Chery Automobile Co., Ltd. (09973): JPMorgan initiates Chery Auto at Overweight, arguing its overseas scale and cash-rich balance sheet are undervalued.

Overview

JPMorgan initiates coverage of Chery Auto with an Overweight rating. Its central view is that Chery’s established overseas platform, increasingly localized production, broad powertrain offering, improving NEV profitability and substantial net cash are not fully reflected in its valuation.

Core views

JPMorgan’s investment case begins with Chery’s overseas franchise. The firm expects overseas sales to increase from 1.3mn units in 2025 to about 2.1mn in 2026, up 61%, before reaching 2.4mn-2.5mn in 2027. It expects Chery to lead Chinese OEMs in overseas volume in 2026, ahead of BYD at roughly 1.9mn units. The report attributes this to more than two decades of overseas operations since the company’s first export in 2001, giving Chery established capabilities in homologation, local product adaptation, distribution, after-sales service and compliance across more than 100 countries and regions. The report argues that the strategic shift from direct exports to local-for-local operations makes this growth more durable as trade barriers rise. Chery operated 12 major production bases, including three overseas bases, at 1H26. JPMorgan estimates overseas capacity will reach about 800k units in 2027, or roughly one-third of total capacity, including 150k units in Spain, 100k in Brazil and 200k in Malaysia. The report expects localization to improve fulfillment, supply-chain resilience and regulatory flexibility, while noting that utilization, local sourcing and regional profitability will determine the returns on these investments. Geographic diversification also limits concentration: 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 MENA 13% each; the UK, Brazil and Russia together accounted for 32%. JPMorgan’s second thesis is that Chery’s five-brand, multi-powertrain portfolio broadens its addressable market and supports a more profitable shift toward NEVs. The company spans mass-market through premium segments and covers ICE, HEV, PHEV and BEV technologies, allowing product and powertrain choices to match local charging infrastructure, incentives, regulation and consumer demand. The report forecasts NEV sales growth of 36% in 2026 and 35% in 2027, reaching about 1.1mn and 1.5mn units. NEV penetration is expected to rise from 31% in 2025 to 38% in 2026 and 48% in 2027. NEV revenue grew 66% in 2025 and 64% year-on-year in 1H26, while gross margin improved from 0.4% in 2024 to 8.8% in 2025 and 12.8% in 1H26; JPMorgan forecasts 14% by 2027. The earnings thesis relies primarily on overseas volume rather than higher overseas unit profit. The report estimates overseas unit profit at about Rmb11k in 1H26 and expects overseas operations to supply more than 95% of earnings in 2026-28. Domestic profitability was depressed by a 48% volume decline in 1H26 as Chery cut shipments for dealer destocking and restructured selected models. JPMorgan expects domestic operations to approach breakeven or modest profitability in 2H26 as inventory normalizes, lower-return products are pruned and mix improves. It forecasts net income growth of 5% to Rmb20.5bn in 2026 and 35% to Rmb27.6bn in 2027; excluding non-cash FX effects, 2H26 core profit is expected to rise about 20% year-on-year. Revenue and net income are projected to compound at 13% and 20%, respectively, from 2025 through 2028. The report places this against a difficult domestic market. China PV retail sales fell 25% year-on-year in 8M26, versus a 5% wholesale decline; JPMorgan forecasts domestic PV demand to fall about 21% in 2026 and another 5% in 2027. It argues that sustainable domestic earnings will depend on unit economics, pricing discipline, retail sell-through and channel health rather than shipment growth alone. In contrast, PV exports rose 73% in 8M26 and NEV exports rose 132%, reinforcing the importance of overseas markets as a volume and earnings buffer. Valuation is the final pillar. JPMorgan sets a HK$35 Jun-2027 target using 6.5x 2027E P/E, versus Chery’s approximately 4x 2027E P/E at the current share price. The target multiple is above Geely’s roughly 5x current 2027E P/E because of Chery’s stronger earnings growth and overseas exposure, but remains below Geely’s roughly 8x R&D-adjusted multiple and BYD’s approximately 13-15x P/E, reflecting BYD’s larger NEV scale, global leadership and greater vertical integration. The report also highlights approximately 20% 2026E FCF yield, forecast ROE of about 33% in 2026 and 34% in 2027, and Rmb98bn of total cash and Rmb82bn of net cash at 1H26. It views net cash, equivalent to nearly 80% of market capitalization, as downside support and funding capacity for expansion and potential shareholder returns.

