BYD, chasing after "money" recklessly, is that enough?

BYD (002594.SZ) released its third-quarter performance for 2023 after the Hong Kong stock market closed on October 30th. The key points are as follows:

Impressive gross profit margin in the automotive business: Despite intensified competition in the new energy vehicle market, the gross profit margin of the car sales business (including the energy business) rebounded to 25.7% this quarter, once again surpassing market expectations. This demonstrates that the key to success lies in the scale of car manufacturing.
Gross profit margin improvement through cost savings per vehicle: Although the average selling price per vehicle continued to be under pressure this quarter, the per-vehicle cost decreased significantly. Dolphin Research attributes this to two main factors: a) the increase in sales volume led to further dilution of depreciation and amortization expenses; b) the downward trend in variable costs resulting from the vertically integrated supply chain layout driven by economies of scale; c) cost reduction from product downgrading.
Outstanding profit performance: BYD's net profit attributable to shareholders in the third quarter reached 10.4 billion yuan, which is close to the mean value of the original forecast of 10.5 billion yuan. The robust profit growth was driven by strong performance in both the BYD automotive (including the energy business) and electronic manufacturing businesses.
Higher R&D expenses lead to lower-than-expected operating leverage: R&D expenses increased by 46% compared to the previous quarter. The high increase is expected to be due to the technological investment in high-end vehicle models and, most importantly, the catch-up in intelligentization. Meanwhile, marketing expenses are expected to further increase in the future under BYD's direct sales model for high-end brands.

Dolphin Research's overall view:

Since BYD's strong profit level for the first half of the year was already announced in the pre-announcement on October 17th, the key to the interim report is to understand the quality of BYD's profitability.

Although BYD Electronics contributed a considerable amount of profit this quarter, the profitability of BYD's automotive/energy business itself is also very strong. From the perspective of per-vehicle economics, the unexpected profit growth is not driven by an increase in vehicle prices, but rather by the dilution of depreciation and amortization expenses through economies of scale and vertical integration of the supply chain.

BYD produces over 75% of its components in-house, and its vertically integrated layout allows it to earn gross profit throughout the entire value chain, from raw materials to vehicle assembly and sales. Despite the downward pressure on vehicle prices in the market, BYD has maintained an impressive gross profit margin by controlling costs. The gross profit margin of the car sales business has exceeded Tesla's for three consecutive quarters, which is also a competitive advantage that BYD has achieved in the first half of its electrification strategy.

However, in the second half of the year, in the arms race centered around intelligentization, most of BYD's models are priced below 200,000 yuan, and intelligentization is not a strong demand at this price range. Moreover, BYD's strategic focus is more on cost control. Therefore, BYD is clearly lagging behind its competitors in terms of intelligentization. The market also takes a conservative stance on the valuation premium for BYD's intelligentization, and BYD needs to catch up in terms of investment in intelligentization in the second half of the year. And BYD's two main drivers for improving profitability are high-endization and going global. However, the main challenge that BYD still faces is the difficulty in breaking through in the high-end market.

Although BYD wants to increase the average selling price of its vehicles through high-endization, the sales potential and profitability of high-end models such as Tang EV, Qin Plus EV, and Han EV have not been fully realized. In the short term, the main driving force is still the mid-to-low-priced models.

As for the global expansion plan, although BYD has accelerated its progress in going global, its main market, Europe, is facing challenges due to the EU's anti-subsidy investigation, which poses significant obstacles to expanding market share.

In the mid-to-low-priced segment, the sales volume of pure electric vehicles is mainly contributed by low-end brands such as Seagull, but it does not bring much profit increment. In the hybrid field, there is still increasing competition and the risk of continuous decline in market share. BYD's strategy of boosting sales through price reduction and downgrading with the Champion Edition has slowed down. Currently, the increase in sales volume relies on the addition of the DM-i version (such as the Dolphin) to the pure electric version. The ability to maintain high growth in sales volume still needs to be observed.

