(Bloomberg) -- A raft of earnings from China’s electric vehicle makers will be heavily scrutinized by investors seeking evidence on whether the sector’s stock price rally can be revived.  

Investors will parse reports from Nio Inc., XPeng Inc. and Li Auto Inc. for clues on whether margins are set to improve after months of pressure wrought by elevated raw material costs and supply chain disruptions. Valuations for the shares may be at risk if there are no signs of a recovery, according to fund managers. 

China’s EV makers are looking for a second wind as a months-long buying frenzy loses steam amid worries over high valuation and a slowing economic recovery. The shares may get a new lease on life if traders spot signs of profitability improving, especially as demand for cleaner cars is expected to climb to a record this year. 

“The nice trend will be their margins bottoming out and productions getting higher,” said Andy Wong, fund manager at LW Asset Management Advisors Ltd. “If their margins keep narrowing, indicating they will need longer time to become profitable, this could affect their valuations in the medium to long term.” 

Of the three EV makers, Li Auto is expected to report the highest gross profit margin at 21% in the second quarter, versus 22.6% in the previous three months, according to analysts’ estimates compiled by Bloomberg. XPeng’s margin probably shrank to 9.6% from 12.2% while Nio’s likely narrowed to 12.3% from 14.6%. All three are expected to have posted net losses in the three months through June. 

The auto manufacturers are wrestling with higher raw material costs after supply struggled to keep pace with a boom in demand. Runaway costs are fueling a “ridiculous” increase in the price of batteries for electric vehicles, Li Auto Chief Executive Officer Li Xiang had said in March.

Read: Chinese EV Maker Calls Raw Input Price Hikes ‘Ridiculous’ (1)

The pressure is especially pronounced for smaller manufacturers which have less economies of scale and limited bargaining power when dealing with suppliers, according to Qi Wang, chief executive officer of MegaTrust Investment.

“Investors are already selling” and “the Chinese EV sector is still trading at a pretty high valuation, against a backdrop of strong sales but not so strong earnings,” said Wang.

To be sure, some investors have been handsomely rewarded by betting on China’s EV market, which is the world’s largest. This includes Shenzhen Co-Power Capital Management Co. which is positioning for more gains on expectations that the sector will see higher valuation. 

EV stocks had jumped earlier as China unveiled policies to revive the auto industry after consumption dried up during the nation’s Covid lockdowns. Even though the rally faltered in July, the broader outlook for the sector is solid as it’s expected to be a key beneficiary of Beijing’s push to foster green energy and high-tech manufacturing.

New-energy vehicle sales rose 117% in July, according to the China Association of Automobile Manufacturers, while the China Passenger Car Association estimates EV purchases will hit a record 6 million this year. 

Li Auto is slated to report earnings after the close of market Monday, while XPeng will announce its profits on Aug. 23. Nio has yet to confirm a date.

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