Quiet May auto market in line with expectations; strong export growth cannot mask domestic demand downside risks

Overview

Nomura Securities released a commentary on China's automobile and electric vehicle sector for May data, noting market performance was quiet yet in line with expectations. The core conclusion is that domestic market demand continues to be weak; May passenger car retail sales fell 22% y-o-y, the lowest post-pandemic level, with full-year 2026 domestic sales expected to see the first historic double-digit decline. Despite EV penetration rising to a record 62.1% and strong export data (May exports up +73% y-o-y), institutions remain cautious on the overall industry, warning that high export growth could trigger trade frictions and tariff risks. Covered companies BYD, NIO, and XPeng Motors all received Buy ratings.

Core views

Domestic demand remains under pressure with no clear signs of recovery. May domestic passenger car wholesale sales were 2.3 million units (-4.2% y-o-y), retail sales were 1.5 million units (-22.0% y-o-y), and cumulative retail sales for the first five months were 7.1 million units (-19.3% y-o-y), the lowest since 2020. Although automakers have launched new models and technology upgrades, no meaningful organic demand improvement beyond new product launches has been observed. If this trend continues without additional incentive policies, 2026 domestic auto sales are likely to experience a double-digit decline. EV structural highlights stand out with record-high penetration rates. May new energy passenger car retail sales were 950,000 units (-7.5% y-o-y, +12.0% m-o-m), outperforming fuel vehicles (retail 561,000 units, -38.4% y-o-y). EV penetration reached 62.1%, up 9.9 percentage points year-over-year. Among them, battery electric vehicles (BEVs) accounted for 67.1%, continuing to lead plug-in hybrids/range extenders (32.9%). The inventory warning index stood at 57.9%, above the警戒 threshold, though local OEMs faced slightly less inventory pressure than joint ventures and luxury brands. Exports serve as key support, but long-term uncertainty increases. May auto exports were 809,000 units (+73.0% y-o-y), with cumulative exports for the first five months at 3.5 million units (+70% y-o-y). Chery leads in fuel vehicle exports, while BYD has a head start in EV exports (e.g., eight roll-on/roll-off vessels). Chinese automakers have made progress in markets such as the EU, Brazil, and Australia; BYD ranks 4th in Brazil and 2nd in Australia. However, rapid expansion may trigger trade tensions; EU-China trade relations are under pressure, and tariffs have increased in Russia, Brazil, Mexico, and other countries. Short-term high export growth could pose challenges for the medium-to-long term.

Analysis framework

The report employs a supply-demand framework to analyze industry sentiment, using month-over-month and year-over-year changes in wholesale/retail data to gauge demand trends, combined with inventory warning indices to assess channel pressure. In terms of valuation, BYD is valued using a Sum-of-the-Parts (SOTP) approach distinguishing between automotive and electronics businesses, while NIO and XPeng are valued using Discounted Cash Flow (DCF) methods with assumed WACC and terminal growth rates. Additionally, the report uses S-curve logic based on penetration rates to analyze the replacement of fuel vehicles by EVs and examines upstream, midstream, and downstream supply chain transmission effects of export growth and potential trade barrier risks.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Demand Framework

  By analyzing year-over-month and year-over-year changes and spreads between wholesale volume (supply side) and retail volume (demand side), we assess the industry inventory cycle and demand sentiment; the report据此 concludes that domestic demand continues to weaken.

• Valuation MethodSOTP Valuation

  Sum-of-the-Parts Valuation

  BYD's business is segmented into automobiles and related products, BYD Electronics, etc., each assigned different PE multiples for aggregation, reflecting varying growth characteristics and valuation logic across segments.

• Valuation MethodDCF Cash Flow Discounting

  Discounted Cash Flow Valuation

  NIO and XPeng are valued using DCF models, setting assumptions for WACC, market risk premium, and terminal growth rate, discounting future cash flows to 2026 for valuation; applicable to automakers not yet profitably stable or in high-growth phases.

