"Price Butcher" BYD: Unleashing its weapons in a fierce battle, dawn is not far off.

BYD (002594.SZ) released its fourth-quarter performance on the evening of March 26th Beijing time. The key points are as follows:

1. Embarrassment in the high-end automotive sector: The sales structure shows that the ultra-high-end models like E-SEED have contributed too little to sales, while the sales proportion of high-end models like TANG, HAN with relatively high pricing is decreasing. The revenue performance is severely affected by the decrease in unit price. Compared to the already devalued third quarter, the prices dropped by another three thousand.

2. Maintaining a decent gross profit margin: Despite announcing price reductions for some models, BYD managed to maintain a high gross profit margin of 25.1% (including the battery business) in the fourth quarter, thanks to the bargaining power under high sales volume and natural cost reduction from batteries. Although it decreased by 0.6 percentage points compared to the third quarter, it is still considered top-tier among various complete vehicle manufacturers observed by the author, especially when Tesla's margin is already below 20%.

3. Profit decline as the "shoe drops": The actual profit in the fourth quarter was 8.7 billion, which is not significantly different from the company's previous announcement. However, despite selling over 100,000 more vehicles in the fourth quarter, the profit was lower than the 10 billion+ profit in the third quarter. It is evident that the challenges in high-end development, R&D deficiencies, and intensified competition are starting to impact profits.

4. Backlash of R&D investment in intelligence: R&D expenses in the fourth quarter increased by 90% year-on-year. Since BYD Electronics' R&D expenses are still decreasing, the actual R&D expenses related to the automotive business should have increased by over 100%.

Looking at the expenditure structure of R&D, whether it's materials (possibly server computing power), headcount, or average salary per person, all are experiencing significant increases. This likely indicates that after a year of high-end development, the realization that intelligence is a necessary course in the high-end process has led to a frenzy of R&D investment to address deficiencies.

Author's overall view:

Since the announcement on January 30th had already significantly lowered the company's stock price, the market was aware that the fourth-quarter performance would be disappointing. Considering the three key indicators of actual performance in the fourth quarter: unit price, gross profit margin, and R&D expenses, achieving a 25% gross profit margin in an industry turmoil speaks volumes about BYD's leading position.

The deflation in unit price and the increase in R&D expenses highlight two major shortcomings of BYD as a leader: a) the lack of progress in high-end development, especially in high-end pure electric vehicles; b) addressing deficiencies in intelligence.

As we enter 2024, these two major shortcomings remain critical areas that BYD needs to address. The company has also outlined its goals for TANG and E-SEED in 2024, with BYD planning to offer advanced driver assistance systems as optional for models priced above 200,000 RMB, and standard for models priced above 300,000 RMBOn these two fronts, Dolphin Jun can only observe and see how things develop. If there is still time for intelligence to make up for shortcomings, it is still difficult to say whether high-end transformation can succeed at the moment.

In the short term, looking at the first quarter, BYD's significant price reduction is a stage of clearing inventory and reducing channel margins. Coupled with the relatively weak sales volume in the first quarter (almost halved compared to the previous quarter), the first quarter performance is bound to decline significantly.

However, despite this, looking slightly ahead, Dolphin Jun believes that compared to BYD waiting for inventory risks to be released in 2023, Dolphin Jun is more concerned about BYD's turnaround opportunity in 2024:

a) BYD is actively digesting channel inventory. From January and February, retail sales at the terminal have continued to be higher than wholesale sales, gradually resolving the risk of social inventory.

b) After clearing channel inventory, BYD can use its higher car gross profit margin and the advantage of DM 5.0 in July and August (claiming a fuel consumption of 2.9L per hundred kilometers and a range of over two thousand kilometers) in the price range of 100,000 to 200,000. By lowering prices to compete with fuel-powered cars, BYD can accelerate the clearance of competitors.

c) Overseas expansion is a continuous increment: the target for this year is 500,000 vehicles, less than 250,000 vehicles last year, with a plan to double.

