- China NEV sales increased by a robust 12% qoq and 23% yoy to 2.31m units in 3Q23. We anticipate China NEV sales to increase 13% qoq and 19% yoy to 2.6m units in 4Q23F.
- Market growth was led by BYD EV deliveries rising 53% yoy and Li Auto’s jumping 296% yoy in 3Q23, thanks to strong consumer preference for PHEV/EREV models.
- BYD began the 3Q23 reporting season with a net profit increase of 61-97% yoy to Rmb8.6bn-10.5bn (positive profit alert), thanks to continual vehicle margin expansion from operational leveraging.
- We think EV makers are likely to post strong 3QF/4QF results due to strong EV deliveries and low lithium prices despite keen competition, aided by improved operational efficiency and expanded sales channels.
- We forecast BYD/NIO/XPeng/Li Auto’s FY23F EV shipments to increase 54%/43%/5%/159% yoy, outpacing China’s NEV market’s 30% growth, as they continue to gain market share due to expanded EV portfolios.
- We maintain our Overweight call on China’s smart EV sector due to stable NEV sales growth and ongoing electrification and intelligence trend. Our sector top picks are BYD and Li Auto.
China’s new energy vehicle market remained strong in 3Q23, and we expect this to continue in 4Q23F
- China’s NEV remained strong in 3Q23. New energy vehicle (NEV) sales in China increased steadily to 746k in Jul 23, 756k in Aug 23 and 808k units in Sep 23, bringing NEV sales to 2.31m units, up 12% compared to 2Q23 and 23% compared to 3Q22 (source: China Association Automobile Manufacturers, CAAM), thanks to: 1) improved consumer demand on the effect from the National Day holiday, 2) manufacturers’ promotions, and 3) strong new model launches. While China delivered 7.83m units passenger cars in 3Q23 (+9% qoq, +6% yoy), NEV penetration rate in China reached 30% in 3Q23 (up 100bp from 29% in 2Q23), indicating a sustained internal combustion engine (ICE) vehicle-to-NEV migration in China’s auto market due to improved mobility experience from electric vehicles (EVs), long- term policy support, and price competition for new EV models.
- BYD and Li Auto were the market leaders in 3Q23. BYD maintained its market share of 33.5% in China’s NEV market in 3Q23, with 822k units delivered (+17% qoq, +53% yoy), due to strong sales performance of the Song series, Qin series and Dolphin, as a result of consumer preference for PHEVs and economy class price segment (Rmb100k-150k). Li Auto continued its streak from 1Q/2Q23 of record deliveries of 105k units in 3Q23 (+21% qoq, +296% yoy), attributed to its extended range EV (EREV) portfolio, which continued to gain market share from European brands in the premium (Rmb350k-450k) and luxury (Rmb450k-550k) price segments. NIO’s EV deliveries jumped 136% qoq and 75% yoy in 3Q23, and Xpeng’s EV deliveries surged 72% qoq and 35% yoy in 3Q23 due to new models launches, following poor EV sales in 1H23 due to model transition and competition.
- BYD began 3Q reporting with strong earnings growth. BYD kicked off the 3Q23 reporting season with a net profit increase of 61-97% yoy to Rmb8.6bn10.5bn (positive profit alert announcement on 17 Oct), primarily due to vehicle margin expansion (we estimate that its vehicle margin reached 23% in 3Q23F and c.19% in 2Q23), amid higher EV deliveries and lower lithium battery costs despite increased competition. We expect NIO and Xpeng to report strong earnings recovery in 3Q-4Q23F as a result of improved vehicle margins due to strong growth in EV deliveries and a better production cost structure. We estimate NIO’s vehicle gross profit margin to improve from 6.2% in 2Q23 to 11% in 3Q23F and 15% in 4Q23F as a result of improved production efficiency, whereas Xpeng’s vehicle margin should return to positive c.9% in 2H23F (-8.6% in 2Q23F) as a result of lower production costs in its new EV platform. We also expect Li Auto to report robust results in 3Q23F/4Q23F due to strong EV deliveries and operational leveraging.
- 2023F EV shipment forecasts for BYD/NIO/Xpeng/Li Auto outpacing China’s NEV market’s 30%. We forecast BYD/NIO/Xpeng/Li Auto’s FY23F EV deliveries to increase 54%/43%/5%/159% yoy to 2.9m/175k/127k/345k units, due to expanded EV portfolios, increase in sales channels, and growing overseas market. While we project China NEV volume sales to increase 30% yoy to 8.5m units (increased 35% yoy to 5.89m units in 9M23), anticipating EV sales to reach 2.6m units (c.870k units/month), with a 13% qoq and 19% yoy growth, in 4Q23F, due to strong seasonal factor, increased price competition (more promotions from EV makers), and improved consumer sentiment in China.
- Maintain Overweight on China’s smart EV sector. We stay Overweight on China’s smart EV sector due to stable NEV sales growth, on the back of stable NEV penetration growth and an ongoing electrification and intelligence trend that is driving consumers to switch to energy-saving, cost-saving, and safe electric vehicles. We keep BYD and Li Auto as our sector top picks due to their outperformance in EV deliveries and vehicle margins in NEV sales. Sustainable strong NEV sales in China, stable EV battery costs that protect EV makers’ profit margins, and fast-growing overseas shipments are all sector re-rating catalysts. Downside risks: volatile lithium battery materials prices, irrational price competition that reduces EV makers’ profit margins while boosting EV sales, and Europe imposing import tariffs for China-made EVs.
