Citibank: Mainland's new subsidy policy for replacing old with new may accelerate the consolidation of entry-level car market, with BYD COMPANY (01211) and other major players having a competitive advantage in scale.

Citi released a research report stating that mainland China has updated the subsidy policy for replacing old cars with new ones this year. Although the subsidy cap remains the same as last year, this year's subsidy will be calculated as a percentage of the vehicle price, unlike the fixed amount from last year. Under the policy for scrapping and replacing, only new energy vehicles priced above 166,700 yuan (RMB) and fuel vehicles priced above 150,000 yuan are eligible to receive the maximum subsidy amount; under the policy for trade-ins, only new energy vehicles priced above 187,500 yuan and fuel vehicles priced above 216,700 yuan are eligible to receive the maximum subsidy amount. Citi believes that the new subsidy for replacing old new energy vehicles and fuel vehicles in the 2026 fiscal year may accelerate the consolidation of the entry-level vehicle market (i.e., with an average selling price below 160,000 yuan). Compared to other small car companies still in a loss-making state, BYD COMPANY (01211), GEELY AUTO (00175), and Great Wall Motor (02333) may have a cost advantage and leverage from higher-profit export business in the domestic market. It is also believed that the subsidy for commercial trucks and city buses this year remains the same as last year, which should benefit Yutong Bus Co., Ltd. (600066.SH) and Sinotruk Jinan Truck (03808). Citi predicts that in the fourth quarter of last year, China's retail sales of passenger vehicles may have deviated from normal seasonal fluctuations by around 700,000 to 800,000 vehicles. Even if 100% of this sales volume is added back to the first quarter of this year, according to Citi's estimates, wholesale sales of passenger vehicles in the first quarter of this year are still expected to decrease by 33% (8% year-on-year). Citi also expects that the H-shares of PONY-W (02026) will enter the Hong Kong Stock Connect around the middle of 2026.