UBS: Oil price fluctuations make the total cost of ownership for electric vehicles more attractive; BYD, CATL, and Li Auto shares

UBS releases a research report stating that some Chinese auto and new energy stocks are rallying today. Geely Auto (00175) shares jumped 8.5% to HKD 17.44, and CATL (03750) surged 7.5% to HKD 591. Currently, the US-Iran conflict is highly similar to the outbreak of the Russia-Ukraine war in 2022, which caused oil and lithium prices to soar. International oil prices and commodities are simultaneously driving up the costs of fuel vehicles and electric vehicle manufacturing. The bank maintains a “Buy” rating for BYD (01211), CATL, and Li Auto (02015), citing favorable risk-reward profiles.

According to the bank’s latest spot price estimates, compared to fall 2025, the costs to produce a battery electric vehicle (BEV), extended-range electric vehicle (EREV), plug-in hybrid electric vehicle (PHEV), and internal combustion engine (ICE) vehicle are expected to increase by approximately RMB 7,000, RMB 6,000, RMB 5,000, and RMB 3,000 respectively. If oil prices remain at current levels, annual operating costs for fuel vehicles could increase by about RMB 2,000. This slightly improves the economic competitiveness of electric vehicles relative to fuel vehicles, partially offsetting the pressure from policy withdrawals and new purchase taxes starting in 2026.

The bank notes that, compared to early 2022 when oil prices surged from $80 to $130 per barrel and retail gasoline prices in China rose from RMB 7.3 to RMB 9 per liter, current oil prices have risen from about $60 per barrel in February to a peak of $120 in March, then retreated to $90. If oil prices stay at this level, retail gasoline prices in China could rise again from RMB 7.5 to about RMB 9 per liter, meaning household fuel costs could increase by roughly RMB 2,000 annually. Since the manufacturing cost of a pure electric vehicle is about RMB 4,000 higher than that of a comparable internal combustion engine vehicle, this represents roughly two years of additional operating costs for fuel vehicles.

UBS states that compared to four years ago, several differences are notable: metal prices have increased more moderately than in the 2022 cycle; electric vehicle products have become significantly more competitive; and overseas sales have increased, helping to ease commodity cost pressures.

More importantly, from a total cost of ownership (TCO) perspective, the efficiency of the electric vehicle industry has greatly improved: lithium iron phosphate (LFP) battery prices have fallen below RMB 500 per kWh, about half of early 2022 levels; charging speeds have doubled; and the number of public charging stations in China has exceeded 300,000, roughly three times the number of gas stations, greatly enhancing convenience.

UBS points out that Chinese EV stocks have underperformed the Hang Seng Index by about 10% so far this year. The bank believes that weak demand in the first quarter has already been reflected in stock prices, and profit pressures from rising commodity prices have been partly digested by investors. Current oil price fluctuations make EVs more attractive from a total ownership cost perspective. If market expectations of inflation transmitted from commodity costs to vehicle prices materialize, demand could recover faster than investors anticipate, warranting renewed attention.