The "War of the Princes" in the new energy vehicle sector: the more they fight, the more scattered they become, is 2024 destined to be "tragic"?

The sector with rapidly increasing penetration rates, when the industry transitions from supply-driven to demand-driven overall, the impact on the investment logic of economic prosperity is fatal.

As for the new energy vehicle industry, the turning point for Chinese new energy vehicles from supply-driven to demand-driven has passed a full two years. If we take the second half of 2022 as the dividing line 《Fatal Doubt: When Tesla's supply-demand contradiction is gone, can single-car profitability be maintained?》, the core leading companies in the new energy sector that Dolphin Jun focuses on, very few can outperform the industry average in terms of stock price performance.

The reason behind this is simple: in the process of economic prosperity investment, when new product demand experiences a short and rapid outbreak, supply cannot keep up with demand (possibly due to high barriers that cannot be matched, or simply because production capacity cannot keep up, resulting in unmet demand), leading to explosive growth in performance.

In economic prosperity investment, the focus is only on whether performance continues to marginally improve, without considering the rational scale and industry structure of a stable business. Extrapolating linearly will almost certainly drive up stock prices by nearly 100%. Therefore, once the supply-demand turning point arrives, the investment logic collapses, and stock prices begin to plummet.

1. After these roller-coaster years, how much of the new energy vehicle logic has been realized and how much has fallen through?
2. After experiencing the hype, where does the core competitiveness of new energy vehicles lie?
3. After two years of demand competition, where has the domestic new energy vehicle market reached?
4. How to view investment opportunities in new energy vehicles?

Here are the detailed contents:

I. How much of the electric vehicle pie has landed?

In the new energy vehicle storyline led by Tesla and the clamor of new car-making forces, electrification and intelligence are the two main themes; auxiliary storylines such as generalized car functions, realization of existing car stocks, and fleet operations make the main storyline more vibrant.

However, up to now, these stories have almost only followed the electrification theme. In the most prosperous Chinese market, when it comes to electric vehicles, there has been no substantial narrative of the fourth life space for cars, no functional generalization similar to the intelligent process of mobile phones, because users still see it as a means of transportation. Therefore, it has not opened up the ceiling of approximately 20 million annual car sales in China, and it has almost entirely followed the logic of stock replacement.

The realization of existing vehicles, whether it is the in-car entertainment system focusing on traffic flow or the SaaS nature of intelligent driving software, seems to be a long way from implementation at the moment (refer to Dolphin's previous analysis "FSD Intelligent Driving: Can't Support Tesla's Next Valuation Miracle"). In addition to intelligent driving itself, the operation of autonomous driving fleets involves a multi-party internet business involving robot drivers (intelligent driving), vehicles, users, and platforms. Scaling this up may take even longer than the distance covered by smart driving (Dolphin will soon provide insights on the business of autonomous driving rental cars, so stay tuned).

II. After the beta-driven hype, where does the core competitiveness of new energy vehicles lie?

Therefore, when various stories only reach the iteration from fuel to electric vehicle propulsion, it is necessary to return to a fundamental question about car manufacturing itself: Does the car manufacturing business have barriers to entry, and are they weak or strong? Dolphin has already provided its judgment on this issue in "Tesla: How Far is Musk's Trillion-Dollar Empire Dream?": "Although there are barriers to entry in the electric vehicle manufacturing business, they are weak."

When there is a lack of core barriers (such as ASML's technological generation gap of more than ten years, or the ecosystem loop of internet businesses like Apple), it reverts back to being a relatively ordinary brand-oriented manufacturing business with weaker barriers. However, even though they are weak, in Dolphin's view, the main points are:

a. Mass Market - The cost scale effect under extreme sales volume forms a positive cycle of price and cost, with the soul essence of this barrier being the extreme cost effect under vertical integration. BYD (for related analysis, see "BYD: The Final Battle!"), Geely, and other players are followers in this race track;

b. High-end Market - Strong brand appeal (such as Huawei, Tesla), strong marketing operations (Huawei, Xiaomi, Li Auto), strong channels (Huawei, Xiaomi, etc.), while maintaining a certain product differentiation (such as Li Auto) for brand premium business; in this race, strong channel and brand capabilities like Huawei and Xiaomi have a high probability of catching up with latecomers.

c. In between these two, in the process of forming a stable endgame, apart from being able to succeed overseas, there may be players who are more inclined to follow along.

