Sequential rebound: 2H26 outlook & 2Q26 earnings preview

Sequentialrebound:2H26 outlook&2Q26earnings preview We revise our full-year 2026 industry forecasts to reflect a weakerdomesticretail marketin1H26, more aggressive dealer-side destocking and strongerexport momentum than weexpected. While retail was soft on the subsidyshifts and macro uncertainties, we believe wholesale remains resilient,underpinned by a surge in exports. We view 1H26 as the cyclical bottom andproject a sequential rebound in 2H26, with export traction andupmarketshifts driving both volume and earnings quality. We expect 2Q26 results todiverge, as export-and mix-led names (Geely, BYD, Leapmotor, NIO) maybeat some investors’ expectations. We continue to favour OEMs with thestrongest global expansion and product premiumization, and we see policystimulus as an under-priced source of upside. China Auto Sector Ji SHI, CFA(852) 3761 8728shiji@cmbi.com.hk Wenjing DOU, CFA(852) 6939 4751douwenjing@cmbi.com.hk Austin Liang(852) 3900 0856austinliang@cmbi.com.hk Wholesale resilience despite retail weakness.We cut our 2026passenger-vehicle (PV)retailvolumeforecastby 11%to 20.65mn units(-11.2% YoY) butonlytrim our wholesale forecastby 0.7%to 30.77mnunits (+2.2% YoY). This divergence isprimarilyexplained by a boomingexport market, which we now projecttocontribute 10.36mn units(+75%YoY), more than a third of total wholesale volume. 1H26recap:macrodrag and subsidy shifts drive OEMs upmarketand overseas.Domestic retailvolumefell 19% YoYin 1H26,draggedby subsidyphase-out and macroheadwinds, with the sub-RMB200ksegmentand lower-tier cities bearing the brunt of the decline.Inresponse, OEMs aggressivelyexpandedlarger vehicles priced aboveRMB200k+ (which are less impacted by subsidy shifts) and overseasmarkets for margin protection. Upmarket positioning and strong newmodel cycles drove OEMs’ sales outperformancein Chinain 1H26,whereas incumbents with established distribution networks continue totop overseas markets. 2Q26 earningstodiverge. Product mix and overseas momentum willalso shape Chinese OEMs’ 2Q26 earnings as most players deliveredsequentialvolume growth. In our view, Geely, BYD, Leapmotor and NIOcould stand out for positive earnings surprise amid better model mixand/or greater overseas sales portion. Xpeng’s net loss may also narrowsignificantly QoQ while Li Auto may see wider net loss QoQ. Catalystsand top picks.We expect the domestic retail decline tomoderate in 2H26, as high base effect eases.We view new stimulusmeasures as possible and a meaningful positive catalyst for share pricesgiven the current bearish market positioning.For stock selection,westillfavour bottom-up selection and range-trading over a top-down call onindustry volume. We preferGeelyamong OEMs andHorizon Roboticsamong auto parts. Related Reports:“China Auto Sector-2026 Outlook: Second halfof the NEV match”-5 Dec2025 “China Auto Sector-Weak 4Q25 sales mayleadto earning miss”-21Jan 2026 Contents 2H26 Industry Outlook: ExportsUnderpin Resilience; WholesaleVolume’s Sequential Rebound Likely....................................................3Lowering retail estimates on 1H weakness, exports anchor wholesale growth....3Subsidy phase-out, macro softness as key drivers behind 1H26 retail weakness41H26 Exports: Europe’s surge, Geely’s acceleration..............................................82H26 outlook and catalysts....................................................................................10Chinese OEMs: 2Q26E Earnings Preview & 2H26E Outlook..............12Geely: Core net profit to grow QoQ; accelerating European localization............12BYD: Strong sequential earnings rebound............................................................13Leapmotor: All-time high sales volume in 2Q26 may lead to record-high revenueand net profit...........................................................................................................14NIO: Approaching breakeven in 2H26....................................................................15Xpeng: Net loss to narrow sharply on new-model ramp-up.................................16Li Auto: Net loss likely to extend into 2Q26...........................................................16Great Wall Motor: Core net profit flat YoY.............................................................17GAC Group: Profit alert flags a wider loss............................................................18 2H26 Industry Outlook:Exports Underpin Resilience;Wholesale Volume’sSequential ReboundLikely Lowering retailestimates on 1H weakness, exports anchor wholesalegrowth Wecut our2026PV retail forecastby 11%to 20.65mn units (-11.2% YoY)to factor in theweaker retail sales volume and greater inventory cuts at dealers in 1H26 than we expected.However, ourdownwardrevision tothewholesaleforecastis far milder.We project2026PV wholesale volume to rise 2.2% YoY to 30.77mn units(vs. prior +2.9% YoY),asthe retailshortfallin 1H26 wasoffsetbystronger-than-expectedexports. Having underestimated the