Chery Auto (09973): JPMorgan initiates Chery Auto at Overweight, arguing overseas scale and NEV margin gains are underpriced

Overview

This initiation report argues that Chery Auto's valuation does not reflect its leading overseas platform, growing and increasingly profitable NEV business, recovering domestic earnings and substantial liquidity. JPMorgan initiates Overweight with a June 2027 target price of HK$35.

Core views

JPMorgan's central thesis is that Chery has progressed beyond being an exporter into a scaled overseas operating platform that should provide more resilient growth than most Chinese passenger-vehicle peers. The firm forecasts overseas sales rising from 1.3 million units in 2025 to about 2.1 million in 2026, up 61%, and to 2.4-2.5 million in 2027. It expects Chery to lead Chinese OEMs in overseas volume in 2026, ahead of BYD at roughly 1.9 million units. Chery has operated abroad since 2001, reaches more than 100 countries and regions, and has built product homologation, local adaptation, distribution, service and compliance capabilities that JPMorgan considers difficult for later entrants to replicate quickly. The report argues that localization is the key mechanism for sustaining that overseas advantage as trade barriers rise. Chery operated 12 major production bases globally, including three overseas bases, as of 1H26. JPMorgan estimates overseas capacity will grow to about 800,000 units in 2027, approximately one-third of total capacity, including planned capacity of about 150,000 units in Spain, 100,000 in Brazil and 200,000 in Malaysia. Local manufacturing, partnerships and assembly arrangements are expected to improve fulfillment, regulatory compliance and supply-chain resilience, while reducing reliance on direct exports. The report also highlights geographic diversification: Western Europe represented 26% of overseas retail sales in 7M26, Eastern Europe including Russia 20%, South and Central America 15%, and Asia ex-China and Middle East/North Africa 13% each. The UK, Brazil and Russia together accounted for only 32% of overseas retail sales. Product breadth is the second pillar. Chery's five major brand portfolios span mass-market through premium and intelligent-EV segments, while its powertrain offering includes ICE, HEV, PHEV and BEV vehicles. JPMorgan believes this lets Chery match product and powertrain choices to differing infrastructure, policy and consumer conditions across regions, expanding addressable demand and reducing dependence on a single technology cycle. It forecasts NEV sales of approximately 1.1 million units in 2026 and 1.5 million in 2027, following projected growth of 36% and 35%, respectively. NEV penetration is expected to increase from 31% in 2025 to 38% in 2026 and 48% in 2027. The report cites NEV gross-margin progress from 0.4% in 2024 to 8.8% in 2025 and 12.8% in 1H26, forecasting 14% by 2027 as scale, mix and fixed-cost absorption improve. JPMorgan expects overseas operations to remain the earnings anchor while domestic profitability recovers from a weak 1H26. Overseas unit profit was estimated at about RMB11,000 in 1H26 versus a slight domestic loss, and overseas operations are expected to contribute more than 95% of earnings in 2026-28. The forecast does not require further overseas unit-profit expansion: continued overseas volume growth at stable unit profitability is intended to drive the bulk of earnings growth. Domestic sales volume fell 48% in 1H26 as Chery reduced shipments to support dealer destocking and restructured selected models. JPMorgan expects normalized shipments, lower inventory pressure, improved mix, pruning of low-return models and narrower losses at investment-stage brands to bring the domestic operation toward breakeven or modest profit in 2H26. The resulting financial forecasts call for revenue and net-income CAGRs of 13% and 20%, respectively, over 2025-28. Net income is projected to rise 5% year on year to RMB20.5 billion in 2026 and 35% to RMB27.6 billion in 2027; excluding non-cash FX-related loss, 2H26 core net profit is forecast to grow about 20% year on year. Group gross margin is forecast to rise from 13.8% in 2025 to around 16% in 2026-28, while ROE is projected at about 33% in 2026 and 34% in 2027. JPMorgan's DuPont analysis attributes the return profile increasingly to higher margins and stable asset turnover rather than financial leverage. Balance-sheet strength is integral to the valuation case. At 1H26, total cash and net cash were about RMB98 billion and RMB82 billion, respectively, with net cash near 80% of market capitalization. JPMorgan forecasts free cash flow above RMB25 billion in 2026 as working-capital conditions normalize after the 2025 trough; it expects cash conversion to recover to around 1x net income. The report notes that 1H26 free cash flow equaled about 27% of market capitalization but cautions that favorable working-capital movements contributed and should not be mechanically annualized. JPMorgan values Chery at a 6.5x 2027E P/E target multiple, producing the HK$35 June 2027 target price. The multiple is above Geely's roughly 5x 2027E P/E because of Chery's stronger earnings growth and overseas exposure, but below the approximately 8x R&D-adjusted Geely multiple and substantially below BYD's roughly 13-15x P/E, reflecting BYD's greater NEV scale, global leadership and vertical integration. At the prevailing price, Chery traded at about 6x 2026E and 4x 2027E P/E, with an approximately 20% 2026E FCF yield. JPMorgan argues that this discount already reflects overseas policy, localization, domestic competition and perceived former-SOE risks, and could narrow if overseas profitability is sustained, domestic earnings normalize and the company executes its NEV and localization transition. The report identifies several explicit downside risks. European local-content requirements under the proposed Industrial Accelerator Act could reduce incentives, raise compliance costs and hurt price competitiveness if implemented before Chery's production and supply chain ramp sufficiently; JPMorgan expects implementation no earlier than mid-2027. PHEVs, about 22% of Chery's overseas volume, could face trade-defense measures from 2027, pressuring export economics if European localization lags. Localization itself carries operational, labor, regulatory, partner, utilization and return risks. In China, weak demand and sustained price competition could delay margin recovery, while overlap across brands and powertrains could weaken differentiation, increase marketing spending and dealer inventory, and reduce pricing discipline.

