Chinese electric vehicle (EV) stocks may provide a refuge from the government's regulatory crackdown on tech giants, according to one of the country’s top-performing asset managers, if investors can tolerate high valuations. Xiong Lin, a fund manager at the Shanghai Ruiyi Investment Development Center, advises those already invested in EV companies and their supply chains to resist the urge to take profits in the market. He believes this sector enjoys greater tolerance for higher valuations in light of the cut in the required reserve ratio, which he considers a boon for liquidity-sensitive growth stocks.
With Beijing aiming to represent electric vehicles as 20% of cars sold by 2025 as part of a strategic growth area, global funds are also optimistic about this sector due to China's ongoing dominance in global EV battery production and the country's supportive industry policies that align with its ambitious plan to reach carbon neutrality by 2060.
Xiong stated in an interview in Shanghai, "Policy support for the industry distinguishes it from other tech fields, making it a safer bet amidst the antitrust actions applied to internet companies." He oversees assets worth 3 billion yuan (464 million dollars) in stocks in China and Hong Kong, with one of his institution's products rising by 55% since July 9, placing it among the top 2% of its peers, according to the latest available data from Shenzhong Pai Pai Wang Investment Management.
In the first half of the year, total wholesale sales of new energy vehicles in China reached 1.1 million units, while retail sales were around 1 million, according to data from the China Passenger Car Association. Sales appear to be on track to surpass the full-year targets set by the association for 2021, estimated at approximately 2.4 million units. The association's secretary general noted that the data for the first half was "greater than anything we imagined," while Xiong added that industry fundamentals would remain strong over the next three to five years with accelerating market penetration.
#### Unattractive Valuations
Valuations in the sector may not be appealing as an entry point for some investors; exchange-traded funds (ETFs) associated with new energy bear trading near record high levels, having gained 60% from their low this year. Stocks of the battery supply company for Tesla, Contemporary Amperex Technology (CATL), and the electric vehicle manufacturer BYD, are trading at forward multiples exceeding 100 times, which is about double the average of the last three years.
CATL reached a new high this week, becoming the third-largest traded stock in mainland China, surpassing several giant financial companies within weeks. The stock, which has a 17% weight on the ChiNext technology-heavy index, accounted for about half of the index's gains over the past six months. Xiong believes that the stock will continue to outperform in the second half. Among the less-performing companies recently was Ningbo Shanshan, a manufacturer of lithium-ion battery materials, which rose by 38% this month, and its peer Ningbo Ronbay New Energy Technology, which increased by 13% during that period.
Xiong also anticipates erratic trading on the CSI 300 benchmark index for the rest of the year, stating that recent gains in his fund were previously secured from cyclicals and low-cost alcoholic beverage brands.
