Search For Next Tesla Fuels Rally in Chinese Auto Stocks

A recovery in car sales in China and hopes that electric vehicles will become widely adopted, have powered a surge in Chinese auto stocks.

An S&P index tracking larger Chinese automobile and component makers has risen 30% in the year through Wednesday, versus an 8.5% increase for the equivalent global index.

Makers of plug-in cars have led the advance, mirroring a huge run-up in Tesla Inc.'s stock. American depositary receipts in Nio Inc., China's best-known company focusing solely on electric vehicles, have more than tripled this year. Rival Li Auto Inc. raised $1.1 billion last month in a U.S. initial public offering, and its shares have since gained 36%.

"People are looking for the next Tesla," said Elizabeth Kwik, Asian equities investment manager at Aberdeen Standard Investments. "With Tesla's success, people now realize the very real potential of electric cars."

Giant property developer China Evergrande Group is turning subsidiary Evergrande Health Industry Group into a car maker. Shares in the Hong Kong-listed unit, which has unveiled six electric-car models but has yet to sell any, have soared, giving it a market value of $27.2 billion, close to that of Ford Motor Co.

Also in Hong Kong, shares of Warren Buffett-backed auto manufacturer BYD Co. (BYDDF), which produces hybrid-, electric- and gasoline-powered cars, have nearly doubled in the year through Wednesday. Some more traditional car makers have also rallied: Great Wall Motor Co.'s Hong Kong stock has risen 38% in the year.

China's overall auto market, the world's largest, is rebounding alongside the broader economy. Retail passenger-car sales rose 7.7% year over year in July, while wholesale electric-vehicle sales rose 19.3% versus a year earlier.

The turnaround, especially in the electric-vehicle industry, is dramatic, after the coronavirus pandemic heaped pressure on many of the country's hundreds of electric-car startups. Just in April, Nio secured a financial lifeline from state investors.

"A year ago investors were worried that some of the startups might not survive, but the view has completely changed," said Mark Mao, a sector analyst at J.P. Morgan Asset Management. He said rising sales and better access to funding had helped drive this shift.

Chinese authorities are broadly supportive. Beijing wants electric vehicles to make up a quarter of all car sales by 2025, according to state-run Xinhua News Agency, up from an earlier goal of 20%. It has also extended subsidy programs for new-energy vehicles by two years, albeit at a smaller size, according to state media. Local governments have also taken steps to support the sector.

Rob Mumford, an investment manager for emerging-market equities at GAM Investments, said his funds had selectively invested in Chinese automobile stocks, focusing on those that made electric vehicles and related components.

Mr. Mumford said government stimulus should encourage households to buy big-ticket items such as cars, while competitively priced new models would boost electric-car sales. "We like the prospects for a rebound in the sector this year," he said.

The market enthusiasm is encouraging a string of capital-raisings. Startups including WM Motor Technology Group Co. and Zhejiang Hozon New Energy Automobile Co. are readying listings in Shanghai, and offshore-listed groups including Geely Automobile Holdings Ltd. (GELYF) are preparing to raise money onshore. Alibaba Group Holding Ltd.-backed Xpeng Inc. plans to list in the U.S.

Paul Pong, managing director at Pegasus Fund Managers Ltd., said many offshore-listed Chinese car makers would be able to raise money on the mainland, and then use those funds to expand production capacity and make more innovative and fuel-efficient vehicles.

Still, electric cars account for a sliver of China's overall market: July sales of 98,000 units, on a wholesale basis, were less than 5% of the total national figure of 2.1 million vehicles, data from the China Association of Automobile Manufacturers shows.

Analysts and investors caution that the market is highly competitive, with newer companies vying against established auto manufacturers, both foreign and homegrown, as well as Tesla.

Mr. Mao at J.P. Morgan Asset Management said the race to succeed in China's electric-car industry was like a marathon. "We're in the first 1 or 2 kilometers," he said.

Write to Joanne Chiu at joanne.chiu@wsj.com


  (END) Dow Jones Newswires
  08-13-20 0544ET
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