Currently, the company's TTM PE ratio is approximately 29-30 times, which is considered reasonable. However, if BYD continues to struggle in high-endization, the market share of hybrids continues to decline, there are no competitive mid-to-high-end models in the pure electric segment, and the company started late in intelligentization and still needs to catch up, the long-term competition for BYD is not optimistic.

PS: BYD is a company with a complex business structure, covering automotive, mobile phone components and assembly, secondary rechargeable batteries, and photovoltaics. However, Dolphin Research's in-depth articles on BYD completed in July last year, "BYD: The Best Battery Manufacturer among Automakers" and "BYD: Seeking Stability and Prosperity after a Sharp Rise," have already identified the core for everyone. Although the company has many diverse businesses, the core is still the automotive business. If you need to understand this company, you can start by reviewing the above two analyses.

The following is a detailed analysis:

Ⅰ. Automotive Business

The unit price is still under pressure, and robust gross profit margin demonstrates that sales volume is the key.

BYD's gross profit margin, excluding BYD Electronics, reached 25.7% in the third quarter, a 4% increase compared to the previous quarter, far exceeding the market's expectation of 21%.

From the perspective of per vehicle economics (including a rough estimate of the battery business), let's break down the sources of the robust gross profit margin in this quarter:

1）Unit price: The unit price is still under pressure in the third quarter, with a price of 153,000 yuan per vehicle, a decrease of 3,000 yuan compared to the previous quarter.

The continued decline in unit price this quarter is mainly due to:

BYD joining the price war and reducing prices for multiple models. In addition to promotional discounts for old models such as Qin Plus DMi and Yuan Plus 2022, the Dolphin DM-i was launched with a pre-sale price of 166,800 to 236,800 yuan, a reduction of 23,000 yuan compared to the pure electric version.
In terms of sales structure, it is difficult to break through in high-endization. In the third quarter, high-end models priced above 200,000 yuan, represented by Han, Tang, and Qin Plus, accounted for only 22% of the total sales, a decrease of 3.2% compared to the previous quarter.

The acceleration of BYD's overseas expansion has led to an increase in the proportion of overseas models (which are priced higher than domestic models), partially offsetting the factors mentioned above, resulting in a 0.3 million yuan decrease in the MoM unit price.

2）Unit cost: The robust gross margin in this quarter comes from a significant reduction in costs due to economies of scale. The unit cost in the third quarter was 114,000 yuan, a decrease of 9,000 yuan QoQ.

However, the cost savings in this quarter did not come from material cost reduction (it is estimated that the decrease in lithium carbonate cost in the third quarter only affects the unit profit by about 150 yuan), but rather from the further dilution of depreciation expenses brought about by the increase in sales volume, as well as the downward pressure on variable costs due to the vertically integrated supply chain layout under economies of scale.

3）Unit gross profit: With a 3,000 yuan decrease in unit price and a 9,000 yuan decrease in unit cost, BYD made a gross profit of 39,000 yuan per car in the third quarter, an increase of 5,000 yuan QoQ. The overall gross profit margin of car sales (including the battery business) increased from 21.6% in the previous quarter to 25.7% in the third quarter. (Note: The unit economics here is a rough estimate combining the battery and vehicle businesses and is for reference only.)

2. Sales continue to grow rapidly, but breaking through the high-end market remains a challenge.

The company sold 824,000 vehicles in the third quarter, a YoY increase of 132% and a MoM increase of 17%. The increase in sales volume in the third quarter was mainly due to the continued effect of price reductions for the champion edition in the second quarter, as well as the strong sales of low-priced pure electric small cars, with the main incremental contribution coming from the Song, Song Plus champion edition, and Seagull models.

However, from the perspective of market share, BYD's overall market share can only be maintained with difficulty, while the market share of hybrid vehicles continues to decline, from 65% in January to 49% in September.

