Broker: UOB Kay Hian
Date of Report: 5 September 2025

China Auto Sector 2025: Price Wars, Margin Squeeze, and the Survival of the Fittest

Executive Summary: The State of China’s Auto Industry

China’s automobile industry faced a punishing price war in the second quarter of 2025, leading to a widespread squeeze on margins throughout the supply chain. Despite government anti-involution measures, intense competition, inventory pressures, and strategic pricing by both domestic and international players like Tesla have created a challenging environment. Industry consolidation is accelerating, with large OEMs and agile young companies poised to survive and thrive, while others face existential risks. This report delivers a comprehensive analysis of the sector, with detailed breakdowns of key players, financials, and investment calls.

Key Themes: Price War Fallout and Industry Realignment

• Price War Impact: Margin contraction hit all but a select few OEMs, with supply chain players also feeling the pressure.
• Government Subsidies: Massive state support is propping up several automakers, distorting net profit figures.
• Inventory and Receivables: OEMs are pushing pain down the supply chain, either squeezing suppliers or dealers.
• Consolidation & Survivors: Large and nimble players are expected to weather the storm; some young firms are emerging as turnaround stories.

Sector Ratings and Top Recommendations

• Sector View: Market Weight (Maintained)
• Top BUYs: CATL, Geely
• Top SELLs: BYD, Li Auto

Peer Comparison Table

Margin Squeeze and the Price War: Winners and Losers

OEMs: Margin Pressures and Strategic Maneuvers

• Margin Squeeze: Almost all OEMs saw big contractions in gross and net profit margins per vehicle, except Geely and XPeng, which improved thanks to strict price discipline.
• Inventory Management: BYD reduced receivable days from 47 to 25, shifting pressure to dealers. GWM stretched payable days to 105, affecting suppliers. Geely kept the healthiest channel inventories, below 45 days.

Auto Parts and Battery Companies: Diverging Fortunes

• Margin Contraction: Five of 12 major midstream/upstream players — Desay SV, Minth, Tuopu, Ganfeng Lithium, Tinci Materials — saw margin contraction.
• Margin Expansion: CATL, Fuyao Glass, and Sanhua posted the strongest margin improvement, leveraging dominant market positions.

Government Subsidies: A Major Profit Engine

• BYD booked RMB 6.4 billion in government grants in 1H25 (up 96%), accounting for 41% of net profit. If fully excluded, core net profit would have plunged 49% YoY.
• GWM’s net profit also relied on over 40% subsidies, up from 15% a year ago.

Tesla’s Price Cut Rekindles the War

• On 1 Sep 2025, Tesla slashed Model 3 prices in China by RMB 10,000, reigniting the industry price war.
• Li Auto responded with discounts of RMB 12,000–30,000 on select models.
• Analysts assert that despite anti-involution policies, oversupply, product heterogeneity, and continued government support make price wars inevitable.

Industry Consolidation: Who Will Survive?

• Large private carmakers (Geely, BYD, Chery, GWM) and major state-owned firms (FAW, SAIC, Dongfeng, Changan, Guangzhou Auto, BAIC, JAC) are expected to survive — some via state-directed M&A.
• Younger players like XPeng, Leapmotor, and Aito are positioned for success as they improve earnings and cash flow.

Company Deep Dives: Sales, Margins, and Outlooks

BYD Company (SELL, Target: HK\$90.00)

• Insurance registrations for the 35th week of 2025 missed expectations, dropping 18% YoY and 2% WoW to 75,000 units — the eighth week of negative YoY growth.
• China PEV market share fell to 26.3%, down 9.6ppt YoY and 2.7ppt WoW. Domestic registrations in August stood at 310,150 units, down 17% YoY.
• Inventory remains high, above 70 days for eight months. BYD cut its 2025 sales target from 5.5m to 4.6m units, but this is not officially confirmed.
• 12 new models are due by year-end, but their impact is uncertain amid fierce competition.
• Overseas growth is strong: August exports were 80,810 units (up 157% YoY), with 8M25 exports totaling 625,816 units (up 136%). Overseas sales forecasts are 1.0m/1.3m/1.6m for 2025–2027.
• Risks: Persistently high inventory (160 days), overseas plant construction issues (Brazil, Turkey).
• Net profit forecasts for 2025–2027: RMB 32.08b, RMB 31.92b, RMB 31.28b, based on 5.0m/5.5m/6.0m units sold. DCF target price: HK\$90.00.

