BYD, Li Auto Smash Foreign Rivals During Price War

(Bloomberg) — China’s electric-vehicle makers are defying an unprecedented price war with their share gains trouncing foreign rivals, and analysts say the rally may run further thanks to a stronger pipeline of new products.

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Li Auto Inc. delivered more than 30,000 units for the first time in June, a 150% increase from a year earlier. The shares have risen 88% in Hong Kong this year, with bears positioned near the lowest level since September, according to IHS Markit data. The firm has held off in cutting prices for its models.

There’s also BYD Co., the EV leader that overtook Volkswagen as the best-selling car brand in China in the first quarter, which has seen shares jump 39% this year in Hong Kong. That’s more than double the global industry gauge’s 17% rise. BYD has also seen growing market share, chipping away at Tesla Inc.’s portion in recent years, according to data from the Passenger Car Association.

Read: How China Beat Everyone to Be World Champ in Electric Vehicles

The strong sales underscore robust demand for local clean vehicles despite China’s lackluster consumer spending, thanks to favorable government policies, strong product roll-outs and attractive pricing. There’s further upside as analysts say the recent demand recovery may boost margins in the second half.

“Valuations are not too rich yet so the rally has legs, so long as the companies can deliver on their monthly numbers,” said Kevin Net, head of Asian equities at LA Banque Postale Asset Management, adding that he’s “less concerned now” compared to earlier this year when Tesla kicked off its aggressive pricing strategy.

Tesla’s latest second-quarter results on Wednesday laid bare the consequences of persistent price cuts on the EV-maker’s profitability. The company’s automotive gross margin fell to a four-year low, and Chief Executive Officer Elon Musk warned that prices may fall further. Dismayed investors pushed the stock down 5% in New York Thursday morning.

BYD is trading at 23.5 times forward earnings, about one-third of its average over the past three years. Meanwhile, Tesla is trading at about 70 times, its highest level since May 2022.

A number of large banks and brokers have turned more favorable on the sector. HSBC Holdings Plc. forecasts that China new energy vehicle sales may reach 8.2 million units this year, a 10% upgrade from its earlier forecasts. “As prices stabilize, we see a stronger demand recovery, as consumers who have been waiting for a better price are more likely to buy a new car,” analyst Yuqian Ding wrote in a report.

Sanford C Bernstein is also turning more positive on China’s auto cycle after seeing improving retail demand. The brokerage holds a cautiously optimistic view, expecting consumer confidence and credit impulse to support auto demand in the coming months.

There are some risks, however. The summer months tend to be the softest in terms of demand, which could hurt the recent momentum for Chinese shares. There are also signs of overheating, with Li Auto and XPeng Inc. nearing technically overbought levels. Bearish bets in particular for XPeng are hovering near a record high in Hong Kong after nearly doubling in its share price recently.

Foreign players have also had some strong share rallies, with Tesla gaining more than 136% since the start of the year, in part due to an artificial intelligence boom.

The next focus will be on the outlook for margin trajectory and delivery momentum of new models announced during second-quarter earnings released next month, Morgan Stanley analysts including Cindy Huang wrote in a note.

Early indications show things are holding strong. BYD reported a threefold increase in preliminary earnings for the first six months and its profit per vehicle may have risen to 8,000 yuan ($1,114) in the second quarter, up from the previous quarter’s 7,500 yuan, according to Citigroup Inc.’s estimates.

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