China Auto Market Slumps 20% in May, Xpeng and Li Auto Target Prices Cut

Overview

This report focuses on China's auto market sales data for May 2026 and the latest operational status of Xpeng and Li Auto. The core conclusion is that, affected by last year's subsidy policy-induced demand exhaustion and high base effect, the domestic auto market continued to weaken in May, with retail sales dropping significantly year-on-year. Although EV penetration remained high at 61%, absolute sales also declined year-on-year. Exports became the main bright spot, offsetting some of the domestic pressure with strong growth. Based on concerns over profitability and competitive landscape, the firm lowered the target prices for Xpeng Motors and Li Auto, but maintained a 'Market-Perform' rating, while remaining tactically positive toward Xpeng's upcoming MONA series of new vehicles.

Core views

Domestic demand continues under pressure, with significant impact from policy exhaustion. In May, domestic passenger car retail sales totaled 1.51 million units, down 20.0% year-on-year, with annualized sales (SAAR) falling to 19.2 million units, below the firm's estimate of 22 million units as normal demand level. This was mainly due to the early release of more than 5 million units of demand during 2024-2025 thanks to subsidy policies. Without new policy support, the weak domestic demand is expected to persist at least until November-December when the base effect normalizes. By brand, mass-market brands suffered the deepest decline (-21.1%), luxury brands also fell by 13.5%, with only a few brands like NIO, Tesla, and Xiaomi—those with strong product cycles—achieving positive growth. The electrification trend remains unchanged, but growth diverges. In May, new energy vehicle (EV) penetration slightly rose to 61.0%, with battery electric vehicles (BEVs) accounting for 41.9% and plug-in hybrid vehicles (PHEVs) accounting for 19.1%. Despite the rise in penetration, total EV sales fell 5.1% year-on-year, reflecting consumers adapting to the new 5% purchase tax implemented starting in 2026. BEV sales bucked the trend, growing 8.3%, while PHEV sales plunged 25.4%. BYD remained firmly in first place with 198,000 units, holding a 21.4% market share; Geely and Leapmotor ranked second and third respectively. Rising oil prices and new model launches supported the economic viability and product appeal of EVs. Exports surged strongly, becoming a key buffer. In May, passenger car exports grew 73% year-on-year, accounting for 35.9% of total wholesale volume, effectively offsetting the weakness in domestic demand. Among them, EV exports soared 119%, contributing about 55% of the export growth. Chery, BYD, and Geely led the export rankings, with growth rates reaching 79%, 85%, and 180% respectively. The firm believes overseas markets have become an important strategic growth point for Chinese automakers, forecasting full-year exports to reach 6.5–7 million units. Xpeng and Li Auto valuation cuts, profitability path still faces challenges. For Xpeng Motors, although the firm remains tactically optimistic about the launch of its MONA L03/L05 models, increased investment in AI and autonomous driving has reduced earnings visibility, lowering the EV/Sales valuation multiple from 1.0x to 0.8x, and cutting the target price to US$20/HK$78. For Li Auto, despite the strong product performance of the new-generation L-series EREV models and accelerated overseas expansion, it faces fierce competition from Huawei, Xiaomi, and rising costs, putting pressure on gross margins. It is expected to turn into a net loss in 2026, with the target price cut to US$15.5/HK$61. Both maintain a Market-Perform rating.

Analysis framework

The firm adopted a comprehensive analysis framework combining 'high-frequency insurance data + macro credit indicators + micro corporate fundamentals.' First, it tracked mandatory first-insurance data to precisely measure real retail demand, eliminating inventory disturbances in wholesale data; second, it introduced the 'credit impulse' indicator, leveraging its historical positive correlation with auto sales (about 0.6) to gauge the macro purchasing power environment; third, it combined channel inventory changes and same-store price discounts to monitor market competitiveness and dealer health; finally, at the company level, it dynamically linked product cycle rhythms, degree of capitalized technology investments, and valuation multiples, distinguishing between short-term tactical opportunities and long-term profitability alignment.

Methodology notes

• Macroeconomic frameworkCredit/debt cycle

  Credit Impulse as a Leading Indicator for Auto Demand

  The report uses the Credit Impulse (change in new credit as a percentage of GDP) to forecast auto consumption trends. Historically, this indicator has a correlation coefficient of about 0.6 with China's auto demand. When the Credit Impulse turns negative, it usually signals a contraction in durable goods purchasing power, serving as an important macro anchor for judging industry beta.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Difference Analysis Between Insurance Registration Data and Wholesale Data

  The firm prioritizes mandatory first-insurance data over manufacturer wholesale data to assess real retail demand. Because wholesale data is easily disturbed by channel inventory buildup or destocking, while insurance data directly reflects terminal deliveries, it can more accurately identify 'demand exhaustion' or 'false prosperity,' making it the gold standard for tracking real industry sentiment.

• Valuation MethodologyPS valuation

  EV/Sales Multiple Adjusted Dynamically According to Earnings Visibility

  For growth-oriented automakers that have yet to stabilize profits, the report adopts the EV/Sales valuation method, but this multiple is not fixed—it is discounted based on the intensity of AI/R&D capital expenditure and the timeline for monetization. For example, Xpeng's valuation multiple was lowered from 1.0x to 0.8x due to increased AI investment delaying profitability, reflecting the logic of 'valuation penalty during the investment period.'

