BYD beats Tesla hands down

Author | Eastland

Cover Image | Visual China

BYD's sales and profits grow significantly, outperforming Tesla

• 🚗 BYD delivered 983,000 vehicles in the first half of the year, a year-on-year increase of 39.7%

• 📈 BYD's net profit in the first half of the year was 13.63 billion, a year-on-year increase of 24.4%

• 🏆 BYD's gross profit margin reached 23.9%, leading Tesla

On July 24, 2024, Tesla (NASDAQ: TSLA) released its Q2 2024 financial report:

Deliveries in the second quarter were 444,000 vehicles, a year-on-year decrease of 4.7%; the car sales gross profit margin fell to 12.9%; net profit in the first half of the year was 2.64 billion USD, a year-on-year decrease of 48.8%.

After the poor performance announcement, Tesla's stock price fell by 12.3% on the same day, closing at 216 USD; stabilizing and rebounding after dropping to 200 USD on August 5, closing at 210.7 USD on September 6, with a market value of 673.2 billion USD and a P/E ratio of 54.

On August 29, BYD (SZ: 002594) released its "2024 Interim Report":

Deliveries in the first half of the year were 983,000 vehicles, a year-on-year increase of 39.7%; the gross profit margin for car sales in the first half of the year reached 23.9%; net profit in the first half of the year was 13.63 billion, a year-on-year increase of 24.4%.

Following the impressive business announcement, BYD's stock price rose by 4.2% and closed at 249.2 RMB; on September 6, the closing price corresponded to a market value of 732 billion RMB and a P/E ratio of 22.4.

Tesla's valuation is much higher than BYD's for three main reasons: good brand image, minimal impact from various barriers, and high technological content.

A good brand image and global product marketing justify higher sales; technological content implies high premiums and gross profit margins.

However, Tesla's sales are only half of BYD's, with a 9.1 percentage point lower gross profit margin.

Scale advantage has been established

It was not until 2022 that BYD's new energy passenger car sales exceeded Tesla's, reaching 194% of Tesla's in H1 2024. Looking only at pure electric vehicles, BYD's sales also reached 90% of Tesla's.

• 2021

In 2021, BYD sold 321,000 pure electric and 273,000 plug-in hybrid vehicles, totaling 594,000 (new energy passenger cars). In addition, they sold 136,000 fuel vehicles.

That year, BYD's new energy vehicle sales were equivalent to 63.4% of Tesla's, with pure electric vehicle sales accounting for only 34.3% of Tesla's (Tesla sold 936,000 vehicles)

• 2022

In 2022, BYD's pure electric and plug-in hybrid vehicle sales were 911,000 units and 946,000 units respectively, totaling 1.857 million units (new energy passenger vehicles). The sales of traditional fuel vehicles were only 5,049 units (production stopped since March).

During this year, BYD's new energy vehicle sales reached 141.4% of Tesla's, but the sales of pure electric vehicles were only 69.3% of Tesla's (Tesla's sales reached 1.314 million units).

• 2023

In 2023, BYD's pure electric and plug-in hybrid vehicle sales were 1.575 million units and 1.438 million units respectively, totaling 3.013 million units (new energy passenger vehicles).

During this year, BYD's new energy vehicle sales reached 166.6% of Tesla's. Among them, the sales of pure electric vehicles were 87.1% of Tesla's (Tesla's sales reached 1.809 million units).

• 2024 H1

In the first half of 2024, BYD's pure electric and plug-in hybrid vehicle sales were 726,000 units and 881,000 units respectively, totaling 1.607 million units (new energy passenger vehicles). The total sales and pure electric vehicle sales were equivalent to 193.4% and 87.4% of Tesla's respectively (Tesla's sales reached 831,000 units).

From January to August 2024, BYD's total sales were 2.328 million units, a year-on-year increase of 29.9%.

In the automotive industry, economies of scale are extremely prominent, from the improvement of fixed asset (production line) utilization rate, R&D investment sharing, supply chain optimization to increased market influence.

BYD's total sales are approximately twice that of Tesla, and its scale advantage is unshakable.