III. After two years of demand competition, where has the domestic new energy vehicle market reached?

3.1) Market becoming more fragmented

Looking at the latest financial reports from the second quarter, the overall capital investment in electric vehicles (excluding Tesla's additional capital expenditure in the direction of intelligence, including BYD, Nio, and Li Auto) has entered a comprehensive decline by 2024. Leading car companies, such as BYD, Tesla, have completed the capacity projects that have been invested in but are yet to be put into production. Apart from the structural adjustment of capacity brought about by the tariff wall for overseas exports, industry-wide capacity expansion has stopped.

However, by 2024, cross-border players have begun to officially release capacity, and the players in the Chinese new energy vehicle market have finally gathered around the table. Due to the entry of strong players onto the scene, the market share has not concentrated but instead decreased after two years of price wars:

Thus, the supply-demand situation in 2024 has become:

a. Supply side: Although there is no new production, the previously explosive industry and optimistic linear extrapolation have led to the gradual release of the under-construction capacity, resulting in an overall increase in market capacity.

b. Demand side: With no market expansion due to generalized functions, and only new energy vehicles based on stock replacement logic, even if the penetration rate continues to increase, its growth is inevitably slowing down.

The above supply-demand contradictions are mainly reflected in these two charts:

a. Upward trend of new vehicle launches vs. downward trend of sales growth rate

b. Ambitious target sales vs. industry growth rate

3.2) "Bankruptcy-style" Valuation with "Life-saving" Price Reduction

Moreover, in the deflationary price war process, the entire industry is facing valuation slaughter. Especially among the listed new energy vehicle companies, although they have been losing money year after year, due to financing activities during the high valuation period and continuous financing channels thereafter, they are not just facing bankruptcy but have already moved away from bankruptcy-style valuations during this year's decline, with companies like Nio and XPeng seeing their PS valuations fluctuate below one time

The pressure on the front end caused by the valuation toe-cutting and financing difficulties in the automotive industry is reflected in the "life-saving" price reduction, such as the ideal L6, Nio's Joy, XPeng's Mona, and the price wars of major car companies.

Why is it called a life-saving price reduction? Because in order to survive, the top priority is not to maintain gross profit margin, but to ensure that cash flow remains unbroken. This cash flow does not come from gross profit margin, but when selling at low prices to increase sales volume, there is at least hope to generate positive operating cash flow through accounts payable to suppliers.

In this stage of the automotive industry, it is not even as good as the smartphone industry in 2015, at least the trend of concentration of leading companies can be seen. It is still very difficult for Dolphin to determine who the ultimate players and long-distance runners are in a situation where barriers are unclear and potential players are just emerging.

IV. How to view investment opportunities in new energy vehicles?

In this competitive stage where the leading positions have not been clarified, it is actually difficult to choose companies with strong valuation and performance certainty from a stock perspective. For the new energy vehicle sector, the investment logic at the individual stock level has also become:

a. Try to choose companies that have hope to stay on the table, such as BYD, Tesla, etc., but must consider the company's own products, input-output, and operating cycles to provide sufficient safety margins.

b. For companies that are unclear whether they can stay on the table in the endgame, only when the market gives a bankruptcy-style valuation, and it is difficult to go bankrupt for a certain period of time with sufficient cash reserves, look for opportunities for marginal reversal and exit when the profit is almost made.

Of course, for the second type of company, this may be like trying to get a chestnut from the fire for those who don't really understand, and for those who track closely, it can also be considered as realizing excess cognition, requiring a higher level of difficulty and courage.

However, compared to other end consumer goods companies, the new energy vehicle industry still benefits from the logic of increasing penetration to some extent. The industry still maintains a growth rate of around 30%, and structural opportunities may drive some individual stocks to achieve high growth. The logic is stronger than industries like e-commerce where the beta dividend is completely lost and has become fully cyclical, but the leading competition is intensifying in a completely zero-sum game industry.

Therefore, in the future, Dolphin will continue to try to find some structural opportunities within the 30% industry sales growth.

V. Establishing a Cognition: Penetration Opportunities Lie in Hybrid

The reason why Dolphin Jun says so is that from the current penetration challenges in various price ranges, the opportunities for new energy vehicle penetration, competition intensity, and market size are relatively large, mainly in two major price ranges: a) 50,000-200,000; b) 300,000 and above. To truly increase penetration rate, the key lies in the price range of 100,000-150,000, which contributes to a significant portion of the entire passenger car sales volume. And it is in this price range that Dolphin Jun's penetration rate increase is most likely dependent on hybrids.

