Stronger-than-expected exports underpin China auto sales; BYD remains the sector top pick, and Xiaomi valuation is attractive

Overview

The report conducts a mid-year review of China's auto industry. Domestic demand is weaker than expectations at the beginning of the year, mainly affected by earlier demand pull-forward, a high base, subsidy reductions, purchase tax increases, macro pressure and weak consumer confidence; meanwhile, exports have significantly exceeded expectations, keeping industry wholesale sales resilient. The research lowers sales, earnings forecasts and target prices for BYD and Xiaomi, but maintains Outperform ratings on both.

Core views

At the industry level, domestic auto demand is expected to remain weak in 2026, while price competition and rising raw material costs will pressure profitability; exports are the most important growth engine. Within NEVs, the mix is shifting from plug-in hybrids toward battery electric vehicles, with long range, fast charging and policy support enhancing BEV competitiveness. At the company level, BYD is the sector top pick thanks to stabilizing domestic share, overseas expansion and its external battery supply business; Xiaomi faces near-term smartphone cost pressure and EV delivery execution risks, but valuation below historical levels provides some margin of safety.

Analysis framework

The report combines data on industry wholesale, domestic retail, exports, powertrain penetration and automaker market share to make top-down forecasts, then adjusts company sales and earnings-per-share forecasts based on model cycles, regional expansion, cost changes and segment earnings outlooks, and uses sum-of-the-parts valuation and one-year forward P/E to determine target prices.

Methodology notes

• valuation methodsum-of-the-parts valuation (SOTP)

  Company equity value is obtained by separately assessing and adding up the value of different business segments.

  Both BYD and Xiaomi use sum-of-the-parts valuation to reflect the different growth and valuation characteristics of businesses such as vehicles, batteries, smartphones, IoT and internet services.

• relative valuationone-year forward price-to-earnings ratio

  Measures valuation level using the P/E ratio corresponding to expected earnings over the next year.

  BYD's target price corresponds to around 20x one-year forward P/E, while Xiaomi's target price corresponds to around 25x one-year forward P/E; the report also compares Xiaomi's current valuation with its historical average and minus-one-standard-deviation level.

• industry forecastwholesale volume component forecast

  Splits industry sales into domestic demand and exports, and further distinguishes battery electric vehicles and plug-in hybrids.

  This method is used to identify the offsetting relationship between declining domestic demand and high export growth, and to assess the impact of changes in powertrain mix on automakers' sales and profitability.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• BYD (1211.HK / 002594.CH)

  A major beneficiary of China's new energy vehicle, power battery and energy storage businesses, and the report's top Outperform pick.

  Strengths

  Domestic NEV share has recovered and stabilized at around 23%, overseas growth is strong, fast-charging model deliveries are accelerating, and external power battery and energy storage businesses are growing rapidly.

  Weaknesses

  Weak domestic industry demand has led to lower sales and earnings forecasts, while plug-in hybrid demand is affected by policy changes.

  Comparison

  Compared with most Chinese automakers, BYD is more resilient thanks to higher overseas exposure and vertical integration capabilities.

  Risks

  Domestic price competition, rising raw material costs, RMB appreciation, overseas expansion execution and target price cut risks.

• Xiaomi (1810.HK)

  A growth stock covering smartphones, IoT, internet services and new energy vehicles.

  Strengths

  Rising NEV market share, product ecosystem synergies, long-term smartphone premiumization and potential future overseas auto expansion.

  Weaknesses

  Memory price increases pressure smartphone sales and gross margin, YU7 demand is weaker than expected, and the 2026 auto delivery target depends heavily on the ramp-up of new models.

  Comparison

  The current approximately 16x 2027E P/E is below the historical one-year forward P/E average of around 25x and also below the minus-one-standard-deviation level of 17x.

  Risks

  Extended memory cycle, further decline in handset sales, delays or weaker-than-expected ramp-up of new models, and auto deliveries below guidance.

• China auto industry

  Domestic demand is under pressure while exports maintain high growth, leading to a clear divergence between domestic and overseas performance.

  Strengths

  Chinese automakers continue to gain share in emerging markets, NEV export growth is significant, and BEV technology and price competitiveness are strengthening.

