China Merchants Securities International (CMSI) has released a research report stating that domestic automotive demand is expected to see a moderate improvement in the second half of the year. By 2027, the sector is anticipated to transition from a pattern of weak domestic demand and strong exports to one of stable domestic demand alongside robust exports. The pessimistic market expectations regarding the demand pull-forward effect this year are already reflected in stock prices, presenting what is currently viewed as the optimal two-year investment entry point.
The report highlights a focus on leaders in both the domestic market and overseas expansion. It names GEELY AUTO (HKEX: 00175) as its top pick, recommends BYD COMPANY (HKEX: 01211), and suggests monitoring XPENG-W (HKEX: 09868).
The report indicates that the impact of policy-driven demand pull-forward in 2024 was concentrated in the first half. The year-on-year decline in domestic demand is projected to narrow significantly to around 10% in the second half, with the industry expected to see a bottoming out and a mild recovery driven by policy support. The recent introduction of four key policies in quick succession aims to regulate industry order and promote structural upgrades. While these policies are unlikely to reverse the overall industry trend, they are seen as providing a supportive floor.
CMSI expresses a relatively optimistic outlook for the industry in 2027, viewing the current period as a buying zone within a two-year trough. On the domestic demand front, the pull-forward effect has dissipated, and industry growth is returning to a stable, upward trajectory. Regarding overseas expansion, judging from the strategic moves of leading companies like BYD COMPANY and GEELY AUTO, high growth is expected to continue next year as localized production accelerates and product line introductions increase.
The current market pessimism concerning the first-half demand pull-forward is considered to be fully priced in. From a two-year cyclical perspective, the industry is at its lowest point, which also represents the best timing for medium- to long-term positioning.
For automakers, CMSI's primary recommendation is GEELY AUTO. Recent focus has been on the company's production capacity cooperation with Volvo and Ford in Europe, marking a crucial step in its European localization strategy. Its June exports exceeded 100,000 vehicles, driven by brands like Zeekr and Lynk & Co, improving its new energy and premium vehicle mix. The firm also recommends BYD COMPANY, citing its ultra-fast charging strategy as strengthening its domestic market foundation, with overseas factory capacity ramping up from the second quarter. Exports are maintaining over 40% of its mix, plug-in hybrid sales are showing strong recovery, and there is seen to be further upside potential in its overseas and premium brand segments. For the medium to long term, CMSI suggests monitoring XPENG-W, as three new model launches in the second half are expected to boost sales recovery, while its Robotaxi and robotics initiatives could provide AI-related valuation upside.
For auto parts suppliers, CMSI continues to focus on companies with high overseas revenue exposure, clear average selling price (ASP) increases, or new business expansion in areas like autonomous driving and connectivity. Specific companies mentioned are MINTH GROUP (HKEX: 00425), FUYAO GLASS (HKEX: 03606), and WEICHAI POWER (HKEX: 02338).
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