Why Li Auto gathered today

Shares of the Chinese electric vehicle manufacturer Li Auto (LI 4.58%) rose as much as 5.1% on Monday before reverting to a 4.1% gain as of 1:49 p.m. ET.

While there hasn’t been much company-specific news, today we saw a new report from Bloomberg New Energy Finance that suggests China may substantially increase subsidies for its “cash for clunkers” program. This has the potential to spur more new EV sales in China this year and has helped boost all Chinese EV stocks, especially the Li.

China will pay you to switch your gas guzzler to green electric vehicles

Since April, China has instituted a “cash for clunkers” subsidy program where citizens can trade in their less efficient internal combustion engine (ICE) vehicle for a subsidy on either an electric vehicle or a more efficient ICE vehicle. Then in July, China announced it would double the subsidy for electric vehicles to 20,000 yuan, but declined to give details on how much the government would spend in total.

In a report on Monday, BloombergNEF analyst Siyi Mi suggested the new subsidies could target an additional 1.1 million EVs, doubling the total amount of the original subsidy. This doubling would obviously be a huge deal for China’s electric vehicle manufacturers, with the potential to boost China’s electric vehicle sales by around $26 billion in 2024, given an average price of just over 25,000 dollars per electric vehicle in China.

Li has grown its sales strongly over the past year, but shipments in the first quarter slowed significantly from previous growth rates in previous quarters. Moreover, on the latest earnings call, Li noted that its April shipments — the first month of the yet-to-be-reported second quarter — rose just 0.4 percent.

But this month, the company announced 51,000 shipments in July, a new monthly shipment record and a 49.4% increase over the previous month. That could mean new subsidies worked in re-accelerating Li sales. So a doubling of subsidies could mean more good news ahead. With the stock down more than 48% over the past year, it’s no wonder the news sent Li’s stock back in the right direction.

Li Auto is still a risky proposition

While Li’s sales apparently picked up again in July, investors should note that its margins have fallen amid a fierce price war among electric vehicle makers in China — and indeed around the world. In fact, Li’s bottom line swung from profits to operating losses in the first quarter, despite a 52.9% increase in shipments.

Inflation, higher interest rates, tariffs that limit Chinese OEMs’ sales to other countries, and other economic concerns have created somewhat of a perfect storm for the EV industry. So seeing China step up its subsidy program is a good thing for all OEMs in China, where EV adoption is higher than in the US.

Still, in theory, he would like to see the industry able to operate profitably without the need for subsidies. While battery electric vehicles are likely the future, the road to that future will be bumpy, and it’s hard to know how much there will be to do in the name of automaker profits.