Chinese EV Stocks Rally as the Country Vows to Support Its Economy

Chinese electric vehicle (EV) stocks including NIO (NYSE: NIO) and Xpeng Motors (NYSE: XPEV) rose sharply yesterday and are up in US premarket price action today also after China vowed to support its sagging economic growth.

Notably, Chinese EV stocks crashed in 2022 and NIO and XPEV respectively fell 69% and 80%. However, they have rallied sharply over the last month and have received further impetus as China looks to support its economy. The country has also vowed to support its ailing property market.

Chinese stocks have rallied

China has vowed to attract more private capital and the Chinese government and the Communist Party have said that they would treat private enterprises the same as state-owned enterprises. Such vows are quite rare in the communist country especially given President Xi Jinping’s tech crackdown and his “common prosperity” agenda.

There has been a broad-based rally in Chinese stocks but the price action of EV stocks stands out. Notably, China sees the EV sector as a key constituent of its “Make in China 2025” policy and also extended the EV subsidy to support the industry.

Chinese EV stocks have rallied

The country’s EV market is the largest globally by a wide margin and almost a third of the cars sold in the country are either fully electric or plug-in hybrid vehicles (PHEVs). China-based BYD is the biggest seller of new energy vehicles (NEVs) globally and last year it booted Tesla from the top spot.

Tesla is still the largest seller of battery electric cars though and expects to produce 1.8 million cars in 2023. The Elon Musk-run company delivered 1.31 million cars last year and expects its annual capacity to reach 20 million by the end of this decade.

There is a price war in China’s EV market

Meanwhile, the Chinese EV industry is grappling with a price war that began last year when Tesla lowered car prices. The EV giant’s price cuts were followed by similar announcements from other carmakers including Xpeng Motors, Ford, Toyota, and Nissan.

Last month, even NIO lowered car prices. Previously the company had categorically said that it won’t join the price war.

The price war was taking a toll on the earnings of startup Chinese EV companies most of which are anyways posting losses. Tesla’s operating margins also fell to 9.6% in the second quarter and have more than halved from their peak. That said, the company’s margins are still among the highest in the industry.

China’s truce to end EV price war failed

Earlier this month, Tesla along with over a dozen Chinese automakers pledged to avoid “abnormal pricing” and promote “core socialist values.”

The pledge was signed by 16 automakers in total of which only Tesla was a foreign automaker. The automakers signed the pledge at an industry conference in Shanghai which stated they “take on the heavy responsibility of maintaining steady growth, strengthening confidence and preventing risks.”

However, the move seems to have failed and The China Association of Auto Manufacturers (CAAM) has retracted the pledge saying that it violated China’s antitrust law.

Analysts on Xpeng Motors’ stock

Xpeng Motors stock has soared ever since it announced the pricing of its G6 SUV. Many brokerages believe that the model would help drive Xpeng Motors’ deliveries which have sagged below 10,000 per month in all six months this year.

In a client note, Goldman Sachs said, “In the near-term, we expect the company’s vehicle delivery volume to regain momentum with the latest G6 model launch, and margin to improve on larger vehicle delivery scale together with battery pricing decline.”

It added, “We believe the market hasn’t fully reflected G6′s potential, as it ranks No.1 among comparable models, and in our view is the most competitive product released by XPeng to date.”

Other analysts are also bullish on Xpeng Motors G6 SUV and Hanyang Wang, an analyst at 86Research Ltd said, “We believe that the G6 will become the best-selling model in Xpeng’s history.”

Wang added, “As a comparable model for the G6, we anticipate Tesla’s Model Y will soon experience another round of price reduction in China, which will slightly impact on Tesla’s vehicle margin in the second half of this year.”

However, JPMorgan analyst Nick Lai advises selling the stock ahead of its Q2 earnings release and said, “Our reservation is that we see ‘survival’ competition in the auto market now which is ultimately a competition on the balance sheet and who has more cash to burn.”

Elon Musk believes that Chinese companies are tough competitors

On multiple occasions, Musk has praised China’s manufacturing ecosystem and EV companies.

In May, Musk termed China-based EV maker BYD “highly competitive.” In 2011, the billionaire had laughed at the possibility of BYD as a competitor to Tesla.

During Tesla’s Q4 2022 earnings call earlier this year, Musk said, “we have a lot of respect for the car companies in China. They are the most competitive in the world. That is our experience.”

He added, “They work the hardest and they work the smartest. And so, if I were to guess, probably some company out of China is the most likely to be second to Tesla.”

Previously also the billionaire praised Chinese workers for burning the 3 a.m. oil” while criticizing American workers for “trying to avoid going to work at all.”

Ford’s CEO Jim Farley also echoed similar views and said during the Q4 2022 earnings call and said: “I don’t think you can be globally successful in the EV business if you don’t compete with the Chinese.”

All said the rally in Chinese EV stocks would get a reality check next week when NIO, Xpeng Motors, and Li Auto (NYSE: LI) release their July deliveries. While Li Auto has impressed with its deliveries, both NIO and Xpeng Motors have disappointed markets with their deliveries.

The delivery reports would be followed by Q2 earnings reports which would help gauge their financial performance amid the tough macroeconomic environment.