How do you pick the next Tesla stock winner in China’s booming EV market?

Given how quickly electric vehicle companies’ stock prices have rocketed, a short-term correction seems likely. But, in the long term, the sector is supported by structural trends which underpin the case for investing. Here are three things to focus on

Chaoping Zhu

Published: 1:30am, 6 Feb, 2021

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New-energy vehicle (NEV) companies have become a red-hot investment theme in recent months. Since the end of September, the benchmark NEV Power Battery index in the A-share market has surged almost 60 per cent. In the overseas markets, Chinese and global electric vehicle stocks have also soared. But is the rally sustainable?

Given how quickly NEV companies’ stock prices have rocketed, a short-term correction is likely. But, in the long term, the sector is supported by structural trends, including changes in technologies, consumer demand and global environmental policies, all of which underpin the case for investing.

The challenge is in picking the winners in a sector in the very early stages of its bloom. This will become increasingly difficult given the rising number of electric vehicle makers and supply chain companies newly listed in China and overseas, as well as the many traditional carmakers joining the battleground.

At this stage, technology is king when it comes to picking companies likely to have a competitive edge. The most crucial factor is battery durability.

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When customers think about switching from cars with internal combustion engines to battery-powered vehicles, the first thing they look at and worry about is range. A typical electric vehicle’s range of 400-500km (250-310 miles) per charge would only last a few days for a driver in China who commutes to work daily, for example.

There are two ways to address such concerns. The first is to improve battery technology, to upgrade cruising power and enable a car to run up to 1,000km (620 miles) per charge. The second is to make available more accessible and convenient charging services.

The second approach seems to be more realistic and popular for now, with some domestic carmakers taking it upon themselves to provide convenient battery-charging services. In the longer term, however, breakthroughs in battery and charging technology will be a stronger catalyst in company performance and thus its stock price.

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Evolving customer demand is another factor to watch. Beyond range, electric vehicle customers have a variety of demands, ranging from autonomous driving to car-owner communities.

Compared to traditional carmakers, NEV makers are more accommodating of customer demands. They are also willing to cultivate and respond to new demands through marketing campaigns and online platforms, such as the recent interest in acceleration times. Electric-vehicle makers that are most responsive to customer demand and can best improve brand loyalty are potential winners.

Last but not least, government policies still play an essential role. The Chinese government’s commitment to reach net-zero emissions, or carbon neutrality, by 2060 should cause a major shift in the way the country produces and consumes energy.

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The NEV sector is an important part of this process, and Beijing wants electric vehicles to make up 20 per cent of all cars by 2025.

At the same time, local governments are encouraged to come up with their own policies, from increasing buying quotas to granting subsidies. The next step might be more stringent requirements on fuel efficiency and battery features in new cars, which could accelerate industry disruption.

According to the China Association of Automobile Manufacturers, NEV production and sales both reached 1.37 million last year, up 7.5 per cent and 10.9 per cent respectively from 2019. Despite such rapid growth, electric vehicles still make up only just over 5 per cent of China’s car market.

If China is to achieve its 2025 NEV target, average annual growth will need to exceed 40 per cent every year over the next five years, which implies enormous growth potential for electric vehicle makers.

There are opportunities in the sector, but it’s important to be cautious as we are still in the very early stages and competition is intense. Technology, customer demand and government policies should be on investors’ radar as they navigate this potentially bubbly group of companies.

Chaoping Zhu is a Shanghai-based global market strategist at JP Morgan Asset Management