As investors reel from Beijing’s extensive regulatory crackdowns, they may be seeking opportunities in sectors that align with the government’s long-term strategic priorities. China’s electric vehicle (EV) sector is one such area of opportunity.
- Chloe Nadia Halim | Published on 02 Nov 2021
- As part of its efforts to go green, the Chinese government is aiming for peak CO2 emissions before 2030, and carbon neutrality before 2060, giving the electric vehicle (EV) sector a boost.
- The EV sector is in line with the Chinese government’s long-term strategic priorities. Given recent regulatory crackdowns, investors can look to the EV sector for investment opportunities.
- To drive the sector’s growth, the Chinese government has invested at least USD 60 billion to support the EV industry, and is pushing an ambitious plan to transition to all-electric or hybrid cars by 2035.
- We recommend investors seeking exposure to China’s EV sector to consider the Global X China Electric Vehicle and Battery ETF (HKEX:2845).
- Our 2023 target price is HKD 268, and this offers investors an upside potential of 34%, based on the closing price of HKD 200.20 on 1 November 2021.
As investors reel from Beijing’s extensive regulatory crackdowns, they may be seeking opportunities in sectors that align with the government’s long-term strategic priorities.
One such area is China’s electric vehicle (EV) sector. With growing environmental concerns, and the rise in exhaust emissions, the country has turned their focus towards the electrification of the transport sector.
Not to mention, China has the largest EV market in the world. The country alone represents close to 50% of the global EV market in 2020. Moreover, with EV penetration rates at less than 6%, the long-term growth potential is substantial.
As China plans for a greener future, the EV sector is one to look out for
China is responsible for 28% of the world’s carbon dioxide (CO2), more than the US and EU combined.
However, the country has plans for a greener future. The government has set a lofty goal of aiming for peak CO2 emissions before 2030, and achieving carbon neutrality before 2060.
Becoming “carbon neutral” means that China will have to reduce its carbon emissions by as much as 90%, and offset the rest through natural systems or technologies that absorb more carbon from the atmosphere than they emit.
Since EVs produce significantly fewer emissions compared to conventional vehicles, they are expected to play a growing role in meeting this climate change goal.
As such, the Chinese government views the EV sector as one that is strategically important to the country’s long-term development. It has identified the sector as one to develop and grow under its “Made in China 2025” (MIC) industrial plan (Figure 1).
Figure 1: Target sectors identified in the “Made in China 2025” industrial plan
To fast-track the sector’s growth, the government has invested at least USD 60 billion to support the EV industry. Of this USD 60 billion used to jumpstart the EV industry, almost USD 37 billion (62%) has gone towards consumer subsidies.
This is necessary as China wants 20% of all new cars hitting the streets to be EVs by 2025, translating to more than four million of such cars on the road. Moreover, by 2035, all new car sales in China must be either full EVs or hybrids.
Hence, government policies and goals have brought the importance of the China’s EV sector to the forefront, highlighting the sector as one to look out for.
EV sales in China is set to grow rapidly
According to KPMG, China has been the world’s largest EV market by sales volume since 2015, and is expected to maintain this position for years to come.
EV sales in China continue to skyrocket, as the demand for emission-friendly automobiles grows. China’s passenger EV sales rose 160% year-on-year in 1H21, to 1.1 million units.
The China Passenger Car Association (CPCA) went on to further estimate that wholesale sales of new EVs in China could reach 2.4 million units this year. This would be an 85% increase from 2020, during which 1.3 million EV units were sold. For the full year 2021, China’s global share of EV sales (proportion of China’s EV sales out of the global volume) is estimated to remain above 45%.
To further increase sales, EVs would have to become more affordable. At this juncture, EVs remain more expensive compared to conventional ICE vehicles, even with the dropping costs of batteries (Figure 2).
Figure 2: The costs of EV battery packs have been on a decline
But, it is estimated, that at USD 100/kWh, EVs will become as cheap to make as gas cars. Such a development would no doubt boost China’s EV sales and adoption rates.
Going forward, there is ample room for China’s EV market to grow, due to the current low penetration rates. EVs accounted for only 5.7% of total sales in the Chinese vehicle market in 2020 (Figure 3), making their long-term growth potential substantial. It is expected that China’s EV sales would grow by more than 40% each year, within the next five years.
Figure 3: Penetration rates of EVs in China from 2012 to 2020
China’s EV sector is a force to be reckoned with
China is winning the EV race.
It has achieved immense success in every step of the EV supply chain (Figure 4) – from the mining of raw materials such as lithium, to battery manufacturing, and vehicle production by Original Equipment Manufacturers (OEMs).
Figure 4: Simplified EV supply chain
Lithium mining: China’s dominance in the upstream lithium mining segment is evident. It is one of the top five countries in terms of lithium reserves (Figure 5), and lithium is a key raw material component of today’s EV rechargeable batteries.
Figure 5: Lithium reserves by country
Over the recent years, Chinese companies such as Jangxi Ganfeng Lithium (SZSE:002460), encouraged by China’s attempts to dominate the lithium market and electrify the country, have grown to become a significant player in the lithium mining segment.
Today, the company is the third-largest lithium compound producer in the world and the leading producer in China.
Battery manufacturing: China is also the world’s largest battery manufacturer. It contributed 511 gWh of the 804 gWh (64%) of global lithium battery production capacity in 2020. If current trends continue, most of the world would likely use Chinese batteries. A clear beneficiary is no other than Chinese EV battery giant, Contemporary Amperex Technology Co (CATL).