The Three Possible Outcomes of a "Price War"

At the beginning of the Year of the Dragon, BYD initiated the "first shot" of a price war. In the second quarter, joint venture brands adjusted their strategies: Volkswagen, Toyota, Honda, Volvo, and other brands reduced terminal discounts, while BMW, Mercedes-Benz, and Audi began to raise prices.

However, as the automotive industry is a typical economy of scale, participants in a price war may not necessarily suffer more than they inflict. There could be three outcomes: upper, middle, and lower:

Upper: Sales growth, cost reduction greater than price reduction, revenue and gross profit margin increase simultaneously, and gross profit amount rises (Davis double-click);

Middle: Sales growth, gross profit margin decreases, but gross profit amount increases (small profit, high sales);

Lower: Price reduction does not lead to sales growth, both gross profit margin and gross profit amount decrease (failing to steal the chicken and losing the rice).

International brands withdraw from price wars not out of morality but out of fear of the third outcome.

How will BYD end up?

1. Making 490 yuan less per vehicle

In 2021, BYD's average vehicle sales price was 179,000 yuan per unit (ex-factory price), with a unit cost of 149,000 yuan and a gross profit of about 30,000 yuan per vehicle;In 2022, BYD's average selling price reached 180,000 yuan per vehicle, with a gross profit per vehicle of 37,000 yuan;

In 2023, BYD's average selling price fell to 160,000 yuan per vehicle, with almost unchanged gross profit per vehicle;

In H1 2024, BYD successively launched multiple "affordable models" while existing models were "priced to the lowest". The average selling price in the first half of the year was 142,000 yuan, a year-on-year decrease of 25,000 yuan. Due to a decrease in per vehicle cost by 24,000 yuan, the result was a meager profit of only 490 yuan per vehicle!

1. Gross profit margin on the rise

In 2021, BYD's automotive business gross profit was 19.6 billion, with a gross profit margin of 17.4%; In 2022, the gross profit surged to 66.2 billion, with a gross profit margin of 20.4%; In 2023, the gross profit exceeded 111.3 billion, with a further increase in gross profit margin to 23%;

In H1 2024, BYD's automotive business gross profit was 54.7 billion, a year-on-year increase of 26.6%; Gross profit margin was 23.9%, an increase of 3.3 percentage points compared to H1 2023.

In H1 2024, Tesla unfortunately demonstrated "failing to steal the chicken but losing the rice": a 6.6% decrease in sales volume, a 27.1% decrease in gross profit (equivalent to 36.5 billion RMB), and a 3.1 percentage point decrease in gross profit margin (Q2 gross profit margin was only 12.9%).

In H1 2024, automotive sales revenue increased by 9.3%, gross profit margin increased by 3.3 percentage points, gross profit amount reached a new high, and BYD achieved the first outcome (Davis double-click).

1. Gross profit and expenses

The blue line represents gross profit. For example, in 2023, BYD's gross profit reached 121.8 billion, with a gross profit margin of 20.2%;

The colored stacked bars represent expenses. For example, in 2023, R&D expenses were 39.5 billion, with an expense ratio of 6.6%; Sales expenses were 25.2 billion, with an expense ratio of 4.2%; Management expenses were 13.5 billion, with an expense ratio of 2.2%;

The higher the blue line, the purer the quality of blue-chip stocks.

In 2023, BYD's three expenses totaled 78.2 billion, with a total expense ratio of 13%, which is 7.2 percentage points lower than the gross profit margin.

In Q2 2024, although Tesla's gross profit margin was only 18% (automotive sales 12.9%), the total expense ratio was only 9.2%. The gross profit margin was 8.7 percentage points higher than the total expense ratio, indicating a better profitability than BYDR&D Efforts Surpass Tesla

In H1 2024, BYD's R&D investment reached 201.8 billion (ranking first among over 5300 A-share listed companies). Of this, 196 billion was expensed, with a capitalization rate of less than 2.8% (consistent with BYD's style).

In 2023, BYD's R&D expenses exceeded Tesla by 11.6 billion, a 41% increase (based on the average exchange rate of 7.0467 in 2023).

