中国汽车：中期展望面临更艰难的对比基数；比亚迪和小米仍是我们最看好的跑赢大市选股

China Autos: Mid-year outlook confronts tougher comps; BYD andXiaomi remain our top Outperform picks Chinese auto demand surpasses expectations amid strong subsidy support, faceschallenging comparisons ahead.Chinese auto demand has exceeded expectations year-to-date but is heading into tougher comparisons, especially from September onwards.We attribute the strong demand in 2025 primarily to government subsidies, as well as thelaunch of competitively-priced products, particularly EVs. However, this subsidy-fueledmomentum began in September 2024 and is now approaching its one-year mark. Eunice Lee, CFA+852 2123 2606eunice.lee@bernsteinsg.com Mika Fu+852 2166 4805mika.fu@bernsteinsg.com Subsidy-fueled growth has its limitations.Looking ahead to 2026, our base caseassumes that trade-in subsidies will not be extended. Historically, subsidy schemes haveonly been extended once, and the industry already saw an extension in January 2025. Evenif subsidies are extended again, their impact is likely to diminish due to consumer fatigue.The industry’s recent surge has been fueled by pull-forward demand, and there is a naturallimit to growth driven by subsidies. Coupled with strong stock performance year-to-date,investor sentiment has softened and may remain subdued in the near term, except aroundkey product launches that could serve as catalysts. Frankie Fong+852 2123 2637frankie.fong@bernsteinsg.com Government’s attempt guidance to curb overly aggressive competition — termed“anti-involution” — remains directional rather than prescriptive, in our view. Competitive pressure remains heightened for OEMs given the supply-demand imbalance.That said, OEMs are moderating their strategies somewhat; for e.g., instead of directprice cuts, they are launching facelifts with upgraded specs and trims but minimal pricingchanges. They are also introducing new models with competitive pricing and offeringfinancing perks such as zero down payment and zero interest rates, as well as otherincentives like free charging. Along the value chain, suppliers stand most to benefit from thetone shift towards “anti-involution”, as all OEMs have announced a shift to 60-day paymentterms, improving from the previous 4-6 month terms. Lifting our 2025 forecast for China passenger vehicle wholesales to c.29.5mn units(Old: 28 mn), +8% yoy, with 24mn for domestic and 5.5mn for exports.In 2025 1H,passenger vehicle wholesale volumes grew 13% yoy, exceeding forecasts. While 2H willbring tougher comparisons, volumes remain supported by subsidies.We have also raisedour EV wholesale forecast to 16mn units(Old: 15mn), reflecting strong domesticdemand of 14mn (+30% yoy, implying 57% domestic EV penetration) and exports of2mn (+60% yoy).Despite EV penetration nearing 50%, we remain optimistic on continuedadoption, as EVs are now generally priced below ICE vehicles, making them an increasinglyattractive choice for Chinese consumers. In 2025 1H, China’s EV wholesale grew 39% yoy,with domestic demand up 31% (BEVs +38%, PHEVs +22%) and exports surging 70%. BYD and Xiaomi remain our top Outperform picks.We maintain an Outperform ratingon BYD, with strong overseas EV performance offsetting domestic market pressures, androbust battery sales to key clients like XPeng and Xiaomi. We are optimistic about Xiaomi’slong-term EV potential following the YU7 launch, despite near-term capacity limits, andpositive on its IoT expansion in China and internationally, while noting increased competitionin the domestic large home appliance market. BERNSTEIN TICKER TABLE INVESTMENT IMPLICATIONS We hold a cautious view of the sector. China’s auto sales in 2025 1H have trended above expectations, which was boostedby the revamped trade-in policy and local government subsidies, accelerated new product launches, and increased OEMpromotions. Policy support could help sustain stronger demand through the rest of 2025, though year-on-year comparisonswill become more difficult from late Q3. We also expect exports will continue to be a growth driver, albeit at a more moderategrowth rate than previous years. We forecast industry wholesale volumes to grow by 8% and reach c.29.5mn units in 2025,comprising c.24mn units (+7% yoy) for the domestic market and c.5.5mn units (+10% yoy) for exports. The long term secular growth outlook for EVs remains intact and even though EV transition has come to the mass adoptionphase in China, we forecast EV sales growth will be c.30% for 2025 and drive EV penetration to 57%. We expect competitionwithin the domestic market to remain intense and put pressure on pricing and profitability. Meanwhile, overseas markets willcontinue to present a strategic growth opportunity. For our EV names, we rateBYD, Xiaomi, and Li Auto Outperform, andXPeng and NIO Market-Perform. Within our traditional Chinese OEMs coverage, we rateGeely OutperformandGreat Wall,GAC, and SAIC Market-Perform. Model updates and price target changes in this report: BYD:We rate BYD Outperform with p