Why is this so? Moving from the ultra-small commuter vehicles priced at around 50-60,000 to the most popular price range of 100,000-150,000, car manufacturers will almost encounter the group that is most sensitive to price and has the most stringent requirements for vehicle convenience. The core demands are reliable range and affordable price. However, for pure electric vehicles, there are two directions to ensure reliable range:

1) Increasing battery capacity, is it feasible? The answer is very difficult

To increase battery capacity within this price range, the essence is to reduce battery costs. Analyzing the price reduction of pure electric models for the mass market by Dolphin Jun, from the end of 2022 to the end of May 2024, the price reduction of pure electric models is approximately 26,000 yuan. However, looking at the battery cost side, based on an average battery capacity of 56kWh for pure electric vehicles, the cost reduction on the battery side reaches 27,000 yuan, essentially offsetting the impact of the price reduction at the end.

This also means that from 2023 to the end of May 2024, the price reduction of pure electric models for the mass market is basically achieved through the cost reduction on the battery side.

However, in terms of reducing battery costs, the price of raw material lithium carbonate has basically stabilized around 100,000 yuan/ton in 2024. The reduction in battery costs through raw materials has almost reached its limit this year, and the room for further price reduction is limited for pure electric models in this price range, which, without a similar vertical integration model like BYD, still leads to thin profit margins and overall gross margins remain in a "deep loss state". There is little room left for further price reductions this year.

Even considering an extreme scenario where lithium carbonate reaches an ultimate low of 50,000 yuan/ton (almost the lowest value in the history of lithium carbonate), and calculating based on the previous settlement price of 150,000-200,000 yuan/ton for lithium carbonate, with an average battery capacity of 56kWh in this price range, the space left for the ultimate cost reduction of pure electric models is only 0.4-0.7 thousand yuan, which is less than the price difference between the pure electric version and the extended-range version, indicating that the price difference issue will still exist.

Moreover, it is even more challenging to reduce costs through battery technology innovation, as current batteries are mainly focused on minor improvements in structure and assembly, with no visible material innovations, and technological innovation is basically stagnant in the short term.

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2) Fast charging to supplement, is it possible? At least not feasible in the short term

In fact, when the battery life cannot be extended, there are two solutions, fast charging and battery swapping.

Due to the difficulty in standardizing battery swapping and the need for heavy asset investment, currently only a few high-end pure electric brands like Nio are doing it, with a limited number of battery swapping stations and no specific models priced between 50,000 to 150,000 yuan;

While models equipped with 800V fast charging have seen some price reductions this year, the lowest starting price can still only go down to the 150,000 to 200,000 yuan price range (Leapmotor C16 pure electric starting price at 161,800 yuan).

Unless there is a major breakthrough in battery technology - significantly improving range without increasing battery costs, or if 800V fast charging can continue to drop to below 150,000 yuan to address range anxiety.

Looking at the relative advantages of hybrids in this price range:

1. Hybrids have a price advantage

Comparing the price difference between hybrid and pure electric versions of the same model, hybrid models are generally priced 3,000 to 40,000 yuan lower than pure electric models.

From the perspective of consumers' concern for the starting price, taking the hybrid leader BYD as an example, the price difference between BYD's hybrid and pure electric models has expanded from 10,000 to 30,000 yuan last year to 10,000 to 40,000 yuan in 2024, with the most popular hybrid model Qinplus Dmi in 2024 having a starting price difference of 30,000 yuan!

The core reason for the price difference is that hybrid models have lower battery capacity, cheaper batteries, but users in this price range have higher demands for cost-effectiveness, making plug-in hybrid models a more cost-effective choice in terms of purchasing costs compared to pure electric models.

2. No range anxiety

Looking at the pure electric models currently available in the 50,000 to 150,000 yuan market, the average range of pure electric models is only around 400-500 km, while plug-in hybrids can achieve a comprehensive range of over 1000 km, showing that pure electric models have a natural "bug" in terms of range.

Moreover, the core users who choose models in the 50,000 to 150,000 yuan price range mostly reside in lower-tier cities with inadequate charging facilities, which presents a significant shortcoming in terms of charging convenience and higher requirements for range.