From 2014 (inclusive) to 2023, BYD and Tesla's cumulative R&D investments were 114.4 billion and 117 billion respectively; by the end of June 2024, BYD's cumulative R&D investment reached 134.6 billion (since 2014).

Looking at the R&D investment of car companies in H1 2024, the first place exceeded 20 billion, while the second place (SAIC) was less than 9 billion, a difference of 11.2 billion.

Between BYD and SAIC, one can fit in "GAC + Dongfeng + Seres + XPeng" or "Geely + Great Wall". Criticizing BYD for "rolling prices" is not as effective as criticizing "rolling R&D".

Expansion Peak Has Passed

1. Aggressive Depreciation

As of the end of June 2024, BYD's original value of fixed assets was 348.6 billion, with accumulated depreciation of 118.5 billion, resulting in a year-end book value of 230 billion, a decrease of 9 billion from the end of 2023. Although the decrease is small, it indicates that the peak of capacity expansion has passed.

Among fixed assets, machinery and equipment account for nearly two-thirds and have a much shorter depreciation period compared to land/buildings, imposing a heavy burden on the company due to substantial depreciation.

In rapidly advancing technological fields, situations often arise where the depreciation period has not ended but the technology has become outdated. For example, with the advent of monocrystalline silicon in photovoltaic batteries, polycrystalline silicon battery production lines (regardless of age) lose competitiveness, and related machinery and equipment can only be sold or scrapped. For new energy vehicle companies, this is a significant potential risk that cannot be ignored.

BYD's response strategy is to accelerate depreciation and eliminate outdated equipment through disposal/scraping. Although this increases current costs, it allows the company to enter the future with lighter assets and reduce the risk of asset impairment (due to forced elimination of outdated equipment).

Using 2023 as an example:

At the beginning of the year (also the end of 2022), the book value of machinery and equipment was 83 billion (original value 128.6 billion). During the year, fixed asset depreciation of 30 billion was recorded, with 6.2 billion in depreciation/scraping, totaling 36.2 billion, equivalent to 43.6% of the initial book value of machinery and equipment (this ratio was 46.1% and 41.2% in 2021 and 2022 respectively).

The additions in 2023 were: 481 billion in purchases and 335.4 billion transferred from construction in progress, totaling 817 billion (compared to 610 billion in 2022) In H1 2024, the increase in the book value of machinery and equipment (acquisition/transfer) was 16.7 billion, while the decrease (depreciation/scrap) was 22.9 billion. The year-end book value of machinery and equipment fell to 132.3 billion.

For three consecutive years, BYD has "cleared" more than 40% of the book value of machinery and equipment each year.

1. High completion rate of construction in progress

As of the end of June 2024, the book value of construction in progress was 43.3 billion (including 4.3 billion in construction materials), an increase of 8.55 billion from the end of 2023.

The interim report shows that BYD has a high completion rate of construction in progress (investment as a percentage of the budget), with the top four being Southwest Industrial Park (78%), Northwest Industrial Park (64%), East China Industrial Park (59.6%), and Central China Industrial Park (59.5%).

Roughly estimated, an additional investment of 32.6 billion in construction in progress would be sufficient to complete all projects.

1. Reduced financial pressure

BYD's interim report is not perfect, with the most obvious "defect" being a 82.7% year-on-year decrease in net cash flow from operating activities. However, this may not necessarily be a bad thing.

In H1 2024, revenue costs increased by 28.4 billion year-on-year, while cash paid for goods/services increased by 92.4 billion, indicating that BYD has settled a large amount of accounts payable to suppliers to alleviate upstream supplier financial pressure and improve the "supply chain ecosystem." As a result, net cash flow from operating activities decreased to 14.2 billion (a decrease of 67.7 billion year-on-year).

Furthermore, in H1 2024, net cash flow from financing activities was negative 12.36 billion (compared to 4.05 billion in H1 2023), mainly due to a 12 billion increase in cash paid for debt repayment year-on-year, while borrowings decreased by 3.85 billion year-on-year.

The significant decrease in net cash flow from operating activities and negative net cash flow from financing activities both stem from BYD's reduced financial pressure.

\* The above analysis is for reference only and does not constitute any investment advice

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