In this year's peak season, where hybrids are the main growth driver in the industry, the competition in the hybrid market is becoming more intense. In the second half of the year, zero-run, Geely Galaxy, Deep Blue, and other low-priced hybrid models that compete with BYD have further eroded BYD's market share in hybrids. Currently, BYD's strategy for hybrids can only be to continuously lower prices for defensive purposes: 1. Introduce champion edition price reductions and downgrades; 2. Introduce low-priced DM-i versions alongside pure electric versions.

The sales growth brought about by the champion edition price reduction effect has slowed down. In September, the pre-sale price of the Dolphin DM-I was reduced by 23,000 yuan compared to the pure electric version, which boosted the sales of the Dolphin model, but it still failed to reverse the continuous decline in BYD's hybrid market share. And in terms of pure electric vehicles, the market share has increased mainly due to the strong sales of low-end pure electric vehicles (priced at 70,000-90,000 RMB), which has kept the market share stable at around 26%. However, low-end models do not bring much profit growth. The main problem is still the lack of breakthroughs in the high-end market for pure electric vehicles. The sales of the Tengshi D9 have remained stable at around 10,000 units per month, and there has been no significant increase in sales volume. The new models N7/N8 also do not seem to be making much impact.

3. The market share of hybrid vehicles is expected to continue to be under pressure, and the sustainability of sales is questionable

BYD sold a total of 2.08 million vehicles from January to September, accounting for 69% of the annual sales target of 3 million vehicles, implying an average monthly sales of 307,000 vehicles for the next four quarters.

Looking at BYD's vehicle planning for the second half of the year, in addition to the launch of the mid-range pure electric Song L and plug-in hybrid vehicle Dolphin DM-I, BYD is mainly focusing on high-end models in an attempt to increase the average selling price of its vehicles.

However, the sales of the Tengshi N7/N8 have been dismal since their launch, and the upcoming or already launched high-end brands, such as Yangwang/Fangchengbao, are more about brand positioning and are unlikely to contribute significant sales. The sales potential and profitability of BYD's high-end brands have yet to be realized, and the main driving force in the short term is still the mid-to-low-end models.

As for the mid-to-low-end models, the low-end pure electric vehicle Seagull has contributed to the sales growth, and the Song L, priced at 150,000-210,000 RMB, will also be launched in the fourth quarter. The risk point for mid-to-low-end models still lies in hybrid vehicles. The sales growth rate brought by the price reduction and downgrading of the hybrid vehicle champion edition has slowed down, and the main growth comes from the new model Dolphin DM-i. The market share of hybrid vehicles is expected to continue to be under pressure, and the sustainability behind the high sales growth in the third quarter is still questionable, according to Dolphin Research.

4. The overseas expansion process has accelerated

BYD has two main strategies to improve profitability: high-endization and overseas expansion. Although there are still challenges in high-endization, the overseas expansion process has clearly accelerated.

In the third quarter, BYD's overseas sales reached 71,000 vehicles, a 100% increase compared to the second quarter's 36,000 vehicles, and the proportion of overseas sales increased from 4.2% in June to 9.8% in September.

However, BYD's main market for overseas expansion, the European market, is facing troubles due to the EU's anti-subsidy investigation, which poses a significant obstacle to expanding market share. BYD can only focus on Southeast Asia and the Brazilian market, where it plans to establish factories and achieve an annual production capacity of 150,000 vehicles in each country.

5. Continued high revenue growth, but continuous decline in unit price

Excluding BYD Electronics, BYD achieved revenue of 126.2 billion yuan in the third quarter of 2023, a year-on-year increase of 40.8%, far exceeding market expectations of 110 billion yuan.

Specifically, the company's car sales in this quarter increased by 53% year-on-year, but the unit price of cars decreased by 2% MoM and 7% YoY. The unit price of cars has also declined from the peak of 176,000 yuan in the fourth quarter of last year to 153,000 yuan in this quarter. BYD is facing fierce competition this year and can only defend itself by continuously lowering prices. The difficulty in breaking through the high-end market has not brought any increase in profits.