• Industry/Industrial Analysis FrameworkInventory cycle (Kitchin)

  Linkage Between Channel Inventory Net Change and Price Pressure

  By calculating 'retail sales minus domestic wholesale volume,' we obtain the net change in channel inventory, and combine it with terminal discount levels to judge market conditions. When the industry as a whole destocks but EV channels restock and discounts widen, it indicates intensified competition in new energy vehicles, signaling a possible continuation of price wars.

Asset mapping & comparison

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

• Xpeng Motors (XPEV.US / 9868.HK)

  Target price cut but tactically bullish on new vehicle cycle

  Strengths

  MONA brand positioning is precise, M03 sales are resilient; L03/L05 new models set to launch, expected to boost traffic; ADAS and VLA 2.0 technologies are industry-leading

  Weaknesses

  Huge investment in AI and robotics, expected to remain loss-making for 2026; GX deliveries below expectations; low earnings visibility compresses valuation multiples

  Comparison

  Compared to Li Auto, Xpeng has greater differentiation in product positioning and technological branding, but weaker financial stability

  Risks

  Risk of cannibalization by new G6 model; slow commercialization of autonomous driving compared to expectations; industry price wars erode gross margins

• Li Auto (LI.US / 2015.HK)

  Target price cut, intensifying competition puts pressure on profitability

  Strengths

  Strong product performance of the new-generation L-series EREV models, L9 orders exceed 10,000; ample cash reserves provide a safety cushion; clear overseas expansion strategy

  Weaknesses

  i6 gross margin only in single digits, dragging down overall profitability; facing fierce competition from Huawei, Xiaomi, and Xpeng in the EREV SUV segment; R&D spending rises

  Comparison

  Compared to Xpeng, Li Auto has healthier cash flow, but higher risk of product homogenization and limited growth elasticity

  Risks

  Crowded PHEV/EREV market leading to loss of market share; rising costs of batteries and storage chips; high initial expenses for overseas expansion

• BYD (1211.HK / 002594.CH)

  Industry leader, maintains Outperform rating

  Strengths

  May EV sales of 198,000 units keep it firmly in first place, with a 21.4% market share; exports grow 85%; strong cost control across the entire industrial chain

  Weaknesses

  Domestic retail sales down 30% year-on-year, most impacted by high base and demand exhaustion

  Comparison

  Far ahead in scale and profitability, benefiting greatly from industry reshuffling

  Risks

  Risk of peaking domestic market share; overseas trade barriers

Key data

• May Domestic Passenger Car Retail Sales1.51 million unitsDown 20.0% year-on-year, down from April, reflecting demand exhaustion
• May EV Penetration Rate61.0%BEVs account for 41.9%, PHEVs for 19.1%; penetration hits a new high, but total EV sales fall 5.1%
• May Passenger Car ExportsUp 73% year-on-yearAccounting for 35.9% of total wholesale volume, EV exports surge 119%, Chery/BYD/Geely lead growth
• Xpeng Motors Target Price AdjustmentUS$20.00 / HK$78.00Previously US$22/HK$86, EV/Sales multiple drops from 1.0x to 0.8x
• Li Auto Target Price AdjustmentUS$15.50 / HK$61.00Previously US$19/HK$74, projected 2026 EPS at -2.44 yuan
• May Credit Impulse20.2%Down year-on-year, 12-month change turns negative to -2.3%, signaling demand pressure

Impact & implications

The report believes that China's auto market will remain in a painful post-policy-exit phase in the short term, with year-on-year declines in domestic sales likely to continue until the end of the year. This puts pressure on all OEMs' domestic businesses, especially those lacking blockbuster new models or overly reliant on a single market. However, structural opportunities still exist: first, sustained high growth in export markets provides companies with a second growth curve; second, EV penetration can still remain high amid rising taxes, proving that product strength has crossed the critical threshold. For investors, the current stage should focus more on companies’ global execution capabilities and cost control rather than simply betting on a recovery in domestic volumes. The cases of Xpeng and Li Auto show that even if a company leads in technology or product quality, if it cannot quickly deliver scale profits amid intense competition, its valuation will still be suppressed.

Risks

• Demand recovery slower than expected after domestic subsidy policy exit
• Increased purchase tax on EVs dampens consumer willingness
• Rising raw material and battery costs squeeze profit margins
• Ongoing industry price wars worsen profitability outlook
• Longer-than-expected monetization cycle for AI and new technologies
• Changes in overseas trade policies affect export growth

What to watch

• Performance and order conversion of Xpeng MONA L03 (July) and L05
• Feedback on sales of Li Auto’s five-seat L8 (June 23) and subsequent L7 facelift
• Whether monthly credit impulse data stabilizes and rebounds
• Trends in industry channel inventory levels and terminal discount changes
• Each automaker’s overseas export volume and progress in new market expansion
• Implementation of government anti-involution policies and their restraining effects on price wars