JP Morgan: Impact of China's Auto Policies Remains Unclear; Cost Pass-Through and Localization Progress to Affect Next Year's Profitability

J.P. Morgan released a research report stating that recent client conversations revealed divergent market views on the earnings impact of the latest policy changes in the auto industry. The bank expects related discussions to remain inconclusive in the near term, reiterates a cautious view on China's auto industry for 2027, and names CHERY AUTO (09973) and Sinotruk Jinan Truck (03808) as its top picks among auto stocks, both rated "Overweight." The bank noted that the market broadly agrees on the policy direction, particularly the battery consumption tax, the cut to export VAT rebates, and tightening overseas trade policies, but is uncertain about which party will ultimately bear the incremental costsbattery suppliers, automakers, dealers, or end customers. The bank expects the policy impact to become clearer around March next year, after automakers advance supplier negotiations and finalize 2027 pricing and incentive strategies. The bank said cost pass-through remains a key variable for corporate profitability, but automakers tend to adopt multiple mitigation measures rather than directly raising manufacturer suggested retail prices. Management is generally reluctant to raise prices on existing models in the still highly competitive domestic market, and instead is considering sharing costs with battery and component suppliers, reducing dealer incentives, selective overseas price adjustments, improving product mix, pricing new models, and accelerating localization. At this stage, it is expected to be difficult to quantify the final earnings impact using simple statutory tax rates.