China’s auto stocks split: BYD down 24%, Ideal up 80%

The divergence between the ups and downs of Chinese auto stocks is intensifying. Shares of BYD, China’s largest new-energy vehicle maker including pure electric vehicles (EVs), are down 24 % from the beginning of 2023, while on the other hand, upstart Ideal Motors has risen more than 80 %. Although China’s new energy vehicle market is expanding rapidly, the companies are experiencing sluggish earnings growth due to intense competition. The industry is facing screening based on whether it can differentiate itself through brand strength and cooperation with the communications industry, among other things.

Ideal Motors announced its sales results for the week ending 10 December on its official website, adding that it ranked fourth in sales of new-energy brands in the Chinese market, the highest-ranking Chinese luxury brand in the list. It’s relatively rare for automakers to publish a week’s sales results in China. The aim is to avoid being drowned out in a crowded field of competitors and to speak out to the stock market and consumers.

Ideal Auto is an automaker founded in 2015. It focuses on plug-in hybrid vehicles (PHVs) for mid-size and large SUV models above 300,000 RMB. As the high-priced family SUVs are a blank slate with less competition, there is less pressure to lower prices so far.

Ideal Auto’s sales in January to November increased to three times the same period of the previous year, reaching 326,000 units. 2022 October to December onwards, the company began to steadily secure an eventual profit, and the most recent July to September 2023 also made a profit of 2.8 billion yuan (compared to a loss of 1.6 billion yuan in the same period of the previous year). “Ideal Motors has not been affected by price competition and has entered a stage where it can gain mass production effects as its sales increase,” according to Hong Kong-based securities firm CCB International.

“If excessive price competition continues, the excellent performance will not be sustainable” (Foreign Securities). For BYD, which has a 30% market share in China’s new energy vehicle market, the market’s gaze has become increasingly harsh. Despite a 64% year-on-year increase in sales from January to November to 2.68 million units, the stock is down 24% from the beginning of the year.

The influencing factor was the sharp price cuts the company implemented to reach its full-year sales target of 3 million units. BYD said in early December that it would push ahead with price cuts on a number of models for a limited time before the end of the month. In the case of the plug-in hybrid model of the sedan Qin PLUS, for example, a 10% discount is available.

Shares of Shanghai-based NIO, an up-and-coming pure electric vehicle company that is also facing price cuts, are down more than 20% since the beginning of the year. The company, which continues to post losses in final profit and loss, said in November that it was laying off 10% of its workforce.

In addition to price competition, another share price influencing factor that has received much attention is the co-operation with the communications sector. The share prices of large automotive companies Chongqing Chang’an Automobile and the centre-stage Ceres Group have risen significantly. The common thread between the two companies is the point of co-operation with Huawei technology to develop a new energy vehicle brand.

Changan’s shares rose 20 % after the company announced in late November that it had taken a stake in a new company set up by Huawei as a spin-off of its automotive business, with systems such as Huawei’s automated driving-related technology in its all-electric car brand “AVATR”.

Ceres is also working with Huawei to launch the “AITO” brand. Sales are being boosted with the help of Huawei’s popularity.

Xiaomi, which announced that it will start mass production of EVs in 2024, has seen its share price rise since late October due to strong performance in its main business.

The China Association of Automobile Manufacturers (CAAM) forecasts that China’s new car sales (including exports) will rise 11.7% year-on-year to 30 million units in 2023 (9.4 million for new energy vehicles). It is expected to grow by just 3% in 2024 from 2023 to 31 million units (11.5 million for new energy vehicles). Of this, exports will grow by 15% to 5.5 million units, with domestic demand for passenger cars likely to slow.

Looking at Ideal Motors, which has seen a significant increase in corporate valuation, the expected price-to-earnings ratio (PER) reaches the 42x range, which is on the high side compared to the likes of BYD (19x range) and SAIC (10x range). Competing companies, including underperforming overseas companies, are also expected to make a comeback. For those stocks that have risen this year, it is also impossible to assert that the momentum will remain positive in 2024.