J.P. Morgan Asia-Pacific Industrials Watch: Chinese automakers’ profits under pressure as automation demand diverges
J.P. Morgan sees machine-tool and semiconductor investment supporting automation in Taiwan, but has cut its earnings forecasts for Chinese automakers; company results also show that revenue growth and improvements in profit quality do not always move in step.
Original source：J.P. MorganFirst published on Unhidea：Original source date：
Key takeaway
J.P. Morgan believes machine-tool and semiconductor demand is supporting the automation cycle, but automotive costs, export policies and changes in some companies’ cash flows are causing the benefits of growth to diverge markedly.
Taiwan’s automation recovery: why distinguish between end-market demand?
J.P. Morgan believes a recovery in machine-tool demand, Chinese manufacturing upgrades, and investment in AI and semiconductors are jointly supporting the automation cycle: Japanese machine-tool orders rose 65% year on year in August 2026, while Taiwan’s machinery export orders rose 23% year on year in the first nine months.
The bank prefers Airtac and Syntec, rating both Overweight; it forecasts return on equity of 23%–46% for the two companies in 2026–2028, above HIWIN Technologies’ 8%–9%. Airtac aims to raise its share of China’s pneumatic components market from 30% in the first half of 2026 to above 35% by 2030; Syntec is expanding its share of the computer numerical control systems market as rivals face component supply constraints.
But Airtac’s chairman said growth in Chinese orders had slowed somewhat. Investors are therefore paying closer attention to areas with more resilient demand, such as machine tools and semiconductors, while automotive and battery demand is weakening.
What profit pressures will Chinese automakers face in 2027?
J.P. Morgan expects domestic passenger-car demand in China to range from flat to down 5% in 2027, with exports growing 20%; meanwhile, higher memory prices, changes to value-added tax policy for new-energy vehicle exports and insufficient plug-in hybrid sales in Europe will add to earnings pressure. The bank downgraded BYD’s A-shares to Underweight and cut earnings forecasts for several automakers.
By the bank’s estimates, a 22%–26% rise in memory costs in 2027 will add another 1000–2000 yuan to materials costs per vehicle; the impact of export VAT policy is equivalent to approximately 5%–10% of earnings per share, while insufficient European plug-in hybrid sales have an impact of approximately 6%–8% on BYD and Chery. The benefit from lithium prices could also be offset by competition.
The forecast gap is evident in 2027 earnings: J.P. Morgan’s net profit forecasts for BYD A-shares, Geely and Great Wall Motor are 12%, 15% and 32% below Bloomberg consensus estimates, respectively.
Which earnings-report growth translated into better profitability?
HD Hyundai Marine Solution’s third-quarter operating profit was 96 billion won, with a margin of 14.7%, below J.P. Morgan’s forecast of 18.2%, mainly due to 9 billion won in Goltens integration costs. The adjusted core margin was 29.2%, above the bank’s forecast of 28.3%; integration costs may continue into the fourth quarter, but are expected to be smaller.
Inovance Technology’s third-quarter revenue rose 19% year on year and net profit rose 24%, but recurring profit calculated by J.P. Morgan fell approximately 12% year on year, while non-cash fair-value investment gains supported reported profit. Operating cash flow swung from an inflow of approximately 1 billion yuan a year earlier to an outflow of approximately 1 billion yuan; industrial automation order momentum has slowed markedly since August.
Hengli Hydraulics’ third-quarter revenue and recurring net profit both rose 30% year on year, but its gross margin fell approximately 2 percentage points to 40.1%, affected by the ramp-up of operations in Mexico and new businesses such as automation ball screws and robotics. Ball-screw revenue rose 400% year on year in the first nine months, and its gross margin turned positive in the third quarter.
If AI capital spending weakens, when will industrial companies come under pressure?
J.P. Morgan notes that the AI capital expenditure cycle has entered its fourth year. High interest rates, uncertainty over the pace of AI monetization, and scrutiny of capital spending by shareholders of major cloud computing companies could all affect future investment.
The bank conducted a downside scenario analysis of 11 electrical equipment and diversified industrial companies affected by AI, concluding that the earnings impact would be more pronounced in 2029–2030 than in the near term; screening for earnings growth, valuation and fundamentals, it finds GE Vernova, nVent and Trane Technologies relatively more attractive.
