Huatai Securities: The fund holdings and valuations in the automotive sector have reached historical lows. Focus on the improvement in domestic sales sentiment by the end of the third quarter.

According to a report by Huatai Securities, in the second quarter of 2026, the proportion of automotive sector funds heavily invested in stocks will drop to 1.65%, the lowest level since 2021. The valuation is below the 15% percentile for nearly five years, with both position and valuation at historically low relative levels. The report suggests that the main reason for this round of reduction is the decline in domestic demand that has pressured profit expectations for the sector. The siphoning effect of the AI main theme has accelerated the clearance of chips, compressing the reduction to a rapid completion within one quarter. All four core sub-sectors have seen a reduction in allocation, but the differentiation is significant: the reduction in passenger vehicles is the deepest, with the weakest fundamentals; commercial vehicles are seeing an improvement in profitability while the decline in holdings and share prices ranks among the highest, showing the largest divergence; parts are the most resilient against declines, and some stocks with independent alpha have seen increased holdings; motorcycles and others are the only over-allocated segment within the automotive secondary sector. The report believes that the odds for the sector may have reached extremes, with limited space for downward adjustments, while the win rate depends on the turning point in the sectors fundamentals. It emphasizes the importance of monitoring the improvement in domestic sales trends by the end of the third quarter, with a priority on the commercial vehicle export chain and the motorcycle sector that have shown strong exports, as well as parts stocks with independent alpha.