Analysis framework

JPMorgan combines company operating forecasts with industry supply-demand analysis, overseas-market and powertrain comparisons, peer valuation comparisons, profitability forecasts, cash-flow analysis and DuPont return analysis. It tests the thesis through overseas scale and localization capacity, NEV mix and margin trends, domestic normalization, balance-sheet strength and relative P/E valuation.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Target P/E valuation

  JPMorgan values Chery using a 6.5x 2027E P/E target multiple and compares it with Geely and BYD multiples.

• Industry AnalysisSupply-demand framework

  China passenger-vehicle demand and export-growth analysis

  The report contrasts weak domestic demand and pricing pressure with strong export demand to explain Chery’s earnings mix.

• Industry AnalysisVolume-price decomposition

  Volume, unit-profit and margin analysis

  The report separates overseas volume growth, stable overseas unit profit, domestic normalization and NEV margin expansion as earnings drivers.

• Corporate Fundamentals and FinanceDuPont analysis

  DuPont analysis of ROE

  JPMorgan explains that improving margins and stable asset turnover increasingly support returns as financial leverage declines.

• Corporate Fundamentals and FinanceFree cash flow analysis

  Free-cash-flow and cash-conversion analysis

  The report assesses working-capital normalization, forecast FCF and net cash as support for self-funded expansion and valuation.

Asset mapping & comparison

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

• Chery Auto (9973.HK)

  Primary covered company; the report expects overseas growth, NEV-margin improvement and domestic normalization to support earnings and valuation re-rating.

  Strengths

  Leading overseas scale, broad multi-brand and multi-powertrain portfolio, improving NEV margins, high net cash and attractive FCF yield.

  Weaknesses

  Domestic earnings were depressed in 1H26 amid destocking and weak passenger-vehicle demand.

  Comparison

  Target 6.5x 2027E P/E is above Geely’s current ~5x but below BYD’s ~13-15x, reflecting Chery’s growth strengths but lower NEV scale and vertical integration than BYD.

  Risks

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

Key data

• Current share priceHK$23.28As of 29 Sep 2026.
• Price targetHK$35.00Jun-2027 target; implies ~50% upside.
• Overseas sales~2.1mn units in 2026EUp 61% from 1.3mn units in 2025; 2.4mn-2.5mn forecast for 2027.
• NEV penetration31% in 2025 to 48% in 2027EForecast mix expansion alongside improving NEV economics.
• NEV gross margin8.8% in 2025 to 14.0% in 2027ESupported by scale, product mix and fixed-cost absorption.
• Net incomeRmb20.5bn in 2026E; Rmb27.6bn in 2027EForecast growth of 5% and 35%, respectively.
• Net cashRmb82bn at 1H26Total cash was about Rmb98bn; net cash was nearly 80% of market capitalization.
• Free-cash-flow yield~20% in 2026EJPMorgan cites this as valuation and downside support.

Impact & implications

JPMorgan argues that Chery’s mix of overseas scale, localization, NEV margin gains and domestic earnings normalization can narrow its valuation discount. The report considers the cash position important both as downside support and as capacity to fund overseas production, NEV development and possible shareholder returns.

Risks

• EU local-content requirements or other trade measures could reduce incentives, raise compliance costs and weaken price competitiveness before European production and sourcing have ramped.
• Potential trade-defense measures affecting China-made PHEVs could constrain export growth and pressure overseas profitability; PHEVs represent about 22% of Chery’s overseas volume.
• Overseas localization may face partner, labor, regulatory, tax, certification and approval challenges, while low initial utilization and higher local costs may dilute returns.
• Weak Chinese PV demand and intense competition could require greater incentives and marketing spending, delaying domestic volume and margin recovery.
• Overlapping price points across brands and powertrains could weaken differentiation, increase internal competition and pressure dealer throughput, inventory and margins.
• Adverse FX and input-cost movements and suboptimal capital allocation are additional downside risks.

What to watch

• Whether post-lock-up technical selling pressure recedes and potential financial-investor supply remains limited.
• Potential dividend-payout increases.
• Domestic loss narrowing, dealer-inventory normalization and sequential overseas sales trends.
• New technology announcements at Chery’s October Tech Day.
• Overseas plant ramp-up, utilization, local sourcing, compliance and regional profitability.
• European policy developments, including potential Industrial Accelerator Act requirements and PHEV trade measures.
• NEV profitability, new-model performance and the pace of domestic normalization.