6. High increase in R&D expenses, resulting in lower-than-expected operating leverage

1) R&D expenses: Continuous investment in intelligent and high-end development

R&D expenses in the third quarter were 11.1 billion yuan, an increase of 46% MoM, significantly exceeding market expectations of 6.78 billion yuan. The R&D expense ratio was 6.8%. The high increase in R&D expenses this quarter is expected to come from investment in technology for high-end models, such as the adoption of Yi Sifang technology, the Yunxian intelligent body control system, and the filling of gaps in intelligent technology.

In the first half of the competition in the new energy vehicle market, BYD has already become very mature in electrification, with core technological advantages in battery, motor, and electronic control, as well as the ability to quickly launch new models to the market with the e3.0 electric platform and the DM4.0 hybrid platform.

At the same time, BYD has strong vertical integration capabilities, with over 75% of components self-made, giving BYD a competitive gross margin from raw materials to vehicle assembly and sales.

However, in the second half of the competition focused on intelligent technology, BYD is clearly lagging behind its competitors. The main reason for this lag is that most of BYD's models are priced below 200,000 yuan, and intelligent technology is not a necessity at this price range. BYD's strategic focus is more on cost control, and the market's valuation of the added value of BYD's intelligent technology is therefore conservative.

But with the launch of high-end models such as the Tang, Yuanwang, and Fangchengbao, intelligent technology has become a key factor in the competition of mid-to-high-end models. BYD must make up for this gap. BYD will continue to invest heavily in intelligent technology through a combination of self-research and multi-supplier models. In terms of progress, some models of the Tang N7 are expected to be equipped with urban NOA in 1Q24, and several models of the Ocean and Dynasty will also be equipped with Orin chips in 2024, indicating that BYD expects to continue high investment in intelligent technology.

2) Marketing expenses: The direct sales model adopted by high-end brands is expected to further increase sales expenses

Sales expenses in the third quarter were 6.39 billion yuan, an increase of 200 million yuan MoM, slightly exceeding market expectations of 6.2 billion yuan.

The sales expenses this quarter were mainly used for the marketing expenses of high-end models such as the Tang, Yuanwang, and Fangchengbao. At the same time, it is estimated that there is also a need to digest old inventory through promotional activities for the launch of the main champion version, which is also included in the sales expenses. BYD's current Wangchao and Ocean Network models mainly adopt a dealership model, with dealers accounting for nearly 90% of the total. However, BYD uses a direct sales model for its high-end models such as Tang, Yuanwang, and Fangchengbao. It is expected that the construction and expansion of stores in the future will further increase sales expenses.

3) Management expenses: Reasonable control and efficient management

In the third quarter, management expenses were 3.46 billion yuan, which remained flat compared to the previous quarter and was lower than the market expectation of 3.77 billion yuan. The management expenses in this quarter were reasonably controlled, reflecting BYD's efficient management of its various business sectors and subsidiaries.

7. High gross profit margin leads to high net profit per vehicle

In the third quarter, BYD's profits continued to increase, with a net profit of 1.1 yuan per vehicle (including the energy business). The profit margin increased from 5.6% in the previous quarter to 7.5% in this quarter, reaching a historical high.

The core operating profit margin in the third quarter was 7.4%, an increase of 2.8% compared to the previous quarter. This increase was mainly due to the improvement in gross profit margin. However, the leverage effect of operating expenses was not released due to the soaring R&D expenses in this quarter, resulting in a 0.6% increase in the operating expense ratio compared to the previous quarter.

II. Energy business relies on energy storage for high growth

With the soaring sales volume of automobiles, BYD's installed capacity of power batteries and energy storage (including self-supply and external supply) has reached 40.7 GWh in the third quarter, a year-on-year increase of 73%. This growth rate is higher than the nearly 53% increase in sales volume of new energy vehicles during the same period, indicating that the energy business still maintains a high growth rate.

