"Big Banks" Citigroup: Five Advantages and Challenges in China's Automotive Industry, Optimistic about BYD and Pony AI

Citi published a research report indicating a neutral outlook on Chinese automakers for the first quarter of 2026, expecting BYD (01211.HK), Geely (0175.HK), and Leapmotor (9863.HK) to potentially outperform the market from the end of the first quarter to the beginning of the second quarter, mainly benefiting from model update cycles and strong export growth. In contrast, Seres (09927.HK), Li Auto (02015.HK), SAIC Motor Corporation (600104.SH), Changan Automobile (000625.SZ), and GAC Group (02238.HK) may underperform due to margin pressure and weak sales prospects for fuel vehicles.

The firm predicts that the Chinese automotive industry will face five major positive and five major negative factors in 2026.

On the positive side: First, the penetration rates of LiDAR, ADAS, and autonomous taxi services are rapidly increasing. Second, automotive exports are expected to grow by 19%, with new energy vehicle exports potentially increasing by 49%. Third, demand for commercial vehicles is in a favorable phase. Fourth, the price war in the passenger car segment is expected to come to an end. Fifth, the market share of electric vehicles will gradually concentrate, leading to improved capacity utilization.

On the negative side: Rising costs may erode automakers' net profit margins by 2 to 5 percentage points. Additionally, the outlook for the first and second quarters of 2026 is becoming cautious, with electric vehicle retail growth potentially slowing to 4% and 0%, respectively. The firm has lowered its wholesale and retail forecasts for passenger cars in fiscal year 2026, with year-on-year declines of 3.8% and 9.6%, respectively, and expects fuel vehicle sales to decline by 25% year-on-year, below market consensus. Meanwhile, high inventory levels of fuel vehicles have raised concerns about destocking; although valuations have bottomed out, market consensus may soon lower profit forecasts.

Citi listed five recommended stocks including BYD (01211.HK), Pony AI (02026.HK) or WeRide (00800.HK), Hesai Technology (02525.HK), Minth Group (0425.HK), and Weichai Power (2338.HK)