China EV – What are investors focused on?

Investing.com -- China’s electric vehicle sector, having weathered a challenging period, is seeing a shift in investor sentiment. 

As the industry enters its traditional peak season, there's a renewed sense of optimism driven by a mix of macroeconomic factors, emerging industry trends, and strategic moves by key players. 

“Market sentiment showing early signs of improvement in September in light of likely better-than-expected 4Q seasonal sales,” said analysts at Morgan Stanley (NYSE:MS). 

These are fueled by the introduction of additional trade-in subsidies from local governments, ranging from RMB 10,000 to 15,000, which are expected to stimulate vehicle purchases without requiring compulsory vehicle scrapping.

Additionally, the anticipated release of highly anticipated electric vehicles like the Onvo L60, Zeekr 7x, XPeng (NYSE:XPEV) P7+, and Denza Z9 has created buzz. 

The sector's outlook is also supported by favorable rotation within the market and shifting growth/value factors, alongside expectations of a rate cut. Despite these positive signs, concerns about weak consumer spending in China linger.

The recent success of XPeng’s M03 has set a precedent, prompting investors to keep a close watch on the upcoming launches of high-profile models. 

The Onvo L60, Zeekr 7x, and XPeng P7+ are seen as catalysts that could impact stock performance. The anticipation surrounding these launches reflects investor eagerness to identify stocks poised to benefit from new market entrants.

While overseas sales faced challenges in recent months due to higher tariffs and inventory adjustments, global markets remain a critical area of focus. Conversations with original equipment manufacturers (OEMs) suggest that international expansion is crucial, especially given the risk of market saturation within China. 

“Of note, we think global strategic tie-ups are key to dealing with geopolitical disputes,” the analysts added.

Price competition continues to shape the market dynamics. Although carmakers are adopting more rational pricing strategies, the price war is expected to persist. OEMs are likely to engage in competitive pricing for strategically important models, such as BYD’s Han and XPeng’s M03. 

Additionally, luxury brands might revisit price competition following a slump in third-quarter sales. The development of smart driving technologies and urban navigation assistance (NOA) remains a focal point. 

Tesla’s planned robotaxi rollout, despite delays in the full self-driving (FSD) activation, serves as a benchmark for the industry. Chinese players are accelerating their advancements in L2+ and urban NOA technologies in response to Tesla’s initiatives. 

Among the stocks drawing investor interest are BYD (HK:1211), NIO, XPeng, Li Auto (NASDAQ:LI), Zeekr, Geely, and Great Wall Motor.

BYD, often seen as a safe haven amidst market volatility, continues to attract attention. Analysts anticipate that BYD will achieve 4 million unit sales this year, with a projected 20-25% growth in the following year. 

The focus is on improving vehicle profitability, with expectations of RMB 10,000+ per unit in the second half of the year. 

Despite its stronghold in the mass market, BYD's performance in high-end and international markets remains under scrutiny.

NIO has recently seen a surge in investor interest, particularly with the anticipated launch of the L60. This event is expected to trigger a volatile short squeeze and potentially substantial returns. 

However, the recent rally in NIO’s shares may have already factored in near-term positives. Future performance will depend on effective production ramp-up and successful conversion of pre-orders into actual sales.

XPeng’s stock has also garnered increased attention, with confirmed orders showing an upward trend. The company’s target of 20,000 deliveries in September, including 8-10,000 units of the M03, is seen as achievable.

The success of the M03 and the upcoming launch of the P7+ are expected to drive further investor interest. XPeng’s Tech Day on October 24 is anticipated to provide valuable updates on its autonomous driving and powertrain technologies.

Li Auto’s guidance of 45-50,000 monthly sales appears achievable, supported by a robust weekly run rate. The company’s strong quality control and cost management are expected to enhance profitability in the second half of the year. Investors are looking for updates on Li Auto’s BEV lineup and additional PHEV models to drive further sales growth.

Zeekr has also attracted increased investor interest, with a focus on its valuation relative to startup peers. The upcoming launch of the Zeekr 7x is expected to be a significant catalyst, alongside its strong order backlog for the Zeekr 009. September deliveries are projected to reach 20,000, bolstered by a solid order pipeline.

Geely is gaining traction as a beta play due to its attractive valuation, solid sales performance, and favorable international exposure. The successful launch of the Galaxy E5, with a weekly run rate exceeding 2,500 units, has strengthened investor confidence. 

However, achieving a meaningful re-rating will require more significant upside surprises to earnings forecasts.

Great Wall (HK:2333) Motor has seen increased interest from southbound funds, driven by strong earnings visibility and a resurgence in exports.The performance of the Tank series will be crucial for the company’s third-quarter results. While NEV transformation remains a key issue, diversification into new markets and increasing market share in China are essential for a potential re-rating.