China auto parts Report Interpretation

Overview

This China auto-parts 2Q/1H26 wrap-up argues that a shared backdrop of cost inflation and OEM price cuts is producing sharply different outcomes across suppliers. Morgan Stanley expects overseas operations, contractual cost recovery, differentiated content and tangible AIDC programs to matter more than broad vehicle volumes in 2H26.

Core views

The report finds broad supply-chain cost pressure from aluminum, memory, PCBs, plastics, energy, freight and labor, alongside continued OEM price reductions. Margin outcomes nevertheless diverged. Sanhua's 2Q26 gross margin fell 1.0ppt year-on-year to 28.3%, Tuopu's fell 0.9ppt to 18.4%, Xingyu's fell 1.4ppt to 18.2%, and Recodeal's declined 2.7ppt year-on-year and 4.5ppt quarter-on-quarter. Memory inflation alone reduced smart-driving gross margins by an estimated 3-4ppt for Desay in 1H26, versus Hirain's guided 4-5ppt and Foryou's 1-2ppt. In contrast, Fuyao's gross margin rose 1.7ppt year-on-year and 2.8ppt quarter-on-quarter to 40.2%; excluding a 1.28ppt tariff-recovery benefit, it still improved 0.4ppt year-on-year and 1.5ppt quarter-on-quarter. Minth's 1H26 margin rose 0.4ppt to 28.6% and Nexteer's rose 0.5ppt to 12.0%. Morgan Stanley attributes resilience to tariff and commodity recovery, customer pass-through, product mix, overseas utilization and sourcing initiatives. It expects only partial cost recovery in 3Q26 for Desay and Foryou and a widening 2H26 margin gap between globally diversified, differentiated suppliers and price-competitive domestic businesses. AIDC has become the principal non-auto growth theme, displacing last year's emphasis on humanoid robots because customer qualification and shipment visibility are clearer. The report identifies four routes: liquid cooling and thermal management for Minth, Sanhua and Tuopu; zinc-alloy precision-casting structural parts for Foryou; AC/DC and DC/DC power electronics for Joyson; and high-speed or high-voltage interconnects for Recodeal. Morgan Stanley expects liquid cooling and precision casting to produce the most visible revenue acceleration in 2H26 because they already have booked revenue and identified programs. Minth generated Rmb0.1bn of emerging-sector revenue in 1H26, 30% from AIDC, and expects liquid-cooling revenue to scale from 3Q26; management also confirmed participation in Nvidia's Vera Rubin supply chain through Cooler Master. Foryou generated more than Rmb0.3bn of AI-related revenue in 1H26 and targets Rmb0.8-1.0bn in 2026 and Rmb1.2-1.4bn in 2027, supported by about Rmb1.4bn of capacity in Huizhou and Thailand. Joyson expects AIDC power-product prototypes around September 2026 but still requires data-center qualification. Recodeal's subsidiary began 400G/800G AEC deliveries in 2Q26 and submitted a 1.6T prototype to a US customer, though AIDC revenue is still too small to offset legacy-EV weakness. Accordingly, power electronics and interconnects retain medium-term potential but depend on validation and production-ramp timing. For 2H26, Morgan Stanley expects recovery to be execution-led rather than volume-led: customer mix, product-cycle timing and content gains should outweigh aggregate China production. It favors Minth for resilient margins and overseas growth—EMEA revenue rose 16% year-on-year in 1H26 while China revenue declined 1%, and North America is targeted to rise from 25% of auto-parts revenue in 1H26 to 30% by 2030. Foryou is preferred for auto-content gains, HUD shipments that more than doubled in 1H26, 29.8% market share, and its AI precision-casting pipeline. Bethel is preferred for product-cycle execution: electric-brake volume rose 66% year-on-year and disc-brake volume 131% in 2Q26, while its first electro-mechanical-brake project entered mass production on the Li Auto L9 Livis. Estimate and target reductions reflect company-specific pressures. Morgan Stanley cut 2026-28 earnings estimates by 13-21% for Xingyu and lowered its target 28% to Rmb127, citing weaker FAW-VW and Seres Aito volumes and plastics/PCB costs, while maintaining Overweight because of structural lighting upgrades. Keboda's estimates were cut 25-32% and its target 28% to Rmb56 on weaker VW volumes and losses at Keboda Intelligent Tech, which recorded Rmb430mn revenue and a Rmb43mn net loss in 1H26; Overweight was maintained for overseas-controller opportunities. Recodeal's estimates were reduced 23-30% and its target 21% to Rmb96 because of weak EV connector demand and competition, while Overweight was retained on AIDC interconnect potential. Tuopu's estimates fell 14-23% and target 13% to Rmb54, with Equal-weight maintained; Joyson's estimates fell 3-10% and target 8% to Rmb23, also retaining Equal-weight. NavInfo's 2026-28 revenue estimates were cut 7-11% and target 6% to Rmb5.2 as HD-map revenue and margins weaken; Morgan Stanley expects wider losses. Changshu Trim was downgraded from Equal-weight to Underweight, with its target cut from Rmb14.7 to Rmb9.0: 2Q26 revenue grew 26% year-on-year but gross margin fell 3.6ppt to 12.2%, net debt was Rmb1.1bn at 1H26, and 2026/27 net-profit forecasts were cut 39%/43% after lower margin assumptions.

