China's New Electric Vehicle Subsidies: Winners And Losers

On September 17th, the Chinese Ministry of Finance announced the long anticipated renewal of China's New Energy Vehicle (i.e. electric vehicle or EV) subsidies.  The new subsidies for cars were in-line with market expectations, but will be reduced to 10% below the current levels next year, and 20% below the current levels in 2015.  Subsidies for buses fell short of expectations.

Conventional gasoline-electric hybrid models were not included in the subsidies, but some plug-in hybrid (PHEV) were.  The subsidies amount to 60,000 ($9,802) yuan for pure electric autos with a range over 250 km (155 miles), and 50,000 yuan ($8,168) and 35,000 yuan ($5,718) for EVs with range over 150 km (93 mi) and 80 km (50 mi), respectively. A restriction on the subsidy for low-speed electric vehicles was removed.

Electric and Plug-in hybrid electric buses also received subsidies, depending on length.  For buses over 50 m in length, EVs will receive 500,000 yuan ($81,680), and PHEVs will receive 250,000 yuan ($40,840.)  shorter PHEV buses do not receive a subsidy, by EV buses over 8 m and 6 m will receive 400,000 and 300,000 yuan respectively.

Stock Winners

The big winners here seem to be manufacturers of Chinese low-speed electric vehicles, among which are Kandi Technologies (NASD:KNDI note:I am long this stock) and its joint-venture partner Geely Automotive (OTC:GELYY.)  Several other Chinese manufacturers of low speed electric vehicles such as Chery Automotive, Shandong Shifeng Group,  and Hebei Yu Jie Ma may benefit as well.

Losers

Makers of high-performance electric cars like Tesla Motors (NASD:TSLA) will benefit relatively less because, unlike in the US, the subsidies are based only on a vehicle's range, not on the size of its battery pack.   This should not significantly effect Tesla's prospects, however, since the company only recently started selling cars in China.

BYD Co (OTC:BYDDF Note: A hedge fund I co-manage is long BYD) has been falling, because, while it makes EVs, it also makes PHEVs, which received a lower than expected incentive.

Neither Winner Nor Loser

Surprisingly, Maxwell Technologies (NASD:MXWL Note: I am short MXWL) has been rallying.  Yesterday, I  assumed the rally was triggered by rumors that these subsidies included a subsidy for Chinese hybrid buses, which often account for over 50% of Maxwell's revenue.  I found comments to that effect on the message boards, including a mis-identification of the plug-in hybrid subsidy as a hybrid bus subsidy.  Today, it appears that it was triggered by a Piper Jaffray upgrade, a reversal of their downgrade in March following the resignation of Maxwell's auditor.  I have not yet seen the research note, but it cannot be based on the Chinese subsidies, given that these do not include Maxwell's customers.

I confirmed this with Mike Sund, Maxwell's head of investor relations yesterday.  He told me that this subsidy announcement does not include subsidies for Maxwell's hybrid bus customers.  Those customers expect a separate subsidy package later this month to include hybrid buses, which is what the company has been saying all along.

Maxwell's rally is even more surprising if we assume that the lower-than expected subsidies for PHEV buses and hybrid cars are an indicator of what the hybrid bus subsidies may be like.

UPDATE: Piper Jaffray reversed their upgrade today saying they had mis-interpreted the subsidies.  According to the fly on the wall:

This morning Piper Jaffray upgraded shares of of Maxwell to Overweight based on misinterpretation of data on China's new hybrid bus subsidy, and failed to note it was only for plug-in hybrids, which the company has immaterial exposure too. The analyst has changed its rating and price target back to Neutral and $8.

This makes the large upgrade unsurprising, since the subsidies for PHEV buses are much larger than anyone expects for hybrids (which are much less expensive than PHEVs.)

Conclusion

The biggest winners from this announcement will be Chinese manufacturers of low-speed electric vehicles, such as Kandi.  The biggest losers seem to be makers of higher powered EVs like BYD and Tesla, but the total impact seems limited.

This announcement should have little bearing on hybrid bus manufacturers and their suppliers like Maxwell Technologies, unless we assume that the slightly disappointing subsidies for plug-in hybrid buses are an indicator of what is to come for hybrid buses. I can only assume that the wild rally of Maxwell stock this morning is triggered not by fundamentals but by a short squeeze triggered by the Piper Jaffray upgrade and confusion about the Chinese subsidy announcement.

UPDATE: And it turns out analysts at Piper Jaffray were confused, too.  They reversed the upgrade this morning.  See above.

Disclosure: Short MXWL, Long KNDI, BYD.