At what point does investor enthusiasm at the dawn of a new technology spill over into irrational exuberance? The British railway mania of the 1840s, the dotcom bubble of the early 2000s and other stock market frenzies offer salutary histories.
In each case, the narrative power of a transformational technology swept away concerns over giddy share valuations until, ultimately, financial gravity was restored with a crash. So how does the boom under way in Chinese electric vehicle stocks compare?
Some observers reckon that valuations are already overcooked. Three leading US-listed Chinese EV start-ups, Nio, Li Auto and XPeng, are all making sizeable net losses but equity investors value them at $35.4bn, $15.9bn and $14.4bn respectively.
Those EV makers and components suppliers that do make profits are so highly fancied that their valuations can be eye-popping. The share price of Hong Kong-listed BYD, which makes EVs as well as traditional cars, is equivalent to 245 times its earnings per share over the previous 12 months. That compares with the Hang Seng index’s average PE of 13.26 times. CATL, an EV battery maker, has a trailing price/earnings ratio of 117.5, also much higher than the average for the Shenzhen market where it is listed.
Nevertheless, the China EV theme still has many believers. These investors see China leveraging its huge scale advantages to make the first EVs that can compete on price with traditional cars. Then, they predict, such cars will find a ready international market in a world increasingly worried about climate change. And in any case, they say, the trailing PE ratio of Tesla is currently running at 1,045.8. So Chinese valuations seem modest by comparison.
Karine Hirn, a Hong Kong-based partner at fund manager East Capital, said investors should not conclude that China’s EV valuations are overdone. “PE valuations are high but still lower than Tesla’s,” she said.
One key moment for the industry is approaching. The price of EV batteries, which make up a big portion of the cost of a car, is set to drop below $100 per kWh by 2023 — from a current $160 — around which point “cost parity” with internal combustion engine cars will be reached, said Ms Hirn.
“The cost parity implies a huge leap in terms of future EV sales,” she added.
Already, the appeal of cost-effective EVs is clear. Overtaking the Tesla Model 3 as China’s best-selling EV in August was a boxy little car called the Wuling Hong Guang Mini EV, which cost about $4,200 — a fraction of the $42,691 that the Tesla Model 3 sells for.
When mass-market scale is reached, the advantages will trickle back to China’s supply chain. Chinese battery makers and auto parts suppliers will benefit a lot, said Ms Hirn, “both from the point of view of the domestic market and from global market demand since they are way ahead of the competition due to scale advantages”.
China’s dominance in EVs is startling. Last year, its manufacturers sold just under 1.2m EVs, accounting for more than half of global sales. But Beijing’s ambitions are writ large: it wants 25 per cent of all car sales in the country to be EVs by 2025, up from about 5 per cent at present. A new government document, the “Energy Saving and New Energy Vehicle Technology Roadmap” — to be announced soon — is expected to add impetus to such targets, industry sources said.
Gary Cheung, director at Haitong Securities, said much of the EV investment action was likely to centre on component suppliers. “One of the hottest investible sectors in China is definitely EV, triggered by Tesla’s entry into China last year with the great hope of stimulating the development of the local EV supply chain,” said Mr Cheung.
Tesla rolled out the Model 3 from its $2bn Gigafactory near Shanghai in January. It has managed to slash costs by localising its supply chain, raising the ratio of locally produced parts to 70 per cent, from 50 per cent at the end of 2019. Some observers now think a 100 per cent locally produced Model 3 is a possibility.
Such a seeding of the local supply chain has helped boost the share prices of local Chinese manufacturers. One of these, Suzhou Inovance Automotive, which makes EV motors for Li Auto and others, has seen its share price surge this year and its trailing PE ratio stands at 81. Some analysts tip its motor to be used in future Tesla Model 3s.
All this is of keen interest to international investors, which have piled into Chinese stocks this year. Copley Fund Research, a consultancy, has found that among 250 leading emerging market investment funds, the total value of Chinese A-shares held stands at $19.6bn, up from $3.25bn at the start of 2017 and $12.6bn at the start of 2020.
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