UBS looks ahead to China's automotive industry Q2 earnings: New Forces increase control costs and boost efficiency, while traditional car companies focus on exports.

UBS Group AG reviewed the sales and product portfolios of major Chinese automakers in its latest report, previewed profits for the second quarter, and compared them to buyer expectations. Despite investor concerns about worsening pricing environment in the second quarter, UBS Group AG believes that corporate profits should be able to remain stable. New energy electric vehicle manufacturers Li Auto, Inc. Sponsored ADR Class A, NIO Inc. Sponsored ADR Class A, and XPeng, Inc. ADR Sponsored Class A are expected to have relatively strict cost controls, while traditional car companies BYD Company Limited, Great Wall Motor, and GEELY AUTO are seizing opportunities in exports and high-end markets. UBS Group AG expects that the second quarter profits of most companies will meet or slightly exceed buyer expectations. Cost control for new energy electric vehicle companies Three new energy electric vehicle manufacturers achieved sequential growth in sales with reasonably improved product portfolios, UBS Group AG expects Li Auto, Inc. Sponsored ADR Class A (02015) to see profit growth, while XPeng, Inc. ADR Sponsored Class A (09868) loss will narrow. Compared to Visible Alpha's consensus, UBS Group AG believes that these three companies have stricter cost controls. The goal for NIO Inc. Sponsored ADR Class A and XPeng, Inc. ADR Sponsored Class A is to achieve net profit balance in the fourth quarter, therefore UBS Group AG expects improvement in gross profit margin with cost controls in place. UBS Group AG believes that for Li Auto, Inc. Sponsored ADR Class A, the decrease in computing capacity leasing costs will help control research and development costs. UBS Group AG thinks that the sales of new models (Li Auto i8, NIO Inc. Sponsored ADR Class A Onvo L90, and XPeng G7) for these three companies are more important than profits, but overall, UBS Group AG believes that the profits for these three companies in the second quarter will meet or slightly exceed buyer expectations. Profit resilience for traditional car companies While there is not much high-quality data available for the quarterly forecasts of these three traditional car companies, UBS Group AG believes that investors are concerned about price competition in the second quarter, with overall expectations being moderate. For BYD Company Limited, UBS Group AG believes that its record high export volume (accounting for 21% of second-quarter sales) will help achieve a net profit of 8,800 yuan per vehicle. Great Wall Motor's efforts to enhance the high-end brands of Wey and Tank, with these two brands accounting for 26% of sales, will help boost profits compared to the previous quarter. The complex corporate structure of GEELY AUTO makes profit forecasting more difficult, but UBS Group AG expects its profits to be close to first-quarter levels. UBS Group AG expects that the performance of these three companies will not deviate significantly from buyer expectations. Stock impact Since the end of May, due to investor concerns about price competition, as well as increasing signs of anti-competitive actions, investor sentiment has cooled slightly compared to the previous quarter, with UBS Group AG's slightly more positive view on the industry. UBS Group AG is looking forward to the debut of Li Auto, Inc. Sponsored ADR Class A (buy rating) i8 at the end of July, and is optimistic about the overseas performance of BYD Company Limited (buy rating) and the high-end efforts of Great Wall Motor (buy rating). UBS Group AG is concerned about the performance of XPeng, Inc. ADR Sponsored Class A's new model G7 in the intense competition. Following the release of sales and product portfolios for the second quarter by major automobile manufacturers, UBS Group AG provided previews of the second-quarter profits for three new energy electric vehicle manufacturers Li Auto, Inc. Sponsored ADR Class A, NIO Inc. Sponsored ADR Class A, XPeng, Inc. ADR Sponsored Class A, as well as three traditional non-state-owned automobile manufacturers BYD Company Limited, Great Wall Motor, and GEELY AUTO. Li Auto, Inc. Sponsored ADR Class A (LI.US, $40, buy) Revenue: Li Auto, Inc. Sponsored ADR Class A delivered 111,000 vehicles in the second quarter, with the L6 accounting for 52,000 vehicles, representing 47% of sales. Sales increased by 20% sequentially and 5% year-over-year, although a decrease in product portfolio compared to the previous year may lead to a basic stability in revenue year-over-year. Since Visible Alpha's consensus has not