2019. Photographer: Qilai Shen/Bloomberg

The U.S. 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.

Stretch Target

NIO, one of Tesla's main rivals in terms of sales in China, is still far behind

Source: China Passenger Car Association

Then there are the giants

Global behemoths including Volkswagen AGToyota Motor Corp. and General Motors Co. are all accelerating electric-car rollouts. At the same time, they have room to cut prices of their gasoline 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 toward profitability.

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