Back to top

Image: Bigstock

2021 China Auto Market Review & 2022 Preview: 3 Stocks to Buy

Read MoreHide Full Article

Auto sales in China, the world’s largest car market, snapped a three-year slump in 2021. According to the China Association of Automobile Manufacturers (CAAM), a total of 26.28 million vehicles were sold in the country last year, marking a 3.8% increase from 2020 levels. But there’s a catch. While COVID-19 concerns and chip deficit disrupted production, the overall vehicle sales growth was primarily driven by strong sales of green vehicles.

With the upward trajectory expected to continue, you can ride the robust EV market in China by investing in Tesla (TSLA - Free Report) , NIO Inc. (NIO - Free Report) and General Motors (GM - Free Report) . Before delving into the stocks, here’s a sneak peek at how China’s auto market (particularly EV sales) fared in 2021 and what you can expect down the road.

December Sales Fall for the 8th Straight Month but EV Momentum Sustains

After decades of blistering growth, the wheels came off China’s auto market in 2018 due to tighter emission standards, trade tensions and economic downturn. In the early months of 2020, China’s vehicle demand was severely hit by coronavirus woes. While sales in the country started to bounce back by mid-2020, the recovery couldn’t sustain for long amid the global chip crunch. In a telling sign that chip shortage was wreaking havoc in the industry, vehicle sales in the country in December 2021 declined for the eighth straight month.

The bright spot for China’s auto market last year was the soaring popularity of EVs. According to data compiled by the China Passenger Car Association (CPCA), full-year deliveries of new energy vehicles (NEVs) skyrocketed 169% to a record 2.99 million units. Sales of NEVs more than doubled both in November and December. Deliveries jumped 122.3% and 138.9% year over year in November and December to total 378,000 and 505,000 units, respectively. Sales for NEVs in China soared for the 18th consecutive month in December 2021. Per CAAM, sales of NEV surged 157.5% to 3.52 million units in 2021.

EV Market on Fire, Prospects Bright

Demand for NEVs has been rising amid climate change concerns, advancement in EV charging infrastructure and favorable government policies. In April 2020, the government of China announced plans to extend subsidies and tax breaks for NEVs such as electric or plug-in hybrid cars for another two years to spur sales. Buoyed by favorable government policies, China — the world’s largest EV market — has been on the uptrend since July 2020 and is seeing solid sales of zero-emission vehicles.

However, this year, China will reduce cash subsidies on NEVs by 30% and scrap them altogether by 2022-end. Industry watchers do not expect EV sales in the country to be impacted by the slashing of subsidies, given that the demand for green vehicles is strong enough to grow without government aid. Quoting Jing Yang, research director of Fitch Ratings, “The new-energy vehicle market in China has evolved to be driven by demand from one that was driven by policies and subsidies.”

While some market experts anticipate risks emerging from coronavirus woes, economic slowdown and high commodity costs to loom over China’s auto industry, they are largely upbeat about the EV momentum, with sales of green vehicles doubling this year. The general secretary of the vehicle industry guild, Cui Dongshu, says “Sales growth by NEVs largely outpaced internal combustion engine-driven (ICE) cars, suggesting that NEVs will continue to replace oil-guzzlers at a quick pace.” Dongshu expects NEV sales in the country to top 6 million units this year. Meanwhile, CAAM envisions NEV sales to surge 47% year over year in 2022 to 5 million units.

EVs in China are on track to reach the 20% nationwide penetration goal in 2022 itself, ahead of the government’s 2025 forecast. Per UBS estimates, three out of five new cars in China are likely to be powered by electricity instead of fossil fuels in 2030. Meanwhile, CAAM envisions NEV sales to rise 47% year over year in 2022 to 5 million units.

Given the upbeat scenario, we highlight three stocks that are likely to help you capitalize on the China EV market’s solid prospects.

3 Stocks in Focus

Tesla: Tesla’s ambitious production plans in the country bode well. China is the second biggest market for this EV behemoth, where the company is spending heavily to boost earnings prospects. Tesla’s Shanghai factory is ramping up well and commands a higher market share in the China EV market. Robust production of Model 3 and Y — which are among the top five hot-selling EVs in the country — at the Shanghai Gigafactory bodes well. 

Last month, Tesla sold a record 70,847 China-made vehicles, the highest monthly rate since it started manufacturing in Shanghai in 2019, per CPCA data. For the full year 2021, Tesla sold more than 470,000 cars made at its Shanghai factory. TSLA currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for 2022 earnings and sales implies year-over-year growth of 32.6% and 40.4%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

NIO: NIO seems well-poised to cement its long-term foothold in the EV market of China. The rising demand for its ES6, ES8 and EC6 models is enhancing the firm’s top line. This year, the firm intends to deliver three new products based on the NIO Technology Platform 2.0, including the ET7 model. Deliveries of ET7 are scheduled to commence in first-quarter 2022. NIO’s battery swap technology is a game-changer and lends it an edge over its peers.

NIO delivered a record-breaking 25,034 vehicles in the fourth quarter of 2021, to boast a new quarterly delivery benchmark that reflected a 44.3% yearly increase. Its yearly deliveries climbed 109.1% to 91,429 vehicles in 2021. NIO currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2022 earnings and sales implies year-over-year growth of 90% and 83%, respectively.

General Motors: U.S. auto giant General Motors commands a huge presence in China, which is the biggest EV market in the world. In 2021, GM introduced its revolutionary Ultium platform, to expedite its move toward a zero-emissions future. The company’s next-generation EVs (across all brands) in China will be powered by Ultium Drive. Cadillac will lead the launch with its LYRIQ in the Chinese market, followed by Buick and Chevrolet. The first Ultium Center opened in Shanghai in October to assemble battery packs for locally built EVs.

General Motors had strengthened its line-up in China with Hong Guang Mini EV, which was launched in July 2020 under the Wuling brand. The Hong Guang MINI EV cemented its position as the best-selling EV in China, with sales of 400,000 units. GM currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2022 earnings and sales implies a year-over-year growth of 1.1% and 4.6%, respectively.

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

General Motors Company (GM) - free report >>

Tesla, Inc. (TSLA) - free report >>

NIO Inc. (NIO) - free report >>