CATL is the world’s number one battery producer, with a 27.3% market share of the global EV battery market, while competitors such as LG Energy Solutions and Panasonic have a 26.6% and 14.5% market share respectively. CATL’s domestic rival, BYD (HKEX:1211) is trailing behind with a 7.6% market share.
OEMs: Downstream OEMs have no doubt benefited from the highly developed domestic EV value chain, arising from the China’s strength in critical components such as raw materials and battery production. They are rapidly expanding their annual production of electric cars, and are on pace to make more than eight million vehicles by 2028 (Figure 6).
Figure 6: Increasing production of electric cars in China
Moreover, according to McKinsey & Company, Chinese OEMs have been dominant in the domestic market, with an 85% share of sales volume in 2019. However, this may soon change as international OEMs have begun moving into the Chinese market in 2020.
Table 1: Most popular battery EV (BEV) brands in China in 2020
| Rank | Brand | Sales volume(in thousand units) |
| 1 | SAIC-GM-Wuling | 177.87 |
| 2 | Tesla | 137.46 |
| 3 | BYD | 130.97 |
| 4 | GAC | 60.14 |
| 5 | Great Wall Motor | 56.26 |
| 6 | SAIC | 51.60 |
| 7 | NIO | 44.49 |
| 8 | Chery | 43.80 |
| 9 | Changan | 29.11 |
| 10 | Xpeng | 27.01 |
| Source: Statista, iFAST CompilationsData as of 4 March 2021 |
Nevertheless, EVs produced from local OEMs such as BYD (HKEX:1211), NIO (NYSE:NIO), and Xpeng (HKEX:9868) continue to be popular (Table 1). In fact, the best-selling EV in China in 2020, is not Tesla’s Model 3, but the tiny Hongguang Mini EV.
The Hongguang Mini EV is produced by SAIC-GM-Wuling Automobile, a joint venture between China’s state-owned SAIC Motor (SSE:600104), US carmaker General Motors (NYSE:GM) and another Chinese company, Wuling Motors (HKEX:305).
Global champions have thus appeared in every part of China’s EV supply chain. Going forward, the government will continue to support the innovation and development of its domestic EV sector, as part of its clean energy transition.
Key investment risks
EV adoption may be slower than expected: While the demand for EVs in China has grown immensely in recent years, there is no guarantee of continuing future demand. The government’s projections are also not guaranteed to happen, as the switch to EVs will not be straightforward with obstacles that may impede its adoption, such as cost considerations and the lack of EV charging infrastructure within the country.
Regulatory policies in China: China in general is considered to be one of the most regulatory-driven market. Having built its EV sector into the world’s biggest, the government is now putting a new focus on consolidating its 300 EV makers.
They are aiming to encourage merger and restructuring efforts, to increase market concentration and rein in overcapacity. And while this policy is expected to benefit China’s top electric-car makers such as Nio (NYSE:NIO), Xpeng (HKEX:9868), Li Auto (HKEX:2015), and BYD (HKEX:1211), by eliminating potential competitors, there is always a risk that future policies may not be so favourable.
Long runway for growth makes this sector attractive
China’s EV sector is exciting for long-term investors because of the underlying structural trend of electrification to meet its environmental goals. Additionally, government support towards the sector has helped fast-track its growth.
To tap on this boom, investors can consider investing in the Global X China Electric Vehicle and Battery ETF (HKEX:2845). The ETF tracks the performance of the Solactive China Electric Vehicle and Battery Index, providing investors with access to companies critical to the development of EVs and batteries in China. It comes with an expense ratio of 0.68%.
Our 2023 target price for this ETF is HKD 268, based on a fair PE multiple of 45.0X. Thistranslates to an upside potential of about 34%, based on the last closing price of HKD 200.20 on 1 November 2021.
Table 2: Top 10 holdings
| Rank | Holding Name | Net Assets (%) |
| 1 | BYD Co Ltd | 9.66 |
| 2 | Contemporary Amperex Technology | 9.45 |
| 3 | Jiangxi Ganfeng Lithium Co | 8.50 |
| 4 | Guangzhou Tinci Materials | 8.17 |
| 5 | Sunwoda Electronic Co Ltd | 7.47 |
| 6 | Wuxi Lead Intelligent Equipment | 7.40 |
| 7 | Eve Energy Co Ltd | 7.36 |
| 8 | Shenzhen Inovance Technology | 6.53 |
| 9 | Shenzhen Capchem Technology | 5.23 |
| 10 | Guoxuan High-Tech Co Ltd | 4.64 |
| Source: Global X, iFAST CompilationsData as of 1 November 2021 |
All in all, we are upbeat on China’s EV sector, due to its dominance across the supply chain and its alignment with the government’s long-term strategic priorities. Not to mention, the sector is also fertile ground for growth, as EVs will likely take a majority share of China’s vehicle market over time.
Table 3: Earnings growth for China’s EV sector
| Solactive China Electric Vehicle and Battery Index | FY20 | FY2021 | FY2022 | FY2023 |
| PE ratio | 146.5 | 72.6 | 48.6 | 33.5 |
| Earnings growth | 81.1% | 101.6% | 49.5% | 45.0% |
| EPS (in RMB) | 29.6 | 59.7 | 89.3 | 129.4 |
| Upside potential | – | – | – | 34.3% |
| Source: Bloomberg Finance L.P., iFAST EstimatesData as of 1 November 2021 |