After years of explosive growth, EV companies like BYD are hurting since China slashed subsidies
Big investing firms are driving right by new energy vehicle makers in China, saying they have a lot of proving to do before their shares become attractive.
As a whole, EV makers are way overpriced, have delivered losses to shareholders in a year the Shanghai Composite Index is up 21.5%, and face a push by Beijing for localities to stimulate car sales that will mean tougher competition from combustion-engine rivals.
Meanwhile, Beijing has cut back subsidies by 60% that boosted sales of environmentally friendly vehicles, spurred tremendous innovation and made China the world's leading EV market.
Share prices of top players such as BYD, BAIC Blue Park New Energy Technology and SAIC Motor have tumbled this year. But not far enough for Xufunds Investment Management and Hengsheng Asset Management, which says it will continue to avoid the sector.
"It's not a good entry point at this stage because the cut in subsidies has had a huge impact on the industry," said Wang Chen, a partner at Xufunds Investment in Shanghai. "Sales will hardly pick up in the foreseeable future, unless there's a big breakthrough in the technology, such as charging and the use of batteries, which can once again fuel sales."
After years of explosive growth in the EV sector, the government decided to slash the subsidies for new-energy car purchases by two thirds on average starting this year.
Subsidies on NEVs with a driving range of 250-300 kilometers were lowered to 18,000 yuan (US$2,614) from 34,000 yuan. For cars with a range of between 300-400km, the subsidies were cut by a sharper 60% to 18,000 yuan, from 45,000 yuan earlier.
The impact was painful and immediate: Last year saw a 62% jump in annual EV sales on top of a 51% surge the year before. But EV sales in July and August actually fell 4.7% and 16% respectively from a year earlier.
It's not just EV makers that are suffering. China's overall car market " the largest in the world " recorded a 14th straight month of declines in sales in August amid a slowing economy weighed down by the escalating China-US trade conflict.
BYD " the Chinese EV maker that Warren Buffett's Berkshire Hathaway holds a 25% stake in " reported a 23% drop in its new-energy car sales last month. Shares of China's biggest manufacturer of electric cars have dropped 0.4% in Shenzhen this year and 18% in Hong Kong. BAIC Blue Park, the electric car-manufacturing unit of BAIC Motor, has slid 7.5% and SAIC 5.7% this year.
BYD derives 41% of it sales from new-energy cars and sales of the type of cars make up almost all of BAIC Blue Park's revenues. The fraction from SAIC, which is more focused on conventional cars with combustion engines, is still minuscule, staying at less than 3%.
"It's an industry that still heavily relies on subsidies and is hard to compete with traditional cars now," said Dai Ming, a fund manager at Hengsheng Asset Manager in Shanghai. "There was lots of front-loading in sales over the past few years because of the government subsidies. Now, with the subsidies gone and the slowdown in the economy, the industry has quickly run into trouble."
Dai said he would shun stocks of any electric-vehicle manufacturers now and likes related component makers that have strong pricing power in the industry chain, such as Contemporary Amperex Technology.
The Shenzhen-traded company, among the world's top three makers of batteries powering electric cars over the past three years, is able to weather the slowdown in the industry because its shipment scale gives the company an edge in pricing its products, Dai said. Contemporary Amperex, which has risen 5.7% this year, is trading at a very high 47.5 times earnings. It is available to northbound traders on the Stock Connect.
Such elevated valuations are another reason steering investors away from new-energy car makers. BYD trades at 30 times earnings in Hong Kong and 41 times earnings in Shenzhen.
BAIC Blue Park, available to northbound traders on the Stock Connect, trades at a whopping 94.2 times earnings in Shanghai. That compares with the median 19.2 times earnings for Chinese carmakers and 14.7 times for the benchmark Shanghai Composite Index.
BYD has warned its third-quarter profit will decrease by as much as 90%, while BAIC Blue Park said net income slumped 80% from a year earlier in the second quarter.
Still, BYD is set to outdo any domestic rivals in the long run and remains a long-term bullish bet as the industry slowdown intensifies competition and weeds out obsolete capacity, according to China Merchants Securities. BYD is in a better position to win more market share than its peers, given it already has almost a quarter of China's electric-car market and a complete industry chain from lithium battery manufacturing to auto making, the brokerage said.
At least for now, investors should wait out the industry pain, as potential car buyers may not shift to new-energy cars from conventional ones any time soon, according to Xufunds Investment's Wang.
China's State Council said last month that it will ease or waive restrictions on car purchases in big cities by increasing supply of plate quotas to bolster consumption and arrest a decline in economic growth. But analysts expect the move will be a bigger boost to sales of comparatively cheaper cars powered by combustion engines.
"Though electric vehicles represent the mega-trend in the auto industry, they still need policy support at this stage," said Wang. "Once the impact of the phase-out of subsidies fully subsides and sales begin to increase on a year-on-year basis, it'll be a good point of jumping into the play."
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