Maintain BUY. GAC’s 2Q26 net loss widened QoQ on selling expenses and equity income, despite revenue beat. Management raised FY26E export target by 20%, which may result in margin improvement in 2H26E. That, along with improving Aion retail customer mix and continuous cost reduction efforts, could drive multi-year GPM recovery, in our view.

2Q26 revenue beat, brand-building expenses drag. GAC’s 2Q26 revenue rose 16% YoY and beat our estimate by 13% to RMB26.3bn. GPM improved slightly to -2.4% (vs. -2.7% in 1Q26 and -4.9% in 2Q25), beating our forecast of -3.1%. Net loss in 2Q26 widened by almost RMB3.2bn QoQ to RMB3.8bn on larger selling expenses (Aistaland’s brand building and network build-out, as well as homegrown brands’ overseas channel expansion) and weaker equity income (GAC Honda’s wider net loss with 30% QoQ sales volume decline).

Margin recovery on exports and customer mix improvement. Following a 132% YoY surge in 1H26 overseas sales volume, management raised its FY26E export target to 0.3mn (from 0.25mn), or ~39% of our homegrown volume forecast. Overseas gross margin is guided at ~8% this year, significantly outperforming domestic negative margins. Localization efforts continue to mitigate tariff risks, with seven KD plants in operation. Meanwhile, Aion’s domestic customer mix is improving, with ride-hailing accounting for ~20% in 1H26 (vs. ~50% in FY25). Such trends, coupled with a 15% cost-reduction target in FY26, we expect GPM to recover to -1.2% in 2H26E, +0.6% in FY27E and +2.7% in FY28E.

Aistaland rollout on track; JV outlook diverges. The first Huawei codeveloped model, Aistaland GT7, launched on 26 Jun with 298 sales channels (40% Huawei-authorized) in operation, following by the 2nd model GX7 in Sep. GAC Toyota remains resilient, with a denser 2027-28 NEV pipeline supporting our stable RMB2.1-2.2bn annual equity income contribution during FY26-28E. Upcoming models at GAC Honda will incorporate HarmonyOS cockpits and Momenta ADAS solutions. We project GAC Honda’s net loss to narrow in FY27-28E.

Earnings/Valuation. We now project GAC’s FY26-28E net loss to be RMB9.9bn/6.5bn/4.2bn, respectively. We maintain BUY and cut H-share target price from HK$4.20 to HK$3.60, based on a SOTP valuation: HK$2.85 per share for homegrown businesses at 0.2x FY27E P/S (lowered from 0.3x due to larger net loss projection); and HK$0.75 per share for JVs and associates at an unchanged 3.0x FY27E equity-income P/E. Our Ashare target price of RMB8.60 reflects a 175% A/H premium. Key risks include lower sales volume/margins, further JV earnings erosion, higher overseas risks than we expect, and a sector de-rating.