Shares of Chinese electric vehicle maker Li Auto (LI +3.62%) rallied as much as 5.1% on Monday, before reverting to a 4.1% gain as of 1:49 p.m. ET.
Though there wasn't much company-specific news, today saw a new report from Bloomberg New Energy Finance suggesting China may materially increase subsidies for its "cash for clunkers" program. That has the potential to spur more new EV sales in China this year, and helped lift all Chinese EV stocks today, especially Li.
NASDAQ: LI
Key Data Points
China will pay you to trade in your gas-guzzler for environmentally friendly EVs
Since April, China has instituted a "cash for clunkers" subsidy program, by which citizens can trade in their less-efficient internal combustion engine (ICE) vehicle for a subsidy toward either an electric vehicle or more efficient ICE vehicle. Then in July, China announced it would be doubling the EV subsidy to 20,000 yuan, but declined to give details on how much the government would spend in total.
In a report Monday, BloombergNEF analyst Siyi Mi suggested the new subsidies could target an extra 1.1 million EV vehicles, doubling the total amount of the initial subsidy. That doubling would obviously be a huge deal for China's EV makers, with the potential to increase 2024 China EV sales by around $26 billion, given an average price of just over $25,000 per EV in China.
Li had been growing its sales robustly for the past year, but first-quarter deliveries did slow down markedly from prior growth rates in previous quarters. Moreover, on its last earnings call, Li noted its April deliveries -- the first month of the yet-to-be-reported second quarter -- had increased only 0.4%.
But this month, the company announced 51,000 July deliveries, a new monthly delivery record, and up 49.4% over the prior-year month.That could mean new subsidies have worked in reaccelerating Li's sales. So, a doubling of the subsidies could mean more good news ahead. With the stock down over 48% over the past year, no wonder the news got Li's stock moving back in the right direction.
Li Auto is still a risky proposition
While Li's sales have apparently reaccelerated in July, investors should note its margins have come down amid a fierce price war among EV makers in China -- and really across the world. In fact, Li's bottom line flipped from profits to operating losses in the first quarter, despite 52.9% delivery growth.
Inflation, higher interest rates, tariffs limiting the sales of China OEMs to other countries, and other economic concerns have created somewhat of a perfect storm for the EV industry. Therefore, to see China step up its subsidy program is a good thing for all of China's OEMs, where EV adoption is higher than in the U.S.
Still, one would theoretically like to see the industry able to operate profitably without the need for subsidies. While battery electric vehicles are likely the future, the road to that future will be rocky, and it's hard to know how much there will be to go around in the name of automaker profits.