Currently, the company's market value corresponds to a PE ratio of about 22 times in 2023. Compared to the possibly deteriorating performance in the short term, the valuation can only be said to be not low. From the perspective of dividends, a dividend of 9 billion, relative to a market value of over 600 billion, annual profit of 30 billion, annual operating cash flow of 170 billion, and cash funds of 110 billion on hand, it can only be seen as a corresponding gesture.

But Dolphin Jun emphasizes once again that looking a little further ahead, it is easy to see that the dawn of BYD is just ahead. In 2023, the risk to watch for when investing in BYD is chasing highs, while in 2024, the focus should be on the turnaround opportunity.

PS: BYD is a company with a complex business structure, covering automobiles, mobile phone components and assembly, secondary rechargeable batteries, photovoltaics, and other businesses. However, Dolphin Jun's in-depth articles on BYD completed in July last year, "BYD: The Best Electric Vehicle Manufacturer" and "BYD: Steady Prosperity After Soaring", have already identified the core for everyone. Although the business is too diverse, the core is still the automotive business. For those who need to understand this company, you can first review the above two analyses.

The detailed analysis is as follows:

I. Automotive Business

1. Gross profit margin of the automotive business in this quarter has slightly decreased compared to the previous quarter

BYD's gross profit margin for the automotive business in the fourth quarter, excluding BYD Electronics, reached 25.1%, a 0.6% decrease compared to the previous quarter, slightly exceeding the market's expectation of 24.5%.

From a single vehicle perspective (including a rough estimate of the battery business), breaking down the gross profit margin decline compared to the previous quarter this quarter:

Bicycle price: The unit price in the fourth quarter is still under pressure, with a unit price of 150,500 yuan, a slight decrease of 2,600 yuan compared to the third quarter.

The continued decline in bicycle prices this quarter is mainly due to:

Price reductions: BYD, in order to achieve its 3 million annual sales target by the end of the year, reduced prices of models such as Song, Qin, Han, and Tang by 10,000 to 15,000 yuan in November. Models like the Escort 07, Dolphin, and Destroyer 05 saw price reductions of 5,000 to 18,000 yuan, with varying decreases of 5-10%.
The proportion of high-end sales structure has declined, with high-end models priced above 200,000 yuan such as the Han, Tang, Tengshi, Yawang, and Fangchengbao accounting for only 21.5% in the fourth quarter, a decrease of 0.5% compared to the previous quarter.

However, BYD's overseas expansion has accelerated, with overseas models (priced higher than domestic sales models) accounting for an increased proportion of 1.6% to 10.3% compared to the previous quarter. This to some extent offset the above factors, resulting in a final decrease of 2,600 yuan in unit price.

Bicycle cost: The unit cost in the fourth quarter is 113,000 yuan, a decrease of 1,100 yuan compared to the previous quarter.

The decrease in unit cost this quarter is not significant, mainly due to the scale effect brought about by the increase in sales volume and a slight decrease in the natural cost reduction of lithium carbonate.

Bicycle gross profit: With a unit price of 151,000 yuan and a unit cost of 113,000 yuan, BYD earned a gross profit of 38,000 yuan per vehicle in the fourth quarter. This represents a decrease of approximately 1,500 yuan compared to the previous quarter. The overall gross profit margin for vehicle sales (including battery business) decreased from 25.7% in the previous quarter to 25.1% in the fourth quarter.

In the fourth quarter, sales reached a historical high, but there are implicit "issues".

The company's automotive sales in the fourth quarter reached 945,000 units, a year-on-year increase of 38% and a quarter-on-quarter increase of 14.7%. The increase in sales in the fourth quarter mainly came from BYD's price reduction to boost sales, with the main incremental contributions coming from the Dolphin, Seagull, and Song models.

