In 2025, the smart transformation of China's automotive industry is accelerating, UBS Group AG is optimistic about Li Auto, Inc. Sponsored ADR Class A (LI.US) leading the new track.

In 2025, the passenger vehicle market in China is showing mild growth, with UBS Group AG predicting a total wholesale volume of 28.324 million units for the year, a 3% increase compared to the previous year. This growth rate has slowed down compared to the 6% increase in 2024. Behind this change in growth rate is a deep structural adjustment within the automotive market, with sales of traditional internal combustion engine (ICE) vehicles continuing to decline while the penetration rate of new energy vehicles (NEV) is accelerating, leading to a "structural shift" in the market. Specifically, the NEV penetration rate is expected to reach 55% in 2025, a 10 percentage point increase from 45% in 2024. At the same time, ICE sales are expected to decline by 15% year-on-year, dropping to 12.748 million units and falling below a 45% market share. The core drivers of these changes mainly include the following points: continued policy incentives, highlighting cost advantages, and shifting consumer expectations. The continuation of the "Replacing Old with New" subsidy policy by central and local governments has stimulated demand by offering subsidies of up to 20,000 yuan for scrapping combustion vehicles over 12.5 years old or new energy vehicles over 6 years old, injecting vitality into the market. Furthermore, the emergence of BEVs is reshaping the competitive landscape through technological advancements, infrastructure improvements, and cost advantages. The increase in penetration rates of BEVs and the improved infrastructure for charging stations are making BEVs more competitive in the market. As a result, top battery manufacturers and upstream lithium mining companies stand to benefit significantly, while companies focused on PHEVs may face valuation adjustments as the market competition landscape shifts. In terms of exports, the growth rate in Chinese automobile exports is expected to slow down to 10% in 2025 from 23% in 2024 due to high tariff barriers in European and American markets. However, the South Hemisphere markets are showing potential for growth, with Chinese car manufacturers finding success in places like South America, the Middle East, Africa, and Southeast Asia. Finally, the paradigm shift from electrification to intelligence in AI technologies is expected to shape the future of the automotive industry, with UBS Group AG highlighting intelligent driving and manufacturing efficiency as key areas of competition for car manufacturers.Sponsored ADR Class A(LI.US) and other car companies have achieved "parking lot to parking lot" full-scene autonomous driving. The AI cockpit of Xiaomi SU7 has a daily user interaction frequency of 15 times, far exceeding traditional car models, bringing users a new driving experience. In terms of productivity revolution, the AI quality inspection system has reduced the defect rate of the production line by 30%, and the unit manufacturing cost of the Ideal Changzhou factory has decreased by 8% year-on-year, effectively improving production efficiency and product quality. In terms of capital focus, new forces with AI genes (such as Xiaomi, Xiaopeng) have a research and development investment ratio of more than 15% of revenue, while traditional car companies cooperating with technology companies like Huawei are facing the challenge of "intergenerational differences", and the industry competition landscape is being reshaped.At the same time, Tesla, Inc. (TSLA.US) is facing challenges in the Chinese market. Due to restrictions on cross-border data between China and the US, its FSD (Fully Self-Driving) technology is facing obstacles in China, giving domestic Chinese companies a window of opportunity for 2-3 years. The Huawei ADS 3.0 system has been implemented in the Wenjie M9, with City NOA (Navigation on Autopilot) coverage 40% higher than Tesla, Inc. Chinese domestic companies are gradually emerging in the field of smart driving and are expected to gain a foothold in future competition. Risk warning: Overcapacity and policy gaming The Chinese automotive industry also faces some risks and challenges in its development process. First is domestic demand pressure. Cash reserves of private non-financial enterprises in China amount to 3.5 trillion yen, and with the rise in interest rates, the willingness of car manufacturers to borrow may weaken, affecting the companies' funding chain and investment plans. Second is external uncertainty. If Trump returns to the White House, a 10% tariff on Chinese goods could impact component exports, while the fluctuation of the Japanese yen could intensify the exchange rate risk for exporters, bringing uncertainty to the companies' international business. Third is the risk of technological iteration. If commercialization of solid-state batteries occurs earlier than expected, the valuation of the existing lithium battery industry chain may face reassessment, and companies need to plan ahead for new technologies to cope with potential market changes. Investment theme: Focus on technology leaders and global winners In this market environment, UBS Group AG prefers the following investment targets: Firstly, Li Auto, Inc. Sponsored ADR Class A. Its AI research and development investment leads the industry, reaching 5 billion yuan by 2024, with a clear trend of high-end market substitution for BBA (Mercedes, BMW, Audi), and a valuation of only 15 times PE (global median for auto companies is 20 times), making it a high-value investment. Second is BYD Company Limited. With the advantage of vertical integration, the production of overseas factories has driven export gross profit margin to 25% (18% domestically), enhancing its competitiveness in the global market. Third is Contemporary Amperex Technology. With a deep patent barrier in fast charging technology, a global market share of over 35%, benefiting from the resurgence of BEVs, with the greatest elasticity, it is likely to continue benefiting from the development of the new energy vehicle market. In summary, the Chinese automotive industry is transitioning from "scale expansion" to "technological dominance," with AI and global capabilities becoming the watershed of the next phase. With the dual catalysis of policy and market, companies with a foundation in hard technology and a flexible strategy for going global are likely to continue leading in structural differentiation. Investors can focus on the performance of these companies in terms of technological innovation and market expansion, seizing investment opportunities brought about by the industry's development.