China Galaxy Securities: New Intelligent and Global Opportunities Enabled by New Quality Productivity. Suggestions focus on four main themes.

China Galaxy Securities released a research report stating that looking ahead to the "14th Five-Year Plan" period, expanding domestic demand and accelerating the development of new productive forces are two key tasks. The auto industry is expected to benefit from the support of domestic demand policies, with AI driving a new round of technological revolution and reshaping the development of the automotive industry. The automotive industry will focus on technological innovation (electrification, intelligence) and global industrial chain layout (going global). In the short term, the report believes that policy dividends that boost domestic demand (such as the replacement of old vehicles with new energy vehicles policy) can be seized, while in the medium to long term, the layout of new productive forces (Siasun Robot & Automation, low-altitude economy) can be planned. The main points of China Galaxy Securities are as follows: The automotive industry makes a significant contribution and replaces land fiscal revenue as a new pillar of economic development. Since 2021, due to the sluggish sales of commercial housing, the decline in the willingness and ability of real estate companies to acquire land, the scale of local government land transfer revenue has significantly decreased, and the proportion continues to decline, making it difficult to continue the economic development model dominated by land fiscal revenue. The accelerated development of new productive forces is injecting new vitality into the economy. The new energy vehicle industry has become an important carrier of new productive forces and a new engine for economic development. On the one hand, the automotive industry makes a significant contribution to GDP. From 2013 to 2024, the total output value of key automotive enterprises in China increased from RMB 2.51 trillion to RMB 4.45 trillion, with the proportion of GDP stable at over 3%, making it one of the pillar industries of the national economy. On the other hand, the automotive industry, with its long industry chain, high degree of association, and wide-ranging influence, can provide a large number of employment opportunities and stabilize the job market. Review of the 14th Five-Year Plan: The golden age of development of independent brand new energy vehicles. Policy support continues to boost domestic demand, and during the 14th Five-Year Plan period, the development of new energy vehicles has entered the fast lane. During the 14th Five-Year Plan period, the new energy vehicle policy shifted from a single direct subsidy to diversified support such as tax incentives, industry planning, and market regulations, mainly focusing on subsidies for replacing old vehicles with new ones, promoting new energy vehicles to rural areas, and reducing purchase tax for new energy vehicles. The sales of new energy vehicles continue to grow, with a rapid increase in penetration rate. In 2024, sales reached 12.8659 million vehicles, a year-on-year increase of 35.5%, with a penetration rate of 40.93%, up by 35.53 percentage points from 2020. Independent brands are rising in the tide of new energy, driving China towards becoming a strong automotive nation. Through advanced layout and continuous technological innovation, independent brands have gained a leading edge in new energy products, successfully promoting the transformation of China's automotive industry towards new energy, with market share reaching new highs. In 2024, sales of independent brand passenger vehicles reached 17.958 million, a year-on-year increase of 23.5%, with a cumulative market share of 61%, up by 8.6 percentage points from the same period last year. Sales of leading independent brand car companies continue to grow, with brands such as BYD Company Limited, Geely, Chery, and Great Wall seeing significant increases in market share. The pace of overseas expansion continues, and the global development of the industry has made new breakthroughs. During the 14th Five-Year Plan period, China's automotive industry exports have maintained high-speed growth, surpassing Japan to become the world's largest automotive exporter. In 2024, the number of exports reached 6.41 million vehicles, with a five-year compound annual growth rate of 45.15%. The export structure continues to optimize, with new energy being a key force driving the growth of China's automotive exports, accounting for 35.76% of passenger car exports by 2024. Export markets continue to expand, maintaining a high share in the European market and rising rapidly in emerging markets such as Southeast Asia and Latin America. Outlook for the 15th Five-Year Plan: The era of intelligent interactive transformations. Artificial intelligence empowers the development of new energy intelligent cars, enhancing the advantages of China's auto industry. Intelligence is transforming from an additional function to the core competitive edge of the automotive industry. AI technology is fully empowering the intelligent automotive industry to form a new ecological system. Intelligent driving: End-to-end solutions to efficiency issues in perception-decision, multimodal large models enhance decision intelligence and scene adaptation capabilities. Intelligent cockpit: The penetration rate continues to increase, and the experience is being restructured from a "tool" to a "third space." It is expected that there will be significant growth space in the field of cockpit monitoring during the 15th Five-Year Plan period. The convergence of cars, intelligent bodies, and low-altitude economy is multidimensional, and the transformation of car companies is inevitable. Intelligent body: Key technologies for autonomous coordination are gradually being upgraded, presenting a trend of diversified applications in the industrial, service, special, and humanoid Siasun Robot & Automation sectors. The core logic behind the entry of car companies and component manufacturers lies in the same source and reuse of automotive technology, the deep integration of industrial ecosystems, and the continuous expansion of application scenarios. The 15th Five-Year Plan period is expected to become a new growth point. Low-altitude economy: The industrialization process is accelerating, and application scenarios are expected to broaden. In recent years, new technologies and applications have driven the continuous growth of key components such as aircraft, core sensors, with deepening applications integrating with culture, tourism, logistics, agriculture, etc. It is expected that the global market size of UAM will exceed one trillion US dollars by 2040. There is vast potential for expansion in overseas markets, constantly exploring new markets, and building overseas new energy automotive industry clusters. In terms of total volume, Chinese independent brands can tap into an overseas passenger car market volume of 10 to 15 million vehicles, with overseas sales expected to reach 9 million vehicles by 2030, and overseas market share to reach 13%. The model structure is influenced by EU tariff policies, with exports of new energy vehicles primarily focusing on plug-in hybrids (PHEV). In terms of export markets, Europe, the Americas, and Southeast Asia have become the most potential markets for China's passenger car exports, while regions rich in oil such as the Middle East and Russia are expected to contribute to the growth of fuel vehicles during the 15th Five-Year Plan period. In terms of overseas mode, localization and optimization of the supply chain will become the core competitiveness of Chinese car companies going overseas during the 15th Five-Year Plan period. On the one hand, the rise of capacity overseas is conducive to faster integration into local markets and risk mitigation, while on the other hand, many car companies are exploring a "new joint venture" model of technology transfer, where Chinese companies lead in product definition and intelligent electric technology, while foreign partners provide branding, styling, and mechanical hardware development, reducing the risks of independent brand overseas expansion. Recommendations focus on four main lines: 1) Policy-driven domestic demand: In the short term, policies encouraging car consumption will continue, but may lean towards high-priced models to avoid price wars and ineffective competition. In the long term, policy orientations that support strong enterprises and encourage long-range hybrid/lightweight technologies are expected to collectively drive domestic car sales steadily upward. 2) Further penetration of electrification and intelligence: The penetration rate of electrification continues to increase, and intelligence is accelerating its penetration into mid-low-priced models, driving the upgrade of both vehicle and components, with the accelerated trend of "equal rights for smart driving" possibly ushering in a new round of industry elimination. 3) Global layout and opportunities for going global: Export markets are core sources of growth. With technological and cost advantages, independent brands are accelerating their global layout, focusing on Europe, Southeast Asia, and emerging markets. 4) Layout of new productive forces: Humanoid Siasun Robot & Automation and the low-altitude economy are expected to create new growth curves, with the expansion of new emerging businesses by car companies and component manufacturers driving medium to long-term growth. Risk Warning: Risks of domestic car market sales falling short of expectations; risks of intensified market competition; risks of export growth falling short of expectations; risks of the development of emerging industries falling short of expectations.