However, looking closely at the "hot sales" behind the scenes, BYD still faces a continuous decline in overall market share in the fourth quarter, dropping from 34% in the third quarter to 31% in the fourth quarter. This is mainly due to the continuous decline in the market share of hybrid vehicles, with pure electric market share relying solely on the low-priced small car Seagull for stability:

Intense competition in hybrids, declining market share: BYD's early advantage in DM-i technology is being caught up by new entrants. Currently, companies like Leapmotor, Geely Galaxy, and Deep Blue are further eroding BYD's hybrid market share with their competitive hybrid models. The decline in hybrid market share in the fourth quarter is still significant, dropping from 51% in the third quarter to 42% in the fourth quarter
Although the market share of pure electric vehicles can be maintained at 26%, it mainly relies on the low-priced small car Seagull to contribute to sales, but it does not bring much profit increment.

The difficulty in breaking through the high-end market has always been a challenge for BYD. From the fourth quarter perspective, except for the Tang D9, BYD's layout of high-end new energy vehicles around 300,000 yuan is relatively weak. The sales of new cars N7 and N8 are lower than expected, lacking competitiveness compared to competing products. The brand positioning plays a more important role, contributing less to sales. The F3 Leopard focuses on the off-road segment, with sales reaching 5,000 units in December. It is hoped to challenge the monthly sales of 10,000 units by benchmarking against the hybrid off-road vehicle Tank from Changan in the future.

Overall, the sales of Tang + Brand Positioning + F3 Leopard models in the fourth quarter only increased by 0.2% to 4.5% compared to the previous quarter. The difficulty in breaking through the high-end market is still a "problem" after the sales boom.

At the same time, the inventory backlog of dealers is another issue after the sales boom. In the fourth quarter, the gap between BYD's retail sales and actual wholesale sales (excluding exports) reached 120,000 vehicles, indicating a serious inventory backlog at BYD dealers.

Destocking in the first quarter, gearing up for the new product cycle

Due to the Chinese New Year holiday and the off-peak sales season in January and February, combined with high inventory levels at BYD, the company took the initiative to reduce inventory and accelerate the clearance of terminal inventory in January and February.

Although the cumulative sales in January and February were 324,000 vehicles, a decrease of 6% year-on-year, the cumulative sales excluding exports were 264,000 vehicles. The retail sales in terminals in January and February totaled 290,000 vehicles, with approximately 27,000 vehicles destocked in January and February.

Starting from mid-February, BYD quickly launched the 2024 models, with multiple Honor Edition new models on the market, further lowering prices compared to the champion models. With the ultimate scale effect and vertical integration layout, BYD achieved extreme cost control, becoming a "price butcher" in the 50,000-200,000 yuan price range. The Honor Edition models are generally 10,000-30,000 yuan cheaper than the 23 models' champion edition, with the starting price of BYD Qin DM-i reduced to 79,800 yuan, truly achieving "electric cheaper than oil" and accelerating the capture of the fuel vehicle market.

BYD further strengthened the terminal competitiveness of its models with the extreme cost-effectiveness of the Honor Edition. As inventory gradually adjusts, BYD's sales continue to recover, the new product cycle of BYD has started, and the weekly sales from March 11th to 17th have quickly recovered to 56,000 vehicles. It is expected that the monthly sales in March will recover to 200,000-250,000 vehicles.

Although the first quarter sales in 2024 are expected to be 500,000-550,000 vehicles, a decrease of 450,000-500,000 vehicles compared to the fourth quarter of last year, the capacity utilization rate is expected to be less than 50%, leading to further depreciation and amortization per vehicle. Discounts on old models will also drag down its gross profit margin, and it is expected that the performance in the first quarter of this year will be under pressureHowever, in the second quarter, with the start of the new product cycle, performance will rebound from the bottom. It is necessary to overlook the short-term impact of the first quarter and focus on the performance thereafter.

The market is also concerned that the launch of the Honor version at a reduced price may affect the gross margin. However, comparing to last year, under BYD's vertical integration and extreme economies of scale, the gross margin in the second and third quarters of last year actually continued to increase despite the launch of the champion model at a reduced price. In addition, this price reduction is actually a recovery of discounts at the dealer end, so the actual reduction is lower, and there is no need to overly worry about the impact on the gross margin.

4. The overseas expansion process has accelerated, with an expected contribution of 400,000 to 500,000 incremental sales in 2024

BYD has two main drivers to improve profitability: high-end transformation and overseas expansion. While the high-end transformation still faces challenges in the fourth quarter, the overseas expansion process has accelerated.