yet reflected the approximately 10% decrease in sales targets for the second quarter, UBS Group AG's forecast for second-quarter revenue is 11% lower than the consensus. Gross margin: UBS Group AG assumes a gross margin of 19.5% for the second quarter, about 30 basis points lower than the first quarter, mainly due to greater pricing pressure in the second quarter than the first quarter. The contribution of L6 to sales is similar to the first quarter, while Mega has a small contribution in the second quarter as it was only present for one month in June, with the product portfolio slightly improving compared to the first quarter. UBS Group AG still assumes that cost optimizations will offset pricing pressure and expects the automotive gross margin to be 30 basis points higher than Visible Alpha's consensus. Expenses: UBS Group AG assumes research and development expenses of 2.6 billion yuan for the second quarter, 1 billion yuan higher than the first quarter. UBS Group AG also assumes sales and management expenses of 2.9 billion yuan for the second quarter, a 15% increase quarter-over-quarter and 3% year-over-year, but slightly lower as a percentage of revenue than the first quarter. This leads UBS Group AG to predict operating expenses of 5.5 billion yuan, stricter than Visible Alpha's consensus. Compared to Visible Alpha's consensus: UBS Group AG's operating profit forecast is 926 million yuan, 14% lower than Visible Alpha's consensus, mainly due to UBS Group AG reflecting the sales target downsizing, though partially offset by controls on production and operational costs. With approximately 100 billion yuan in net cash on Li Auto, Inc. Sponsored ADR Class A's balance sheet, UBS Group AG expects interest income to be 600 million yuan. This will bring net profit to 1.526 billion yuan, 10% higher than the Visible Alpha consensus. Compared to buyer expectations: UBS Group AG believes that buyers are aware of the sales target downsizing for the second quarter, so their expectations are lower than the seller consensus (as reflected by Visible Alpha). Overall, UBS Group AG expects the profit of Li Auto, Inc. Sponsored ADR Class A to meet or slightly exceed buyer expectations. XPeng, Inc. ADR Sponsored Class A (XPEV.US, $18.0, neutral) Revenue: XPeng, Inc. ADR Sponsored Class A delivered 103,000 vehicles in the second quarter, with 39,000 Mona M03 deliveries, accounting for 38% of sales. Sales increased by 10% sequentially, benefiting from a low base, with a year-over-year growth of around 200%; however, a decrease in the product portfolio from the previous year may narrow the year-over-year growth to around 150%. Although Visible Alpha's consensus has not yet reflected the company's expected 3% reduction in second-quarter sales, UBS Group AG's forecast for second-quarter revenue is similar to market consensus. Gross margin: The expected automotive gross margin for the second quarter is 12.0%, up approximately 150 basis points from the first quarter, mainly due to an improved product portfolio. Mona M03's sales share is lower than the first quarter, and exports increased by 45% compared to the previous quarter, which will increase profits. Therefore, the expected automotive gross margin is positive, up 60 basis points from Visible Alpha's consensus. Referring to historical trends, assuming service margin of 1 billion yuan, slightly higher than Visible Alpha's consensus of 940 million yuan. Expenses: Research and development expenses for the second quarter are estimated to be 2 billion yuan, which is relatively stable sequentially with a 36% year-over-year increase. Sales and management expenses are estimated to be 2 billion yuan for the second quarter, a 3% increase sequentially and 27% year-over-year; UBS Group AG's forecast for operating expenses of 4 billion yuan is similar to Visible Alpha's consensus. Compared to Visible Alpha's consensus: The forecast for operating profit is a loss of 457 million yuan, 7 million yuan higher than Visible Alpha's consensus, mainly due to UBS Group AG's higher expectations for automotive gross margin, while also adjusting service margin assumptions. Assuming interest and other income of 150 million yuan, this will reduce the net loss to 300 million yuan, lower than Visible Alpha's consensus of 1 billion yuan. Compared to buyer expectations: UBS Group AG believes that buyers are aware of the improvement in XPeng, Inc. ADR Sponsored Class A's product portfolio in the second quarter, so their profit expectations are higher than the seller consensus reflected by Visible Alpha. UBS Group AG expects that the profit of XPeng, Inc. ADR Sponsored Class A will moderately exceed buyer expectations.