Breaking it down, the high growth of the energy business in this quarter mainly comes from the surge in energy storage business. The shipment volume of energy storage batteries in the third quarter was 12.1 GWh, with a year-on-year growth of 190% and a MoM growth of 46.6%. However, the growth rate of power battery business has slowed down. The shipment volume of power batteries in this quarter was 28.6 GWh, achieving a year-on-year growth of only 48%, which is lower than the growth rate of new energy vehicle sales during the same period.

III. Strong performance of BYD's electronic business

In the third quarter, the mobile phone component and assembly business operated by BYD Electronics achieved a revenue of 36 billion yuan, continuing to grow by 31% compared to the same period last year, but lower than the market expectation of 47.09 billion yuan.

In the third quarter, BYD Electronics' gross profit margin was 9.7%, which continued to increase by 1.7% from the previous quarter and exceeded market expectations by 9.0%. BYD Electronics' net profit in the third quarter was 1.53 billion yuan, with a profit rate of 4.2%, which exceeded market expectations by 3.1%, and it has come out of the trough at the beginning of this year.

The growth of income and net profit mainly benefited from:

1) Growth of automobile business: Thanks to the growth of sales of new energy vehicles of BYD, the parent company, and a large number of R&D to promote technological innovation and expand the categories of automobile parts, the volume of smart cockpits began to increase this quarter, which increased the bicycle value of new energy vehicle parts business from 4,100 yuan in 2021 to about 5,600 yuan in 2023, and the gross profit of automobile business was higher than that of consumer electronics business.

2) With the rapid growth of the new smart product sector, the increase in the share of overseas major customers and the recovery in the demand of Android customers, the Group's capacity utilization rate continued to increase.

Dolphin Research Historical Articles:

Earnings Season

August 28, 2023 Earnings Report Review: "BYD: What's Left After the 'Windfall'?" (Link)

August 29, 2023 Conference Call: "Profitability is Not a Problem Amid Price Wars, Better Profits in Q3 and Q4 (BYD Summary)" (Link)

April 28, 2023 Earnings Report Review: "BYD: Making Money in the Electric Vehicle Price War" (Link)

March 29, 2023 Conference Call: "BYD Summary: High-end Supports Profits, Mid-to-low-end Spreads Costs, Internationalization Rebuilding BYD" (Link)

March 29, 2023 Earnings Report Review: "BYD: Counterattacking Buffett's Selling Pressure" (Link) Earnings Report Analysis on October 29, 2022: "Did Buffett Abandon BYD? BYD's Dominant Performance"

Telephone Conference on August 31, 2022: "BYD: Using Procurement to Offset Subsidy Reductions, Targeting Annual Production of 4 Million Vehicles Next Year (Conference Summary)"

Earnings Report Analysis on August 30, 2022: "A Moment of Transformation: Will BYD Become a Profit Machine?"

Earnings Report Analysis on April 28, 2022: "BYD: Stable Sales Performance, Successfully Overcoming the Year-End Challenge"

Telephone Conference on March 30, 2022: "Advanced Technology Facilitates Product Upgrades, BYD's Strong Sales Performance in 2022 (Conference Summary)"

Earnings Report Analysis on March 30, 2022: "BYD in Turmoil: Selling Cars is Easy, Making Money is Difficult"

Earnings Report Analysis on October 28, 2021: "Beyond Sales Figures, BYD's Lackluster Performance"

Earnings Report Analysis on August 28, 2021: "BYD: Performance Falls Short of Expectations, Investment Logic Discounted"

Hot Topic

July 12, 2022: "Did Buffett Sell BYD? The Case is Solved"

In-Depth Analysis

August 10, 2021: "BYD Shares (Part 2): After the Soaring Rise, Seeking Stability and Prosperity?" On July 23, 2021, Dolphin Research published an article titled "BYD: The Best Battery Manufacturer in the Automotive Industry".

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