In the fourth quarter, BYD's overseas sales volume reached 97,000 vehicles, a 37% increase compared to the third quarter's 71,000 vehicles, with the proportion of overseas sales also increasing from 8.6% in the third quarter to 10.3% in the fourth quarter.

Although BYD's main overseas market, the European market, faces challenges from the EU's anti-subsidy investigation, there is significant resistance to expanding market share.

However, the company's overseas production capacity can play a crucial role. BYD is expected to start production in new capacities in Thailand/Brazil/Uzbekistan/Hungary in 2024 (with 150,000 capacities each in Brazil and Thailand). With more models accelerating overseas expansion and new production capacities starting production in 2024, it is expected that BYD will export 400,000 to 500,000 vehicles in 2024.

5. Revenue lower than expected due to a decrease in unit price

Excluding BYD Electronics, BYD achieved revenue of 142.2 billion RMB in the fourth quarter of 2023, an 18.2% year-on-year increase, lower than the market's expectation of 158 billion RMB.

Specifically, in this quarter, the company's car sales volume increased by 38% year-on-year and 15% quarter-on-quarter, but the unit revenue per car decreased by 14.5% year-on-year and 1.7% quarter-on-quarter. The unit revenue per car has also declined from the peak of 176,000 RMB in the fourth quarter of last year to 150,000 RMB in this quarter, reflecting intense competition. BYD has been defending its market share by continuously reducing prices in 2023 and maintaining profits through extreme cost reduction on a large scale6. R&D and Sales Expenses Increase Significantly This Quarter

1) R&D Expenses: Addressing Shortcomings through Intelligent and High-end Development

In the fourth quarter, R&D expenses amounted to 14.6 billion, an increase of 3.5 billion compared to the previous quarter, significantly exceeding the market's expectation of 11.4 billion. The R&D expense ratio was 8.1%. The high increase in R&D expenses this quarter is expected to be due to the higher salaries and number of R&D personnel, mainly used for catching up in intelligence and investing in new technology platforms (DM5.0 and E4.0 platforms).

In the first half of the competition in new energy vehicles, BYD has already achieved maturity in electrification, establishing core technological advantages in electrification such as batteries, motors, and electronic controls, as well as possessing the electric E3.0 platform and hybrid DM4.0 dual platform to quickly launch new models into the market.

At the same time, BYD has strong vertical integration capabilities, with over 75% of components self-made by BYD, giving BYD a competitive gross profit margin (BYD can earn gross profit throughout the entire chain from raw materials to vehicle assembly and sales).

However, in the second half of the competition focusing on intelligent development, BYD is noticeably lagging behind its competitors. The main reason for this lag is that most of BYD's vehicle models are priced below 200,000 RMB, where intelligence is not a necessity. BYD's strategic focus is more on cost control in this price segment, and the market's valuation of the added value of BYD's intelligence is therefore conservative.

With the launch of high-end models such as Tang, Yuanwang, and Fangchengbao, intelligence is also a key focus of competition in the mid-to-high-end vehicle segment, an area where BYD must make up ground. In the third quarter of this year, BYD is expected to achieve advanced intelligent driving options for models priced over 200,000 RMB, and advanced intelligent driving as standard for models priced over 300,000 RMB, which will also benefit BYD's breakthrough in high-end development.

2) Sales Expenses: Direct Sales Model for High-end Brands + Year-end Sales Push Increase Sales Expenses

In the fourth quarter, sales expenses amounted to 7.98 billion, an increase of 1.6 billion compared to the previous quarter, slightly exceeding the market's expectation of 6.2 billion.

Currently, BYD's Wangchao and Haiyang models mainly use a dealership model, with dealers accounting for nearly 90%. However, for its high-end models Tang, Yuanwang, and Fangchengbao, BYD mainly adopts a direct sales model. It is expected that the further increase in sales expenses is due to the construction and expansion of stores for high-end brands.