Geely Automobile (BUY, Target: HK\$42.00)

• 35th week insurance registrations soared 42% YoY and 7% WoW to 57,300 units, led by the Galaxy series.
• August registrations increased 37% YoY to 224,400 units, slightly higher than wholesale shipments. Inventory is robust, remaining below 45 days.
• New models — Galaxy A7, Galaxy M9, Galaxy Starray 6, Zeekr 9X — received strong market response.
• Three more EVs to launch before year-end: Galaxy Starray 6, Lynk & Co 10 EM-P, Zeekr 8X SUV.
• 2025–2027 core net profit forecasts: RMB 13.56b, RMB 16.56b, RMB 20.35b, based on sales of 3.0m/3.6m/4.3m units. Target price: HK\$42.00 (23x 2026F PE).

XPeng (BUY, Target: HK\$150.00)

• August deliveries surged 169% YoY to a record 37,709 units. Insurance registrations for the 35th week were up 140% YoY to 8,400 units.
• The new P7 model, launched in late August, received over 30,000 orders in 48 hours. New P7 features include advanced tech design, rotatable touchscreen, AR-HUD, and in-house Turing AI chip.
• Upcoming: Kunpeng Super EV X9 (RMB 359,800–419,800) with 800V SiC platform, 740km range, 5C charging, and L4-ready autonomy.
• 2025–2027 delivery forecasts: 400,000/500,000/650,000 units. 2025 net loss forecast: RMB 1,591m; 2026–2027 net profits: RMB 1,098m, RMB 5,273m. Target price: HK\$150.00 (10-year DCF).

Li Auto (SELL, Target: HK\$70.00)

• August deliveries plummeted 41% YoY and 7% MoM to 28,529 units. 35th week insurance registrations fell 25% YoY, but rebounded 11% WoW due to price cuts on L9 and Mega.
• The i8 model recorded 3,200 insurance registrations since launch, aiming for 8,000 by end-September. Sales growth depends on the new i6 pure electric SUV, with up to 720km range, debuting in September.
• 2025–2027 net profit forecasts: RMB 5.26b, RMB 5.87b, RMB 6.54b, based on 400,000/450,000/500,000 units. Target price: HK\$70.00 (10-year DCF).

Monthly Sales Snapshot by Brand (August 2025)

Spotlight: Product Launches and Innovation

• Geely Galaxy A7: Mid-sized plug-in hybrid sedan, RMB 81,800–117,800, class-leading range and AI features.
• Galaxy M9: Six-seat flagship plug-in hybrid SUV, RMB 193,800–258,800, advanced AI and smart driving tech.
• Zeekr 9X: Premium all-electric SUV, RMB 479,900–569,900, 800V ultra-fast charging, 623km range, luxury features.
• XPeng P7 (2025): Tech-forward sedan with Turing AI chip, strong early orders.

Key Financial and Operational Metrics: 2Q25/1H25 Summary

Investment Outlook: Opportunities and Cautions

• Preference order: auto parts manufacturers > OEMs > dealers.
• CATL and Geely are highlighted for innovation and market leadership.
• BYD and Li Auto are contrarian SELLs, reflecting peaking domestic sales and persistent margin pressures.

Conclusion: Navigating a Volatile but Dynamic Sector

The Chinese auto industry in 2025 is marked by aggressive price competition, reliance on government support, rapid innovation, and looming consolidation. Investors should focus on innovation leaders and those with resilient balance sheets, while remaining wary of companies with high inventories and overexposure to domestic market saturation. As the sector moves toward a new equilibrium, selectivity and vigilance are paramount.