JP Morgan's Insight: The narrative of automotive company valuations has changed, with overseas expansion and AI potentially becoming new valuation anchors

Author | Zhou Zhiyu

Editor | Zhang Xiaoling

The recently concluded Guangzhou Auto Show left the deepest impression on Nick Lai, the head of Asian automotive industry research at JP Morgan, as "cold." He described this auto show, which serves as the finale for 2025, as "the smallest domestic auto show in the past decade."

As some foreign brands chose to remain low-key with their heavyweight new models, and second-tier brands like Porsche, Jaguar Land Rover, and Hyundai were absent, the signal conveyed by the industry is very clear: everyone is saving their "bullets" for 2026—especially for the Beijing Auto Show in April next year.

In an interview with Wall Street Insight, Nick Lai warned that the Chinese auto market may enter a more challenging environment in 2026. He pointed out that the capital market will no longer pay for mere sales volume; the valuation anchor is rapidly shifting towards the monetization capability of AI technology and overseas profitability levels. Only companies with these two Alpha attributes will be able to break through and gain a premium in such a market.

Nick Lai believes that the fundamental reason for the intense competition in 2026 is that there are too many competitors. By the end of 2025, the estimated production capacity reserve in the Chinese automotive industry is 50 million units. However, the estimated total industry product output for 2025 is only about 34 million units.

Additionally, Nick Lai predicts that lithium carbonate prices will rise overall next year. Coupled with the potential tightening of the "trade-in" subsidy policy, the gross profit margin for car manufacturers may be further compressed. However, OEMs can still alleviate these pressures through various strategies, such as creating better sales combinations, expanding overseas, or launching competitive new energy vehicle models, as seen with several interesting new energy models from Chinese brands at the Guangzhou Auto Show.

"Assuming that domestic demand remains flat next year (2026), cost pressures will be transmitted from OEMs to first-tier suppliers, and every link in the supply chain may have to bear the burden."

In such a high-intensity competitive environment, Nick Lai believes that 2026 will be a year of further polarization in the market landscape.

Nick Lai observed that some foreign brands have begun to rationally cut losses.

Of course, not all foreign brands are retreating. Brands like Volkswagen, Audi, Nissan, and Toyota have chosen to embrace local supply chains like Huawei, attempting to regain ground through technological alliances.

For foreign brands, embracing the Chinese local supply chain is no longer a choice but a matter of survival. Nick Lai believes that joint venture brands are heading towards polarization: one type, like Volkswagen, is managed by Chinese leadership with high dominance, actively utilizing local supply chains and platforms, and these companies are expected to "regain ground"; the other type still adheres to a global synchronization strategy, struggling to adapt to the speed of product iteration in China, and may face greater challenges in the future.

Nick Lai predicts that weaker brands will accelerate their exit due to a lack of self-sustaining capabilities, and industry concentration will further lean towards the leading players.

In such a red ocean market, how will the capital market select winners? Nick Lai pointed out that investors' valuation logic is undergoing a fundamental change.

Looking back at 2025, although the automotive sector overall underperformed the MSCI China Index, the number of automotive companies whose stock prices doubled by mid-year reached a historical high (5 companies). This indicates that the market is no longer making Beta investments in the sector but is seeking individual stocks that can generate Alpha Looking ahead to 2026, Lai Yizhe pointed out two new valuation anchors: going overseas and AI.

As domestic competition becomes fierce, overseas markets have become a new growth point. Lai Yizhe estimates that China's automobile export volume is expected to be around 6.6 million units in 2025, and this figure will exceed 7 million units in 2026. More importantly, the profit contribution is significant, with "the profit generated from selling one car overseas being approximately equivalent to that from two to four cars sold domestically."

Lai Yizhe expects that by 2026, the profit contribution from overseas operations for some major manufacturers will reach as high as 20% or even over 50%. Those who can successfully expand overseas will gain higher profit expectations in their valuation models.

In addition to making money from car sales, the capital market is beginning to pay a premium for "technological attributes." "Next year (2026), some individual companies will have AI stories to tell, such as whether robots or autonomous driving models will gain traction..." Lai Yizhe emphasized that although humanoid robots are still in their early stages, some companies have already taken the lead in this area.

The future valuation of car companies will no longer be limited to the PE (price-to-earnings) logic of manufacturing but will incorporate the valuation systems of tech stocks such as AI, chips, and robots. Companies with these stories will see their stock performance diverge further from traditional automakers.

By 2026, the Chinese automotive market will enter a true "final sprint." For car companies, the era of simply "competing on price" has ended. Only those that can generate profits in overseas markets and tell compelling new stories of "AI + mobility" in the capital market will gain the favor of capital and the right to survive