CMB International released a research report stating that China's passenger vehicle retail and wholesale sales are expected to hit record highs in 2025, surpassing market expectations from late last year. By 2026, with the phase-out of "trade-in" subsidies and purchase tax incentives, the auto industry may face a more complex landscape. Instead of focusing solely on potential sales slowdown concerns, investors should pay closer attention to intensifying competition and battery price risks in China's auto sector. GEELY AUTO (00175) is the top pick in the auto sector, backed by solid fundamentals and attractive valuations. CMB International's key views are as follows:
**Auto Industry Resilience May Outperform Market Expectations** Despite reduced replacement subsidies and halved NEV purchase tax incentives, the firm expects China's passenger vehicle retail sales in 2026 to remain flat year-on-year, while wholesale volumes may grow 2.9% YoY, supported by export growth. Contrary to most investors' cautious outlook, CMB International holds a more optimistic view on China's auto sales resilience and does not rule out potential new stimulus policies if sales weaken in H1 2026.
Driven by a wave of new models, China's NEV retail sales are projected to rise 15.5% YoY to 14.93 million units in 2026, with market share climbing to 61.8%. NEV wholesale volumes may grow 18.5% YoY to 18.5 million units (59.2% market share), fueled by sustained strong export growth (+40% YoY), which will also boost overseas NEV adoption.
**2026 Industry Trends: Escalating Competition, PHEV Comeback, Battery Price Surge** With a record number of new model launches expected in 2026, competition in China's auto sector will intensify. Aggressive pricing strategies adopted by some automakers may prompt broader industry follow-through, while brand loyalty among Chinese consumers continues to weaken amid a focus on value-for-money.
Chinese brands are likely to further expand market share, though foreign automakers will ramp up localized NEV offerings, potentially introducing more competitive models. Meanwhile, improved supply-demand dynamics for energy storage batteries could drive price hikes in 2026, squeezing automaker margins. Additionally, as trade-in subsidies taper off, PHEV model launches accelerate, and battery costs potentially rise, PHEVs may regain growth momentum in 2026.
**NEV Competition Enters Second Half in 2026** Three factors signal this shift: 1) Valuation premiums for EV startups vs. traditional automakers may narrow; 2) Competition will extend beyond vehicle manufacturing into AI (e.g., Robotaxi and robotics); 3) Foreign brands will accelerate NEV rollouts with deeper understanding of the Chinese market.
With winners yet to emerge, range-trading and contrarian strategies may prove optimal in 2026.
**Investment Recommendations** **Auto Sector Top Pick: GEELY AUTO (00175)** – Strong fundamentals and attractive valuation. Its NEV lineup has room for expansion, with new models likely driving sustained sales growth in 2026. High-margin models launched in H2 2025 and accelerated NEV exports could boost profitability.
**Battery Sector Focus: ZENERGY (03677)** – The lithium battery newcomer completed its HKEX IPO in April 2025, with investment value yet to be fully recognized. Leveraging operational efficiency and a lean structure, ZENERGY boasts industry-leading margins. Customer mix optimization (deepened partnerships with GAC-Toyota, Volkswagen, and SAIC) may further lift margins, while potential battery price hikes could provide additional upside.
Comments