China Auto – Domestic Weakness and External Headwinds Weigh on Export Profitability

China’s passenger vehicle market remained split in 3Q26, with domestic retail sales falling 22.8% YoY while exports surged 81.3%, becoming the industry’s key growth driver. Despite NEV penetration reaching 64.8%, domestic NEV sales declined 11.6%, as ICE vehicles sales contracted sharply rather than an overall market expansion. It is expected that exports are to remain strong, supported by Chinese automakers’ product and pricing competitiveness, although lower export tax rebates and rising trade barriers may reduce incremental profitability. Given weak domestic demand and growing overseas policy risks, we remain cautious on the sector, with a relative preference for BYD’s European localization strategy.

Domestic NEV Penetration Gained on Shrinking Domestic Market: In terms of total passenger vehicle volume, domestic retail segment fell 22.8% YoY to 4.6m units in 3Q26, following declines of 16.9% in 1Q26 and 19.7% in 2Q26. However, wholesale volume fell only 4.4% YoY, supported by strong exports. Domestic NEV retail sales declined 11.6% to 2.97m units, despite penetration rising 8.3ppts to 64.8%, primarily due to a steeper decline in ICE sales.

Export Market Faces Rising Policy Risks: Passenger vehicle exports rose 81.3% YoY to 2.72m units, including 1.62m NEVs (+157.3%), accounting for nearly 60% of exports. Customs data showed exports to Europe excluding the UK at 560k units (+92% YoY), the UK at 166k (+95% YoY), Latin America at 484k (+66% YoY), Russia at 295k (+74% YoY) and the Middle East at 431k (+2% YoY), reflecting regional divergence. As domestic demand weakens and price competition intensifies, exports have become a key source of incremental revenue and profit. However, Europe, a market with relatively high ASPs and profit, faces increasing trade restrictions. Beyond existing anti-subsidy tariffs on Chinese BEVs, potential EU quotas on hybrid imports could constrain growth. China’s planned reduction in NEV export VAT rebates from 13% to 9% starting April 2027 may bring forward shipments in the near term but increase costs and pressure per-vehicle profitability thereafter.

Against this backdrop, we compare BYD, Geely Auto and Great Wall Motor (GWM) to assess how product mix, overseas exposure and cost efficiency shaped their 3Q26 performance.

Overseas Growth Drives Revenue Divergence: All three automakers relied on exports to offset domestic weakness. BYD led in overall volume growth, supported by relatively resilient domestic sales and rapid overseas expansion, with revenue growth mainly volume-driven. Geely recorded the fastest overseas volume growth, while premium brand Zeekr’s share of total sales doubled from 7% in 3Q25 to 14% in 3Q26, lifting revenue per vehicle and delivering both volume and ASP growth. In contrast, GWM avoided aggressive discounts to protect its brand positioning and pricing, but weaker domestic demand and competitor promotions weighed on sales. Overseas growth was insufficient to offset lower domestic volumes and revenue per vehicle, resulting in revenue contraction.

Cost Efficiency and Product Mix Drive Gross Profit: BYD’s vertical integration and scale helped reduce cost per vehicle by 4% YoY, exceeding the 3% decline in revenue per vehicle and improving gross profit per vehicle. Geely benefited from a higher premium vehicle mix, with revenue per vehicle outpacing cost growth and lifting gross profit per vehicle by 13%, outperforming peers. In contrast, GWM’s revenue per vehicle fell 1% while costs rose 1%, reducing gross profit per vehicle by 7%, as pricing discipline failed to offset changes in sales mix and cost pressures. Nevertheless, gross profit per vehicle declined QoQ across all three companies, indicating continued near-term pressure.

Expense Control and Overseas Factors Drive Earnings Divergence: BYD and Geely reported net profit growth of 40% and 27% YoY, respectively, both exceeding revenue growth despite FX losses. BYD’s lower G&A and R&D expenses and improved finance costs offset part of the sequential gross profit pressure, keeping net profit per vehicle broadly stable QoQ. Geely recorded a smaller sequential decline in gross profit per vehicle, but FX losses and other operating expenses drove a 14% QoQ decline in net profit per vehicle. GWM’s earnings fell sharply amid weak demand and margin pressure, compounded by FX volatility and delayed Russian vehicle recycling-fee compensation. The company recognized RMB2.27bn of related compensation in 1H25 but none in 1H26, creating a significant YoY earnings gap. Net profit fell 41% YoY in 3Q26 and 56% in 9M26, although the Mgt remains confident in eventual recovery. Overall, Geely benefited from premiumization, BYD demonstrated cost-driven earnings resilience, while GWM lagged amid demand and cost pressures.

Our View: We remain cautious on China’s auto sector. Lower lithium carbonate prices should reduce battery procurement costs, while relatively stable copper and aluminum prices may support a modest gross margin recovery in 4Q26. However, weak domestic demand and intense price competition are unlikely to reverse, with domestic passenger vehicle sales expected to decline slightly in 2027, leaving exports as the main earnings growth driver.

We expect exports to remain strong given Chinese automakers’ product and pricing competitiveness, but lower NEV export rebates may reduce profit per vehicle. Moreover, potential EU quotas on Chinese hybrid imports could cap volume growth. Under a proposed annual quota scenario of 350k units, versus projected exports exceeding 750k units this year, growth in Europe could face significant constraints. Given exports’ increasing contribution to earnings, these policies may weigh on sector profitability.

We like BYD in this sector, whose early investment in European manufacturing reduces its reliance on direct exports from China. Combined with vertical integration and cost advantages, this provides greater flexibility against rising trade barriers. As overseas competition increasingly depends on market access and localized production alongside product and pricing competitiveness, BYD appears better positioned than peers to protect overseas market share and earnings resilience. The counter is trading at 16x FY26E P/E and 13x FY27E P/E. (Research Department)