Chinese electric vehicle companies have come under intense pressure in the past two years as the industry grapples with weak demand, price wars, and a challenging international market.
While publicly traded EV companies have boosted deliveries, their stocks have plunged, costing investors billions of dollars.
Chinese EV stocks have dropped
In Hong Kong, shares of BYD, the biggest Tesla competitor, have dropped by over 25% from their all-time high in 2022.
US-listed Chinese EV companies like Polestar, Nio, Xpeng, Li Auto, and Lotus Technology have dropped by 80%, 56%, 42%, 42%, and 50%, respectively in the past 12 months.
Nio stock has tumbled by over 92% from its highest point in 2021, bringing its market cap from $85 billion to $9.6 billion. Xpeng’s stock has dropped by 88%, pushing its valuation from over $54 billion to $8.4 billion. Li Auto’s market cap has moved from a peak $44 billion to $20 billion.
This performance has happened even as these companies have reported a sharp increase in manufacturing capacity and deliveries.
Earlier this month, Nio announced that its deliveries rose to 21,209 in June, a 98% increase from the same month in 2023. Its quarterly deliveries rose by 143.9% to 57,373, bringing the cumulative total to over 537,020. These are impressive numbers for a company that started delivering its vehicles in 2018.
Xpeng delivered 10,668 vehicles in June, a 24% increase from June 2023 and a 5% increase from May. Li Auto delivered 47,774 vehicles, a 46% increase, bringing the cumulative total to over 822k. Other Chinese companies reported double-digit growth in deliveries.
Chinese EV companies are also seeing robust revenue growth. Li Auto’s annual revenue rose from $40.8 million in 2019 to over $17.4 billion in 2023. According to Yahoo Finance, the average revenue estimate for 2024 and 2025 is $20.25 billion and $27.30 billion.
Nio’s revenue rose from $1.1 billion in 2019 to over $7.8 billion in 2023 while Xpeng’s rose from $334 million to $4.3 billion. Similarly, BYD’s revenue rose from over $18.3 billion in 2019 to over $84.8 billion in 2023.
These numbers show that China is becoming a major player in the automotive industry, which was non-existent a few years ago.
Headwinds remain
Chinese EV stocks have dropped because of the rising headwinds in the industry in China. According to CNN, the country has over 200 domestic EV companies that are all working to gain market share. Huawei and Xiaomi, which are best known for their smartphones, have also launched their vehicles.
As a result, these companies have continued their price wars in a bid to gain market share. These price cuts have then led to lower gross margins, with most companies reporting substantial losses. As shown below, the gross margin of most EV companies has retreated in the past few years.
One solution for this saturation is to expand their businesses overseas. However, Chinese EV companies are facing substantial challenges in these markets. In April, the FT reported that Chinese EVs were piling at European ports like Rotterdam and Antwerp-Bruges.
European governments have responded by implementing 25% tariffs on Chinese vehicles in a bid to protect their local industries. In the United States, the Biden administration has announced 100% tariffs on Chinese EV companies.
Therefore, a likely solution will be for them to focus on emerging and developing markets like Turkey, Brazil, and South Africa. The challenge is that most of these countries don’t have supportive infrastructure to support EV companies.
Potential opportunities for Chinese EV stocks
There are two key opportunities for Chinese EV companies despite the ongoing challenges in the industry.
First, the ongoing sell-off has left significantly undervalued companies. Their forward price-to-sales ratios have all dropped in the past few years. Nio’s forward P/S ratio has dropped to 1.05 while Polestar, Li Auto, and Xpeng have 0.68, 1.09, and 1.35, respectively.
Tesla, on the other hand, a company that is no longer growing, has a forward P/S ratio of 8.020, its highest point since January 2024. This is a sign that these companies are experiencing substantial pessimism even as their delivery and revenue growth accelerate.
Second, Chinese companies can weather European and American tariffs and gain market share in the two regions. That’s because these companies have mastered the concept of low-cost manufacturing.
Also, they have a lot of government support and access to cheap raw materials like lithium and nickel. As such, even with a 100% tariff, some Chinese EVs can sell vehicles at a similar price to American-made cars.
For example, BYD launched a hybrid car with a 2,000km range that sells for $13,800 in China. A 100% tariff on that vehicle would see it cost $27,600 in the US, the same amount that a new Prius costs.
The other opportunity is that many new Chinese EV companies will not make it, which will let the dominant players like BYD and Li Auto to consolidate their market share. Over 300 startups like Aiways and Byton have filed for bankruptcy.
In the future, I expect that the industry could see mergers and acquisitions as the companies build scale and boost their market share.
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