Analysis framework

Morgan Stanley compares 2Q/1H26 revenue, earnings and margin performance across China auto-parts suppliers, then links differences to input costs, OEM pricing, customer mix, overseas exposure and product differentiation. It evaluates AIDC opportunities by commercial maturity—booked revenue, customer programs, qualification and ramp-up—and revises company forecasts, target prices and scenario values using DCF or, for NavInfo, segment-level comparable multiples.

Methodology notes

• Industry AnalysisSupply-demand framework

  Supplier margin analysis through raw-material costs, OEM price cuts, customer pass-through, utilization and product mix.

  The report explains earnings divergence by comparing cost pressure with each supplier's ability to recover costs, maintain utilization and sell differentiated products.

• Valuation methodsDCF (Discounted Cash Flow)

  Base-case DCF valuation for Xingyu, Keboda, Recodeal, Changshu Trim, Tuopu and Joyson.

  The report derives base-case targets by discounting forecast cash flows using stated WACC and terminal-growth assumptions, then presents bull and bear scenarios.

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  NavInfo sum-of-the-parts valuation using peer EV/sales multiples for map, chip and ADAS businesses.

  Morgan Stanley values NavInfo's separate businesses using relevant comparable-company revenue multiples and combines their enterprise values into an equity value.

Asset mapping & comparison

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

• Minth Group Limited (0425.HK)

  Preferred supplier with overseas exposure and early liquid-cooling revenue potential.

  Strengths

  Resilient 1H26 margin, EMEA revenue growth of 16% YoY, and expected AIDC scaling from 3Q26.

  Comparison

  China revenue declined 1% YoY in 1H26 while EMEA grew 16% YoY.

• Foryou Corporation (002906.SZ)

  Preferred beneficiary of auto-content gains and AI precision casting.

  Strengths

  HUD shipments more than doubled in 1H26, market share reached 29.8%, and AI-related revenue exceeded Rmb0.3bn.

  Weaknesses

  Lower auto-margin assumptions were incorporated into estimates.

  Comparison

  Its AI precision-casting pipeline offers more visible near-term growth than earlier-stage AIDC categories.

• Bethel Automotive Safety Systems Co Ltd (603596.SS)

  Preferred supplier for brake-by-wire and Level 4 autonomy exposure.

  Strengths

  Electric-brake volume rose 66% YoY and disc-brake volume 131% YoY in 2Q26; EMB entered mass production.

  Comparison

  Morgan Stanley describes Bethel as having the strongest product-cycle execution among its covered auto-parts stocks.

• Changzhou Xingyu Automotive Lighting Sys (601799.SS)

  Covered auto-lighting supplier; Overweight maintained despite forecast and target reductions.

  Strengths

  Structural auto-lighting upgrades and sustained ASP growth potential.

  Weaknesses

  Weaker FAW-VW and Seres Aito volume, OEM price pressure, and plastics/PCB cost inflation.

  Comparison

  Its margin fell to 18.2% in 2Q26, unlike the margin improvement reported for Fuyao and Minth.

  Risks

  Weak China auto demand, slower ADB penetration and rising raw-material prices.

• Suzhou Recodeal Interconnect System (688800.SS)

  Covered supplier transitioning from EV connectors toward AIDC interconnects; Overweight maintained.

