China stocks rallied this week after the country's central bank introduced new stimulus packages, following a similar move by the U.S. Federal Reserve. The central bank cut interest rates on existing mortgages and reduced the reserve requirement ratio for banks by 50 basis points, freeing up significant amounts of money for lending. These actions were supported by the government, which expressed its commitment to bolstering the economy and the stock market. This positive sentiment led to a surge in shares of China-based electric vehicle (EV) makers listed on U.S. exchanges.
As of Friday morning, XPeng (XPEV, Financial) saw its shares rise by 8.14% for the week, with the stock price reaching $12.62. Li Auto (LI) also experienced a significant increase.
U.S.-based steelmaker Cleveland-Cliffs (CLF) benefited as well, with its shares climbing. The connection here lies in China's role as the world's largest producer of steel. Increased domestic demand in China could lead to lower exports of Chinese steel, thereby supporting global steel prices, which have been declining.
China's announcement of a larger-than-expected stimulus package and its commitment to achieving a 5% annual growth target are positive indicators for global investors. XPeng (XPEV, Financial) and Li Auto (LI) are particular beneficiaries due to their expanding vehicle lineups and growing sales. XPeng, for instance, delivered over 77,000 EVs year-to-date through August, a 17% increase over the prior year. The company has just initiated deliveries of its Mona M03 sedan, a competitor to the Tesla Model 3.
Li Auto is also seeing growth, delivering over 20,000 vehicles in August, the third consecutive month it has exceeded that level. The company's focus on its L6 premium SUV has attracted young families, and additional stimulus could further boost sales.
XPeng Inc (XPEV, Financial) operates in the midrange to high-end segment of China's passenger vehicle market. The company has sold over 141,000 EVs in 2023, accounting for about 2% of China's passenger new energy vehicle market. Despite this growth, XPeng has a GF Value rating of "Possible Value Trap, Think Twice." The GF Value for XPeng is estimated at $20.72, indicating potential undervaluation. However, the financial metrics show some red flags: an Altman Z-score of 0.72 (distress zone), and a Beneish M-Score of 0.37 (possible manipulator). On the positive side, XPeng's operating margin is expanding, a favorable profitability indicator.
In summary, the stock movement in these companies is largely driven by China's aggressive economic measures, which are expected to boost both domestic and global demand.
