HSBC takes a clear stance: BYD has "enormous upside potential", while Tesla is "maintained as reduce"!

As the sales champion of global new energy vehicle companies, BYD's performance in the Chinese market outshines Tesla. In the past six months, BYD's H shares have risen by 19%, outperforming the market, while Tesla has plummeted by 28%.

In a recent report released by HSBC, it pointed out that Tesla is on a path of "difficult return to reality" with a highly uncertain future, giving it a sell rating; while BYD, with its deep technological reserves, can continue to lead the new energy vehicle market, receiving a buy rating.

BYD: Leading in Technology, Difficult for Peers to Catch Up in the Short Term

Analysts state that over the past decade, BYD has accumulated a moat of products and technology that makes it difficult for competitors to replicate. Coupled with strong sales performance in April and May, it has provided support for its stock price.

On May 28th, BYD announced its fifth-generation DM hybrid technology, which can achieve a total range of 2100 kilometers (almost three times that of traditional fuel vehicles).

HSBC believes that peers cannot easily replicate the company's leading technological position, thanks to ten years of innovation and unique vertical integration capabilities.

Overall, with the strong growth of plug-in hybrid vehicles in 2016 (CPCA data at 41%, and 33% by 2023), we believe BYD has the ability to capitalize on sales opportunities with its plug-in hybrid technology. With affordable models for the market below RMB 150,000, as well as new car cycles in the compact and midsize markets, we expect BYD to continue gaining market share, especially as fuel vehicles continue to decline.

Looking ahead, HSBC stated that BYD has a strong product and technology cycle, with its existing plug-in hybrid models likely to be gradually updated and transition to the fifth-generation DM hybrid platform. Overall, with the strong growth of plug-in hybrid models in 2024 (41%, compared to 33% in 2023), BYD is well prepared to capitalize on sales growth opportunities with its plug-in hybrid technology.

HSBC also mentioned that compact passenger cars are the mainstream of the Chinese car market, accounting for 78% of passenger car sales in 2023. In the first four months of this year, compact models contributed 58% to BYD's retail sales. With the strong push of plug-in hybrid technology and competitive pricing, BYD dominates the compact electric vehicle market.

HSBC pointed out that the electrification rate of compact passenger cars is low, with most market share held by fuel vehicles (27% electrification rate in the first four months of this year). The bank believes that BYD has the ability to seize sales opportunities with its outstanding product competitiveness of plug-in hybrid models (compared to traditional fuel vehicles) at reasonable prices.

Overall, HSBC holds an optimistic view on BYD's sales and market share expansion prospects, maintaining a buy rating for BYD with a target price of HKD 322, representing a 38% upside from the current price

Tesla: Weak Sales, Uncertain Future

For Tesla, the evaluation given by HSBC is quite negative.

Firstly, in terms of management, HSBC points out that there are still uncertainties regarding Musk's sky-high compensation plan approved earlier this month. Even if the shareholders' meeting approves Musk's compensation agreement, it will not resolve the legal dispute, only meaning that the court may consider the voting results of the shareholders' meeting when making a decision.

Moreover, Musk has previously stated that he would feel uneasy about turning Tesla into an AI and robotics giant if he did not have 25% of the voting rights. However, even if his compensation agreement is approved by the court, theoretically, after exercising 304 million options, Musk's stake in Tesla would only be about 22%, meaning he would need to hold an additional 3% of Tesla's shares to be "comfortable."

On the operational front, HSBC believes that the situation of weak Tesla sales has not been alleviated:

In an environment where the penetration rate of electric vehicles is not high and competitive pressure continues to increase, Tesla's sales continue to be affected. After experiencing a weak first quarter (with sales down 9%), Tesla CEO Musk stated that Tesla would achieve growth for the remainder of this year, but deliveries in April to May in the US/EU/China once again fell by 9%.

We believe that model aging, issues with bulk sales, and unfavorable political factors are affecting sales (and profitability). We have lowered revenue expectations for 2024-26 by 3-7% and operating income expectations by 5-9%.

Furthermore, HSBC is also skeptical about Musk's grand visions (robotaxi and humanoid robots):

In the long term, the timing and commercialization of Tesla's various ideas (Dojo, FSD, Optimus, etc.) remain uncertain. There may be hope in the future, but it is still very uncertain.

In conclusion, HSBC rates Tesla as a sell with a target price of $120. As of the US stock market closing on May 18th, Tesla was trading at $185 per share, indicating a potential downside of 35%