The race to be China’s Tesla has an unexpected leader

Not so long ago, China’s answer to Tesla looked set to be one of two companies: Li Auto or Nio. The hope that these companies would start generating sales in line with the US electric vehicle maker sparked a years-long rally in their shares from 2020. 

Shares of Nio rose more than 1,000 per cent in 2020 alone while shares of Li Auto traded at over 200 times forward earnings at its 2022 peak. Now the two face diverging fortunes following an unexpected shift in local consumer trends.

Li Auto shares on Tuesday fell more than 19 per cent in Hong Kong after the company reported first-quarter vehicle sales of Rmb24.25bn ($3.4bn), missing estimates. Net income of Rmb1.3bn also missed expectations.

The underlying reason for the sell-off goes beyond weak earnings. Investors had been clinging to hopes that strong sales of its first fully electric model, the Mega multi-purpose vehicle, would boost margins: at a starting price of about $78,000 it was seen as one of the top local premium EVs.

Deliveries of the Mega in March, reported to be more than 3,000 units, were less than half that expected by analysts. This compounded concerns about a lack of new battery EV models: Li Auto has postponed its plans to launch pure electric SUV models to next year.

Li Auto and Nio’s edge over local rivals in software had also persuaded investors that the companies deserved a premium valuation. Proprietary autonomous and intelligent driving features were a rare offering among local peers just a couple of years ago.

That is no longer enough. China’s two largest smartphone makers have been trying to beat them at their own game by releasing EVs with smart features much earlier than expected. Xiaomi kicked off sales of its EV this March, at an affordable starting price of around $30,000. Huawei’s EV has been climbing the sales rankings following its launch last year.

Nio still has one advantage. It differentiated itself by investing heavily in recent years in charging stations and battery-swapping technology. Analysts had thought the latter stood little chance of generating commercial returns. But Nio now has more than 2,200 fast-charging stations and 2,400 battery-swapping stations, among the largest network in China. Its battery swapping is gaining a local following and its charging stations reached profitability last year.

Charging infrastructure will become an increasingly important factor in winning over EV buyers, and investors.

june.yoon@ft.com