• Industry/Industrial Analysis FrameworkPenetration S-curve

  Penetration S-Curve

  Tracking changes in EV penetration in the passenger car market (e.g., 62.1%), we determine whether the industry is in a phase of rapid penetration growth, thereby analyzing the substitution effect of EVs on fuel vehicles and their growth potential.

• Competition and Strategy FrameworkMoat / competitive advantage

  Moat/Competitive Advantage

  Analyzing BYD's head start in overseas markets (e.g., roll-on/roll-off fleet, global capacity layout) to evaluate its competitive barriers in export operations relative to other new forces.

Asset mapping & comparison

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

• BYD (1211 HK)

  Beneficiary: Significant export advantage, technology platform upgrade

  Strengths

  Operates eight roll-on/roll-off vessels; global capacity gradually increasing; top rankings in Brazil/Australia markets

  Weaknesses

  Domestic retail sales down 29.2% y-o-y, market share down 6.7pp y-o-y

  Comparison

  Has a head start in the EV export market compared to other new forces

  Risks

  Intensified competition affecting margins, slower-than-expected overseas expansion, technology upgrades failing to drive demand as anticipated

• NIO (NIO US)

  Beneficiary: High y-o-y sales growth, new model deliveries initiated

  Strengths

  May retail sales up 61.9% y-o-y; ES9/GX delivery initiation expected to improve shipment volumes

  Weaknesses

  Absolute sales scale still small, facing profitability pressure

  Comparison

  Growth rate exceeds industry average, but market share remains low

  Risks

  Capacity ramp-up unable to meet demand, new models fail to gain share, operating expense improvements slower than expected

• XPeng Motors (XPEV US)

  Beneficiary: New model cycle, technology cooperation

  Strengths

  May retail sales up 2.6% m-o-m, new model plans underway

  Weaknesses

  May retail sales down 14.3% y-o-y, fierce market competition

  Comparison

  Like NIO, relies on new model cycles for improvement

  Risks

  2026 new model growth weaker than expected, intensified competition, robotaxi and humanoid robot development slower than expected

Key data

• May Passenger Car Wholesale Sales2.3 million units-4.2% y-o-y, +5.8% m-o-m
• May Passenger Car Retail Sales1.5 million units-22.0% y-o-y, +9.2% m-o-m, lowest since 2020
• May EV Retail Sales950,000 units-7.5% y-o-y, +12.0% m-o-m
• EV Penetration Rate62.1%+9.9pp y-o-y, +1.5pp m-o-m, record high for the month
• May Auto Export Volume809,000 units+73.0% y-o-y, +1.6% m-o-m
• Cumulative Exports Jan-May3.5 million units+70% y-o-y
• Inventory Warning Index57.9%Above警戒 line; local OEMs at 54.8%

Impact & implications

For the industry, 2026 will be a year of structural transformation; declining domestic sales may become the norm, with exports becoming the key force offsetting weak domestic demand, though trade protectionism risks including tariffs and market access restrictions must be watched. For covered companies, BYD, leveraging vertical integration and overseas layout advantages, is expected to gain market share during industry consolidation; NIO and XPeng rely on new model cycles and overseas expansion, requiring monitoring of capacity ramp-up and operating efficiency improvements. Investors should focus on automakers with global competitiveness while guarding against geopolitical and trade friction disruptions to export businesses.

Risks

• Further decline in domestic market demand, potentially seeing historic double-digit negative growth
• High export growth triggering trade frictions with multiple countries increasing auto-related tariffs
• Intensified industry competition affecting automaker margins and market shares
• Overseas expansion slower than expected, uncertainty in opening new markets
• Technology platform upgrades failing to drive demand as anticipated

What to watch

• Signs of organic improvement in domestic demand in the second half of 2026
• Whether new incentive policies will be introduced to boost domestic sales
• Changes in EU and emerging market trade policies and tariff implementation status
• Progress of BYD Blade Battery 2.0 capacity ramp-up
• Delivery data for NIO ES9/GX and XPeng new models