In this report, we sum up our investment strategy for the APAC auto sector. In 2020 we saw the start of a shift to tougher environmental regulations, heightening expectations for uptake of electric vehicles (xEVs). We expect a further pickup in the shift to xEVs (including HEVs) from 2021 driven by tighter regulations, automakers’ xEV launch strategies, and technological innovation. We estimate 2030 sales weightings of 14.6% for battery electric vehicles (BEVs), 37.0% for hybrids (HEVs), and 55.6% for broadly defined electric vehicles (xEVs). We recommend picking stocks with structural growth stories amid the shift toward EVs or prospects for emerging-market growth

 Further shift from cyclical recovery to structural growth: The cyclical recovery from COVID-19 is virtually over, and market expectations are rapidly shifting toward medium-term structural growth themes. Regulation and innovation will likely continue to accelerate the shift toward electric vehicles (xEVs) in 2021 and beyond, and we view this as a key medium-term structural theme.

 xEV demand to accelerate further: The full-scale implementation of European CO2 regulations (95g/km) in 2020 added impetus to (mainly European) automakers’ EV strategies. NEV demand in China fell in 1H but has subsequently recovered, and the recent announcement of revised draft NEV regulations suggests a further shift toward xEVs is likely. We also focus on the resulting impetus for growth in strong/mild hybrid vehicles (HEVs) as well as BEVs. We estimate 2030 demand for BEVs at 14.8 million vehicles (14.6% of the total) and for HEVs at 37.4 million (37.0%), with the xEV weighting rising to 55.6%.

 Focus on emerging-market growth, restructuring: We also continue to focus on growth in emerging markets. Demand in India has rebounded sharply from COVID-19, and we expect a sustained recovery to the previous trendline. We also focus on individual firms' restructuring progress. Nissan and Honda in particular have embarked on fundamental reforms to their auto businesses, and we focus on the impact of production capacity cuts and platform revamps.

 Regional stock recommendations: Our APAC auto team’s regional recommendations based on the above-noted megatrends are Suzuki Motor (7269) and Toyota Industries (6201) in Japan, NIO, Dong Feng Motor (489), and Wuxi Lead (300450) in China, HMC (005380) in South Korea, and Mahindra & Mahindra (MM) in India. Our stocks to avoid are Mitsubishi Motor (7211) and Aisin Seiki (7259) in Japan, Shanshan (600884) in China, Hyundai Wia (011210) in South Korea, and Tata Motors (TTMT) in India.