This article first appeared on GuruFocus.
The momentum that once pushed China’s electric-vehicle names into a market-wide rally is starting to look fragile, and the shift has caught investors off guard. Xpeng (NYSE:XPEV), which had surged more than 130% earlier this month, reported continued losses and weak guidance, triggering a 10% selloff in Hong Kong the next day. Even BYD (BYDDF), one of the sector’s steadier anchors, showed signs of pressure that could unsettle the narrative around long-run profitability after years of rapid expansion. Fund managers suggest the first quarter of 2026 could be a tougher stretch as two years of trade-in and scrappage incentives wind down, leaving demand potentially softer just as competition picks up. In an industry that once relied on abundant policy support, investors may now need to recalibrate their expectations.
Earnings misses have accelerated that reconsideration. Zhejiang Leapmotor dropped to its lowest level since April after announcing profit at less than 65% of analyst estimates despite nearly doubled sales, while Li Auto and Nio issued fourth-quarter delivery and revenue forecasts that fell short of market expectations. Analysts had anticipated a year-end lift ahead of EV tax breaks phasing back in from 2026, yet Bloomberg Intelligence now projects China’s new-energy vehicle growth to slow to 13% next year from 27% this year. To keep demand flowing, EV makers are leaning heavily on incentives Geely’s rebate reaches up to 15,000 yuan, with Li Auto and Xiaomi offering their own even as rising battery costs could tighten margins further. Fund managers warn that these overlapping pressures could weigh on earnings at a time when the industry is trying to move away from aggressive price-cutting under Beijing’s anti-involution push.
Some companies may still find pockets of resilience. BYD and Geely are positioned toward the mass-market segment where consumer downgrading trends could offer a relative advantage, and their international footprint is expanding fast BYD’s overseas sales volume more than doubled in the third quarter, while Geely expects its sales outside China to climb as much as 80% next year. Others are placing longer-dated bets, from Xpeng’s plan to mass-produce humanoids by the end of 2026 to Li Auto’s vision of turning vehicles into embodied AI robots. But these ambitions may take time to translate into meaningful earnings. UBS analysts note that without policy clarity for 2026, investors could stay cautious, especially toward the names that outperformed during this year’s stimulus-driven cycle.