  Strengths

  400G/800G AEC deliveries began in 2Q26 and a 1.6T prototype was submitted for US-customer verification.

  Weaknesses

  Legacy EV demand is soft and AIDC revenue remains too small to offset it.

  Comparison

  AIDC interconnects have longer qualification dependence than liquid cooling and precision casting.

  Risks

  Delayed AEC qualification, weaker NIO deliveries, low Mexican-plant utilization and higher copper prices.

• Jiangsu Changshu Automotive Trim Group (603035.SS)

  Downgraded from Equal-weight to Underweight.

  Strengths

  Revenue grew 26% YoY in 2Q26.

  Weaknesses

  Gross margin fell 3.6ppt to 12.2%, balance sheet was in Rmb1.1bn net debt, and forecast profitability was materially reduced.

  Comparison

  Trades at a premium to traditional auto-parts makers despite weaker profitability and balance-sheet constraints.

  Risks

  Cash-flow constraints, slower key-customer sales, potential dilutive fundraising and intensifying price competition.

• NavInfo Co Ltd (002405.SZ)

  Covered smart-driving, map and automotive-chip supplier; Equal-weight maintained.

  Strengths

  AutoChips has begun shipping automotive-grade MCUs and SoCs.

  Weaknesses

  Slower HD-map revenue, heavy R&D spending, wider forecast losses and gradual expected market-share gains.

  Comparison

  Its SOTP assigns Rmb9.0bn EV to map-as-a-service, Rmb2.2bn to chips and Rmb0.8bn to ADAS.

  Risks

  Competition in HD/ADAS maps and uncertainty over monetization and pricing of future products.

Key data

• Fuyao 2Q26 gross margin40.2%Up 1.7ppt YoY and 2.8ppt QoQ; adjusted margin still improved excluding a 1.28ppt tariff-recovery benefit.
• Minth 1H26 gross margin28.6%Up 0.4ppt YoY despite aluminum inflation.
• Foryou AI-related revenueMore than Rmb0.3bnGenerated in 1H26; company targets Rmb0.8-1.0bn in 2026 and Rmb1.2-1.4bn in 2027.
• Bethel electric-brake volume growth66% YoY2Q26 growth; disc-brake volumes rose 131% YoY.
• Changshu Trim net debtRmb1.1bnAt 1H26, increasing balance-sheet uncertainty amid an industry slowdown.
• Xingyu price targetRmb127Cut 28%; 2026-28 earnings estimates reduced 13-21%.
• Keboda price targetRmb56Cut 28%; 2026-28 earnings estimates reduced 25-32%.
• Recodeal price targetRmb96Cut 21%; 2026-28 earnings estimates reduced 23-30%.

Impact & implications

The report expects 2H26 sector performance to remain highly dispersed. Suppliers with overseas customer bases, better cost recovery, differentiated content and early AIDC sales are positioned more favorably, while domestic price competition, weak vehicle volumes, low utilization and unproven new-business ramps remain constraints. AIDC is meaningful strategically, but its near-term earnings contribution differs sharply by product category and supplier.

Risks

• Further raw-material, memory, energy, logistics and labor cost inflation could deepen margin pressure.
• OEM price cuts and highly competitive domestic projects may prevent suppliers from fully passing through higher costs.
• Weak China or global vehicle demand, lower customer volumes and low utilization could delay recovery.
• AIDC power-electronics and interconnect revenue may be delayed by customer qualification, validation and production-ramp requirements.
• For Changshu Trim, constrained cash flow and a tight balance sheet could limit capacity investment and increase financing risk.

What to watch

• Whether Desay and Foryou achieve partial cost pass-through in 3Q26.
• Liquid-cooling and precision-casting revenue progression in 2H26, particularly Minth's scaling from 3Q26 and Foryou's AI order and capacity ramp.
• Customer qualification and ramp milestones for Joyson's AIDC power products and Recodeal's AEC and power-whip products.
• Overseas utilization, overseas revenue growth and contractual cost recovery for globally exposed suppliers.
• China passenger-vehicle sales, VW-related volume trends, EV demand and the pace of OEM price competition.
• New order wins and margin development for the preferred names, alongside Changshu Trim's cash-flow and balance-sheet progress.