Over the weekend, electric vehicle companies Nio (NYSE:NIO), XPeng (NYSE:XPEV), and Li Auto (NASDAQ:LI) led a rally of Chinese EV stocks.
There is hope that China's zero-Covid policy is ending and the economy will see a big boost.
NIO has risen from $10 to almost $13, XPEV from $7 to over $11 per share, and LI stock has risen from $17 to $22.
XPEV stock is the strongest of the group but has seen the greatest gains, although it is still down 77% in 2022. NIO stock has fallen 62% while Li shares are down 25%.
China opening up?
Investors believe that China's Covid-19 lockdowns are starting to be eased, possibly permanently. This is why the rally in Chinese EV stocks is occurring. Morgan Stanley recently upgraded Chinese stocks to overweight.
The Yuan is also seeing a rally similar to Chinese EV stocks. In just one week, the Yuan has recovered three months worth of losses and is now at 6.96 against the dollar. This has a positive effect on the value earnings and sales in China.
The relief rally is good news for China bulls… but those who have been waiting for months are still suffering. Alibaba is now trading at just over $90. It was worth more that $300 when it was peak. JD.Com is now at $59 but was once worth $106. And Pinduoduo, which is now at $88, was once worth $195.
The Chinese EV manufacturers could face trouble if investors such as Canada's pension fund withdraw from the sector. Tesla is up only 10% from its Nov. 21st low. The rally was also limited to China, as other U.S. stocks opened lower on December 5.
What's next for Chinese EV stocks?
Chinese EV manufacturers must now justify their valuations by demonstrating strong growth. Despite record Nio deliveries in November, bears fear that the current rally may be exaggerated. A market cap of $22 Billion is not sustainable unless the Yuan sustains its rally and sales rises dramatically.
Originally published on InvestorPlace.com
On the date of publication, Dana Blankenhorn held a long position in BABA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
