Auto sales in China, the world’s largest auto market, saw a three-year decline in 2021. According to the China Association of Automobile Manufacturers (CAAM), a total of 26.28 million vehicles were sold in the country last year, marking an increase of 3.8%. increase from 2020 levels. But there is a catch. While COVID-19 concerns and the chip shortage disrupted production, overall vehicle sales growth was mainly driven by strong sales of green vehicles.
With the upward trajectory set to continue, you can take advantage of China’s robust electric vehicle market by investing in You’re here TSLA, NIO inc. NOS and General Motors GM. Before we dive into stocks, here’s a look at how the Chinese auto market (particularly EV sales) fared in 2021 and what you can expect going forward.
December sales fall for 8th straight month, but EV momentum continues
After decades of meteoric growth, wheels from the Chinese auto market pulled back in 2018 due to tougher emission standards, trade tensions and an economic downturn. In the first months of 2020, demand for vehicles in China was hit hard by coronavirus concerns. While sales in the country began to rebound in mid-2020, the recovery could not be sustained for long amid the global chip crisis. In a telling sign that the chip shortage was wreaking havoc on the industry, vehicle sales in the country in December 2021 fell for the eighth straight month.
The bright spot in the Chinese auto market last year was the growing popularity of electric vehicles. According to data compiled by the China Passenger Car Association (CPCA), full-year new energy vehicle (NEV) shipments soared 169% to a record 2.99 million units. NEV sales more than doubled in November and December. Shipments jumped 122.3% and 138.9% year-over-year in November and December to total 378,000 and 505,000 units respectively. NEV sales in China soared for the 18th consecutive month in December 2021. According to CAAM, NEV sales jumped 157.5% to 3.52 million units in 2021.
Electric vehicle market on fire, bright prospects
Demand for NEVs has increased due to climate change concerns, advances in electric vehicle charging infrastructure, and supportive government policies. In April 2020, the Chinese government announced plans to extend subsidies and tax breaks for NEVs such as electric or plug-in hybrid cars for two years to boost sales. Supported by supportive government policies, China – the world’s largest market for electric vehicles – has been on an uptrend since July 2020 and is recording strong sales of zero-emission vehicles.
However, this year China will cut cash subsidies on NEVs by 30% and phase them out completely by the end of 2022. Industry watchers do not expect electric vehicle sales in the country will be affected by the reduction in subsidies, since the demand for green vehicles is strong enough to grow without government assistance. Quoting Jing Yang, Research Director of Fitch Ratings, “China’s new energy vehicle market evolved to be driven by demand from another that was driven by policies and subsidies.”
While some market experts anticipate risks from coronavirus concerns, economic slowdown and high raw material costs weighing on China’s auto industry, they are largely bullish on the momentum of electric vehicles, vehicle sales greens having doubled this year. Automotive Industry Guild Secretary General Cui Dongshu said “Sales growth of NEVs has far exceeded that of internal combustion engine (ICE) cars, suggesting that NEVs will continue to replace oil consumers at a rapid pace”. Dongshu expects NEV sales in the country to exceed 6 million units this year. Meanwhile, CAAM forecasts NEV sales to grow 47% year-over-year in 2022 to 5 million units.
Electric vehicles in China are on track to reach the national penetration target of 20% by 2022 itself, ahead of government forecasts for 2025. According to UBS estimates, three out of five new cars in China will likely be powered to electricity instead of fossil fuels in 2030. Meanwhile, CAAM forecasts NEV sales to grow 47% year-over-year in 2022 to 5 million units.
Given the optimistic scenario, we highlight three stocks that can help you capitalize on the strong outlook for China’s EV market.
3 actions in brief
You’re here: Tesla’s ambitious production plans in the country bode well. China is the second-biggest market for the electric vehicle giant, where the company is spending heavily to boost its earnings outlook. Tesla’s Shanghai factory is developing well and has a higher market share in China’s electric vehicle market. The robust production of the Model 3 and Y – which are among the five best-selling electric vehicles in the country – at the Gigafactory in Shanghai bodes well.
Last month, Tesla sold a record 70,847 Chinese-made vehicles, the highest monthly rate since manufacturing began in Shanghai in 2019, according to CPCA data. For the whole of 2021, Tesla sold more than 470,000 cars made at its Shanghai factory. TSLA currently sports a No. 1 Zacks rank (Strong Buy). Zacks’ consensus estimate for 2022 earnings and sales implies year-over-year growth of 32.6% and 40.4%, respectively. You can see the full list of today’s Zacks #1 Rank stocks here.
NIO: NIO seems well placed to establish itself in the long term in the Chinese market for electric vehicles. Growing demand for its ES6, ES8 and EC6 models enhances the company’s product line. This year, the firm intends to deliver three new products based on the NIO 2.0 technology platform, including the ET7 model. ET7 deliveries are expected to begin in the first quarter of 2022. NIO’s battery swap technology is a game-changer and gives it an edge over its peers.
NIO delivered a record 25,034 vehicles in the fourth quarter of 2021, to boast a new quarterly delivery benchmark that reflects a 44.3% year-on-year increase. Its annual deliveries soared 109.1% to 91,429 vehicles in 2021. NIO currently carries a Zacks Rank #2 (Buy). Zacks’ consensus estimate for 2022 earnings and sales implies year-over-year growth of 90% and 83%, respectively.
General Motors: The American car giant General Motors has a strong presence in China, which is the largest market for electric vehicles in the world. In 2021, GM introduced its revolutionary Ultium platform, to accelerate its transition to a zero-emissions future. The company’s next-generation electric vehicles (all brands) in China will be powered by Ultium Drive. Cadillac will lead the launch with its LYRIQ in the Chinese market, followed by Buick and Chevrolet. The first Ultium center opened in Shanghai in October to assemble batteries for locally built electric vehicles.
General Motors had strengthened its range in China with Hong Guang Mini EV, launched in July 2020 under the Wuling brand. The Hong Guang MINI EV cemented its position as the best-selling electric vehicle in China, with sales of 400,000 units. GM currently carries a No. 2 Zacks rank. Zacks’ consensus estimate for 2022 earnings and sales implies year-over-year growth of 1.1% and 4.6%, respectively.
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