This Week's Trade Idea

Buying Li Auto and Tesla

_{Posted by Club Member TomTD 16.6.23}

Chinese central bank has started to cut key policy rates, and there are reports that government officials have been soliciting advice from business leaders on how to revitalize the economy. My sense is that more government stimulus to support growth is underway.

A friend of mine (buyside analyst) travelled to China recently, he said sentiment among is his local contacts has never been this negative. Youth unemployment is over 20%, and the property sector remains challenged. GS is predicting an L-shape recovery in the property market that may be a multi-year drag on the economy.

Sentiment is so poor, perhaps we are at the bottom?

I think the Chinese EV sector might be the best way to play the China recovery story. This is not a struggling sector waiting for a turnaround. EV sales in China are still robust and are expected to growth by 27% this year to 8.7 million units, representing over 30% of total auto sales, up from 26% last year. EV demand is clearly there despite the poor economic sentiment. China now has price parity between EV and internal combustion engines, so incremental government economic stimulus, which I think is likely coming, will drive further EV penetration and possibly a near-term catalyst for Chinese EV stocks.

Tesla is one obvious way to play this given its market position in China. Li Auto has strong sales and delivery momentum relative to peers, and the stock’s price action also reflects that. Pairing Tesla and Li Auto makes sense to me, as trying to pick one “ultimate EV winner” is difficult, and Li Auto’s stock is going to be more sensitive to any domestic news surrounding government stimulus.

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