Tesla Jumps 5%, BYD Halts ICE, Revival of New Energy?

Facing the future development prospects of new energy vehicles (NEVs), BYD has taken the lead in announcing the cessation of production of fuel-powered vehicles, focusing resources on the development of new energy vehicle business.

Echoing this is the rise of Tesla's stock by 5% at the close of the US stock market, reaching a new high since January 5th, with NIO, XPeng, and Li Auto also seeing increases of 5% to 9%, making the new energy vehicle sector very active.

The new energy-themed funds, which performed very well in 2020 and 2021, are set to take off from now in 2022 given the current situation.

01, A Significant Signal

BYD announced that starting from March 2022, it will completely stop the production of fuel-powered vehicles, concentrating all the company's resources on the business of new energy vehicles, including pure electric and plug-in hybrid vehicles. This is undoubtedly a significant signal for the entire new energy vehicle industry.

BYD's current monthly production and sales have both broken through 100,000 units, growing by more than 400% compared to the same period last year. Since the beginning of the quarter, the cumulative production has reached 287,500 units, surpassing the total of the first eight months of last year, making rapid progress in the new energy vehicle race.

At the same time, BYD's fuel-powered vehicle production and sales had actually been gradually declining before this, and by March of this year, they were close to zero. So BYD's official announcement was merely making this phenomenon public.

This also reflects the current state of the entire new energy vehicle industry.

In terms of China's situation, in 2021, China's automobile production and sales finally reversed the downward trend of the past three years, with both production and sales exceeding 26 million units. The main contribution to reversing this trend came from new energy vehicles, with last year's production of new energy vehicles reaching 3.545 million units and sales reaching 3.521 million units, with year-on-year growth of 160%.

At the same time, the market penetration rate of new energy vehicles has also significantly increased, with a single-month penetration rate of 19.1% on December 10th, and an average of 13.4% for the whole year.Not only is the situation in China like this, but the global situation also shows this trend, with more and more countries and regions beginning to reduce the production and sales of fuel vehicles. The European Union will ban the sale of fuel vehicles by 2035, and Singapore and Canada will do the same by 2040.

In addition to policy requirements for energy saving and carbon reduction, there is another important reason for the global reduction in the production and sales of fuel vehicles and the increase in the production and sales of new energy vehicles: the continuous rise in crude oil prices. It can be said that this is also an active choice made by consumers.

02, Hidden Worries

The new energy vehicle industry seems to be in a very good situation, and the increase in new energy stocks over the past two years has been very good. Fund investors who have purchased new energy-themed funds have also achieved good returns. However, the risks involved are still worth paying attention to.

On the one hand, we can see the continuous increase in the production and sales of new energy vehicles, as well as the continuous improvement in market penetration. We have also seen that in the first quarter performance announced by several new energy vehicle concept stocks recently, several companies are expected to have a profit increase of more than 100%. These are all good news.

On the other hand, the chairman of Weichai Group said at a recent performance release conference that the new energy industry is currently in a state of disorderly competition, and it is necessary to pay attention to the potential catastrophic overcapacity of new energy vehicles in the future.

At the same time, at the China Electric Vehicle Hundred People Forum, the deputy director of the Development and Reform Commission also said that although China's new energy vehicles have achieved breakthrough development, problems such as blind investment and disorderly development still exist to varying degrees and may explode in the future.

This is not sour grapes, but the voices of participants in the new energy industry. They are just more sober than others in the frenzy.

03, Overcapacity

Last year, the financing events in the new energy vehicle industry reached the highest peak in history, with disclosed amounts reaching 360 billion yuan, totaling 239 cases.Capital is continuously pouring into this track, and structural overcapacity issues have already emerged.

In 2021, the production capacity of new energy passenger cars was 5.695 million vehicles, but sales were only 3.326 million vehicles, with a utilization rate of less than 60%. Moreover, it is important to note that the construction capacity is still expanding significantly. According to incomplete statistics, there are currently more than 10 million vehicles of construction capacity under way, which will be put into production in the future.

The rise in raw material prices, chip shortages, and long delivery cycles are many challenges that the new energy vehicle business departments still need to solve slowly.

For the many vehicle companies that have already tested it, they also need to consider how to improve profits.

Taking BYD as an example, in 2021, the operating income increased by 38% year-on-year, but the scale profit decreased by 28%, and the net profit excluding non-recurring gains and losses fell by 57% year-on-year, with the current net profit amount being only 1.25 billion yuan. In contrast, Great Wall Motor's net profit is 6.7 billion yuan, and Geely Auto's net profit is 4.8 billion yuan.

How can we avoid this problem of increasing operating income but decreasing profits?

04, New Energy Fund

For fund investment, the prospect of the industry is a necessary condition for medium and long-term investment. From this perspective, the medium and long-term value of new energy-themed funds does exist.

However, looking at the short term, there is still a lot of uncertainty.

The first aspect comes from the continuous increase in penetration rate, and the valuation of related stocks faces a significant decline. Although since the first quarter of this year, the valuation of new energy has been significantly discounted, it is still in a high position compared to other industries.The uncertainty on the second front lies in the fact that new energy-themed funds often encounter significant drawdowns. Taking the Yifangda Environmental Protection Fund as an example, the fund experienced drawdowns approaching or exceeding 20% in 2018, 2020, and 2021, respectively. Moreover, the maximum drawdown in February of this year has already reached 24%. Looking at historical data, the room for future declines is not substantial, but even so, buying at the current low levels cannot avoid the possibility of significant declines in the future. All of these are the greatest tests of patience for fund investors.