The combination of factors 1) & 2) also leads to the demand side perspective, where in the same price range, pure electric models are significantly lower than hybrid models that have already brought prices down to 50,000 to 150,000 yuan in terms of comprehensive range and space (due to the high cost of pure electric batteries, making it difficult to further reduce prices, resulting in pure electric A0-class models and hybrid A-B-class models being in the same price range).

Car companies located in this price range have also realized the dual dividends of sales volume and gross profit in the plug-in hybrid market. They have begun to enter the plug-in hybrid field, and have started to launch extended-range/plug-in hybrid models one after another in early 2023. The current players in the plug-in hybrid market in this price range are mainly BYD, Changan, Geely, and Leapmotor.

However, in terms of competition among plug-in hybrid brands positioned in this price range, the core competition lies in cost scale effects. Only car companies that can provide lower prices on the same product performance dimension externally, and have high management efficiency internally, can win in the "plug-in hybrid market share battle". Therefore, continuing the analysis of BYD by Dolphin Jun in the past, the core strong target is still BYD, observing its penetration opportunities under the positive cycle of vertical integration cost and scale advantages.

5.2) Over 300,000 RMB: Brand + Marketing High-end Strategy

Compared to the hardcore requirements for cost and scale effects below 200,000 RMB, the core feature of the high-end market above 300,000 RMB is that there are not many sales, but there is a lot of profit. The core is to build consumer brand awareness. If successful, it can even move downward in price bands for a dimensionality reduction attack (such as Huawei's Honor brand). The path is more long-term.

Because improving product pricing ability and converting BBA customers actually require both product strength and brand strength (differentiated product positioning + brand awareness). For example, the oversized product definition of Li Auto, the brand and channel parasitic relationship with Huawei, and intelligent driving, Nio's high-quality service. They all want to raise prices, but currently, it seems too difficult for the brand to move up, whether it's BYD or XPeng's attempts, they have basically ended in failure.

Also, due to the soft threshold of brand awareness, the plug-in hybrid brands that have stabilized in this price range are only Aito, Li Auto, Xpeng P7, with a relatively stable landscape. As for high-end pure electric vehicles, with the sinking of brands and models, currently only Nio remains, and the competition is less intense compared to the 200,000-300,000 RMB price range.

Therefore, Dolphin Jun focuses on the opportunities for these companies in:

a. The changes in market share of these companies in the high-end car market itself;

b. With the market share in the current high-end market already exceeding 40%, and the diminishing penetration space, can the downward shift in price bands by these high-end car companies bring marginal increments?

Due to the relatively stable structure of the high-end new energy vehicle market itself, Dolphin Jun believes that there is still a high possibility of opportunities emerging in 2025. However, compared to the high-growth opportunities in 2024, Dolphin Jun is more concerned about the opportunities for high-end cars to lower prices through new brands and new product categories.

For example, can Nio's Leda have an explosive impact? Can Li Auto inject new vitality into itself through pure electric vehicles? Can Aito's products in the lower price range become popular?

In other price ranges, such as the 150,000-200,000 price range, there may be some opportunities for pure electric vehicles, mainly because the incremental supply of models this year is not as large. At the same time, some models with full-range 800v fast charging have entered this price range.

However, in the 200,000-300,000 price range, Tesla used to dominate. The penetration rate is relatively high, and it is also the most competitive. This is because full-range 800v+ standard smart driving products are concentrated in this area, new car sales account for a high proportion, and the price reduction of high-end brands will also first sink to this price range.

The only opportunity may be when Tesla's models become outdated, allowing new domestic brands to eat into Tesla's market share. However, due to Tesla's strong price anchoring effect in this price range, it is difficult to have a pricing advantage. The only way is to offer better configurations at the same price, which means adding more features.

Previously, adding more features included cost reductions (such as battery cost reductions), but the cost reduction at the battery end has basically ended this year. In the future, the cost of adding more features will correspond to real profit erosion.

In summary, in the structural investment opportunities in the 100,000-150,000 price range, the focus is on opportunities related to BYD. In the price range above 300,000, Dolphin Jun is more concerned about the reversal opportunities brought by extreme valuation + brand/price reduction.

Regarding the opportunities related to BYD, Dolphin Jun has already focused on them through individual stock analysis, so they will not be discussed in detail here. Next, Dolphin Jun will review the reversal opportunities for Nio in the new energy vehicle industry, so stay tuned