Analysis framework

JPMorgan combines operating forecasts, regional sales and market-share data, capacity plans, powertrain mix analysis, profitability and cash-flow forecasts, peer valuation comparisons and DuPont return analysis. It links overseas localization and product breadth to sales resilience, then assesses how mix, domestic normalization and cash generation translate into earnings, returns and a target P/E valuation.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Target P/E valuation

  JPMorgan applies a 6.5x 2027E P/E multiple to derive its HK$35 target price and compares that multiple with Geely and BYD.

• Industry AnalysisVolume-price decomposition

  Volume, mix and unit-profit analysis

  The report separates overseas volume growth, domestic normalization, NEV penetration, gross-margin improvement and unit profitability to explain earnings growth.

• Corporate Fundamentals and FinanceDuPont analysis

  DuPont analysis of return on equity

  JPMorgan assesses ROE through net margin, asset turnover and financial leverage, concluding that projected returns rely increasingly on operating performance rather than leverage.

Asset mapping & comparison

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

• Chery Auto (9973.HK)

  Primary covered company; overseas growth, NEV margin improvement and balance-sheet strength underpin the Overweight rating.

  Strengths

  Leading overseas scale, localization footprint, multi-brand and multi-powertrain coverage, improving NEV economics and substantial net cash.

  Weaknesses

  Domestic business was loss-making in 1H26 amid destocking and model restructuring.

  Comparison

  Target multiple is above Geely's current ~5x 2027E P/E but below BYD's ~13-15x P/E.

  Risks

  Overseas policy tightening, localization execution, domestic competition, FX and input costs, and capital allocation.

• BYD (1211.HK)

  Comparable used in valuation and overseas-market discussion.

  Strengths

  Greater NEV scale, global leadership and stronger vertical integration, according to the report.

  Comparison

  JPMorgan's Chery target multiple retains a substantial discount to BYD's valuation.

• Geely (175.HK)

  Comparable used in valuation analysis.

  Comparison

  Chery's 6.5x target P/E is a premium to Geely's ~5x current 2027E P/E but below JPMorgan's ~8x R&D-adjusted Geely multiple.

Key data

• Rating and target priceOverweight; HK$35.00 Jun-2027 targetTarget implies approximately 50% upside from HK$23.28 on 29 Sep 2026.
• Overseas sales1.3 million units in 2025 to c.2.1 million in 2026JPMorgan forecasts 61% year-on-year growth, followed by 2.4-2.5 million units in 2027.
• NEV penetration and gross margin31% in 2025 to 48% in 2027; 8.8% to 14%Forecast NEV mix and gross-margin improvement.
• Net incomeRMB20.5 billion in 2026E; RMB27.6 billion in 2027EForecast growth of 5% and 35%, respectively.
• LiquidityRMB98 billion total cash and RMB82 billion net cash at 1H26Net cash was nearly 80% of market capitalization.
• Valuation~4x 2027E P/E and ~20% 2026E FCF yieldJPMorgan applies a 6.5x 2027E target P/E.

Impact & implications

JPMorgan argues that Chery's overseas scale, local production buildout and flexible product portfolio provide a stronger earnings buffer than domestic China auto demand alone. The institution expects proof of sustained overseas profitability, domestic recovery and successful localization to narrow the valuation discount.

Risks

• European local-content requirements or other policy changes could raise compliance costs, reduce incentives and weaken Chery's pricing competitiveness before localization ramps.
• Potential trade measures on China-made PHEVs could pressure export growth and overseas profitability; PHEVs represent about 22% of Chery's overseas volume.
• Localization may face delays, low utilization, higher labor and energy costs, regulatory breaches, partner misalignment or labor disruption.
• Weak Chinese passenger-vehicle demand and price competition could delay domestic volume and margin recovery.
• Overlapping brand and powertrain positioning could create internal competition, higher discounts, inventory pressure and weaker channel efficiency.
• Adverse FX and input-cost movements or suboptimal capital allocation could impair the investment case.

What to watch

• The pace of overseas sales, profitability, local production ramp-up, capacity utilization and local sourcing.
• European policy developments, especially the proposed Industrial Accelerator Act and possible PHEV trade measures from 2027.
• Domestic dealer inventory normalization, retail sell-through, pricing discipline and the pace of loss reduction.
• NEV penetration, new-model performance and progress toward a 14% NEV gross margin in 2027.
• Potential dividend-payout increase, stronger sequential overseas sales and technology announcements at Chery's October Tech Day.