Shares of Chinese electric vehicle (EV) manufacturers dropped sharply in Hong Kong, fueled by concerns over weak fourth-quarter demand amid intense competition and subdued consumer spending in China. Li Auto led the decline, with its stock falling 9.1% on last week. BYD's shares decreased by 1.6% following their second-quarter earnings report, while XPeng and NIO also saw losses of 5.5% and 5.1%, respectively.
Li Auto Earnings Miss Triggers EV Stock Selloff
The selloff was triggered by Li Auto’s earnings release and guidance after the market closed. The hybrid vehicle maker reported a second-quarter net profit decline of over 50%, down to 1.10 billion yuan ($154.4 million), due to lower margins and slower sales growth. Analysts noted that Li Auto’s cautious outlook for the fourth quarter and the overall weak sentiment in the Chinese EV market contributed to the stock downturn.
Concerns Loom Over China’s EV Market as Li Auto Lowers Sales Target
“The fourth quarter is typically strong for China’s EV market, but there are concerns that this year may be different,” said Qu Ke, an analyst at CCB International, citing reduced consumer demand amid economic challenges.
Bernstein analysts led by Eunice Lee highlighted that Li Auto did not provide a gross margin outlook for the fourth quarter, unlike for the third. They also pointed to management’s concerns about demand, competition, and pricing pressures. Li Auto lowered its full-year sales target to 500,000 units, down from a previous range of 560,000-640,000 units.
China's EV Market Faces Uncertainty Amid Weak Demand
The industry has seen turbulence this year, with significant price cuts in the first quarter as automakers fought for market share, followed by a sales recovery in the second quarter driven by government incentives and the Beijing Auto Show. However, weak consumer spending has continued to impact car demand. Retail car sales in July fell 2.8% year-on-year to 1.72 million units, according to the China Passenger Car Association (CPCA).
Analysts warn that fourth-quarter EV sales in China may disappoint, given the high comparison base from last year, when retail car sales reached 6.46 million units. Despite this, Li Auto’s performance might improve in the third quarter, with Citi analysts forecasting a sequential recovery in margins and sales volumes.
About Li Auto
Li Auto is a prominent Chinese new energy vehicle (NEV) manufacturer known for its premium smart vehicles. The company began mass production of its first model, the Li One, in November 2019. This model is a six-seater, large, luxury plug-in hybrid SUV, featuring a range extension system and advanced smart vehicle technologies. In 2023, Li Auto sold over 376,000 NEVs, capturing approximately 4% of China's passenger NEV market. Building on the success of the Li One, Li Auto is diversifying its product lineup to include both battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs), aiming to appeal to a wider range of consumers in the competitive NEV market.
Li Auto Evaluation
Checking the analysts' target price and considering Li Auto's financial data, the current share price appears to be approaching an attractive level. I believe that the recent decline in the stock price is temporary, and in the long term, given the current value, it could be a good investment opportunity.
On the positive side, I highlight the low debt level, consistent growth in revenue and operational activities, as well as a strong return on equity (ROE).
On the downside, I note the projected earnings per share (EPS) growth for the next 3-5 years, although this doesn't necessarily mean the trend won't reverse in the long term.
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