  Weaknesses

  Domestic demand is dragged down by subsidy roll-off, purchase tax increases, a high base and weak consumer confidence.

  Comparison

  Battery electric vehicles are outperforming plug-in hybrid electric vehicles; automakers with higher overseas exposure are relatively stronger.

  Risks

  Price wars, raw material price increases, FX volatility, export trade barriers and overseas logistics disruptions.

Key data

• 2026 China passenger vehicle wholesale volume29 million to 30 million unitsFlat to down 3% year-on-year.
• 2026 domestic retail demand20 million to 21 million unitsDown 11% to 13% year-on-year.
• 2026 auto exports8.5 million to 9 million unitsUp 40% to 50% year-on-year, the main source of industry growth.
• 2026 domestic NEV sales growth1% to 3%NEV penetration is expected to be around 62%.
• NEV sales in 1H264.6 million unitsDown 14.2% year-on-year; plug-in hybrids fell 27.2%, while battery electric vehicles fell 6.1%.
• China auto export growth in 1H2672%ICE vehicle exports grew 32%, and NEV exports grew 128%.
• BYD 2026 sales forecast4.9 million unitsOf which approximately 3 million units domestically and approximately 1.9 million units overseas.
• BYD battery shipments in 1H26134GWhExternal shipments to third-party automakers and energy storage projects accounted for more than 50%.
• BYD earnings-per-share forecast2026 RMB4.15; 2027 RMB5.57The target price cut mainly reflects lower domestic sales and earnings forecasts.
• Xiaomi 2026 auto delivery forecast548,000 unitsClose to the company's 550,000-unit target, but risks are skewed to the downside; the 2027 forecast is 765,000 units.
• Xiaomi smartphone shipment forecastdown 20% in 2026; up 3.5% in 2027Rising memory prices are expected to continue pressuring near-term margins.
• Xiaomi earnings-per-share forecast2026 RMB0.93; 2027 RMB1.41The target price cut reflects lower smartphone shipment, gross margin and EV sales forecasts.

Impact & implications

Industry sales resilience mainly comes from exports rather than a recovery in domestic demand, so overseas channels, product adaptation and FX management capabilities will become key differentiators in automaker performance. BYD's advantages in overseas markets, fast-charging models and external battery supply are expected to offset some domestic pressure; Xiaomi needs to rely on rapid ramp-up of new models and smartphone premiumization to cushion cost shocks. From an investment perspective, it is appropriate to remain cautious on the industry while favoring companies with global expansion capabilities, product-cycle support and valuation margin of safety.

Risks

• Domestic auto demand continues to be weaker than expected, and the effects of earlier pull-forward and a high base may persist.
• Subsidy reductions and higher NEV purchase taxes may further pressure sales.
• Rising costs of raw materials and components such as metals and memory may erode vehicle and smartphone margins.
• RMB appreciation may create additional pressure on profitability for export-oriented automakers.
• Domestic price competition continues to intensify, and retail prices and valuation multiples may remain under pressure.
• BYD's overseas expansion, external battery supply orders and new model deliveries may fall short of expectations.
• Demand or ramp-up pace for Xiaomi YU7 and SkyNomad models N70 and N90 may be below forecasts, causing the 2026 delivery target to be missed.
• Geopolitics, shipping disruptions and trade policy changes may affect auto exports and supply chains.

What to watch

• Whether domestic passenger vehicle retail demand stabilizes in the second half of 2026, and changes in subsidy and purchase tax policies.
• China auto and NEV export growth, overseas market share and trade restrictions.
• Sales changes and penetration trends for battery electric vehicles relative to plug-in hybrid electric vehicles.
• The impact of raw material costs and the RMB exchange rate on automakers' second-quarter and second-half margins.
• BYD's domestic market share, overseas deliveries, fast-charging model capacity and progress in external battery supply business.
• Monthly deliveries and capacity ramp-up of Xiaomi SU7, YU7, and SkyNomad N70 and N90.
• Memory price cycle, Xiaomi smartphone shipments, average selling price and gross margin.
• Whether industry valuation multiples stabilize after domestic demand improves or capital flows back in.