Additionally, in the fourth quarter, the company invested a significant amount in sales expenses to boost sales volume, providing a bonus of 666 RMB per vehicle sold to all stores that met their sales targets.

3) Administrative Expenses: Reasonable Control and Efficient Management

In the fourth quarter, administrative expenses amounted to 3.18 billion, a decrease of 280 million compared to the previous quarter, lower than the market's expectation of 3.61 billion. This quarter's administrative expenses were reasonably controlled, reflecting BYD's efficient management of its various business sectors and subsidiaries.

7. Decline in Single-Car Net Profit

The core operating profit margin in the fourth quarter was 5.3%, a decrease of 2 percentage points compared to the previous quarter. This was mainly due to the decline in gross profit margin, as well as the surge in research and sales expenses in this quarter that were not offset. Operating expenses ratio instead increased by 1.4% compared to the previous quarter.

In the fourth quarter, BYD's net profit declined slightly. In addition to the decline in operating profit margin, both asset impairment losses and credit impairment losses increased. Ultimately, BYD's net profit from single cars (including the energy business) was 8,000 yuan, and the profit margin decreased from 7.5% in the previous quarter to 5.6% in this quarter.

II. High Growth in Energy Business Mainly Relies on Energy Storage Volume, While Growth in Power Batteries Has Slowed Down

BYD's installed capacity of power batteries and energy storage (including self-supply and external supply) had reached 50GWh by the fourth quarter, a year-on-year increase of 54%. The energy business still maintained a high growth rate.

Breaking it down, the high growth of the energy business this quarter mainly came from the volume of energy storage. In the fourth quarter, the shipment volume of energy storage batteries was 18.5GWh, with a year-on-year/half-year growth of 194%/52%. However, the growth rate of power battery business slowed down, with a shipment volume of 31.5GWh this quarter, achieving only a year-on-year/half-year growth of 21%/10%, lower than the growth rate of new energy vehicle sales during the same period, and the market share of power batteries has been continuously declining.

III. Strong Performance of BYD's Electronic Business Continues

In the fourth quarter, the mobile phone parts and assembly business operated by BYD Electronics achieved revenue of 37.8 billion yuan, a year-on-year increase of 5%, exceeding market expectations of 35.3 billion.

In the fourth quarter, BYD Electronics' gross profit margin was 9%, a slight decrease compared to the previous quarter, but still higher than the market expectation of 8.1%. The business has already emerged from the low period earlier this year.

The revenue growth was mainly driven by:

Consumer electronics: According to IDC, global smartphone shipments in 4Q23 increased by 8% year-on-year. With the recovery of market demand, it is expected that the company's Android complete machine assembly and parts business will grow year-on-year, as well as the increase in market share of overseas major customers, driving growth in consumer electronics business.
Automotive business growth: Benefiting from the growth in sales of the parent company BYD's new energy vehicles, as well as a large amount of research and development driving technological innovation to expand the category of automotive parts, the increase in shipments of intelligent driving-related accessories, and the growth brought by the increase in the value of parts per vehicle in the parts business

Dolphin's historical articles:

Financial Report Season

October 30, 2023 Financial Report Review "[BYD, soaring towards "money", is it enough?"(https://longportapp.cn/zh-CN/topics/10436482?channel=t10436482&invite-code=4NOXYT&app_id=longbridge&utm_source=longbridge_app_share)"

August 28, 2023 Financial Report Review "[BYD: The embarrassment after the "windfall", what ace is left?"(https://longportapp.cn/zh-CN/topics/9427933?app_id=longbridge)"

August 29, 2023 Conference Call "Under the price war, the company's profitability is not a problem, profits will be better in the third and fourth quarters (BYD minutes)"

April 28, 2023 Financial Report Review "BYD: Making money in the electric car price war is the real skill"

March 29, 2023 Conference Call "BYD minutes: High-end supports profits, mid-to-low end spreads costs, internationalization reshapes BYD"

March 29, 2023 Financial Report Review "BYD: Counterattacking Buffett's selling pressure on "windfall""

October 29, 2022 Financial Report Review "Abandoned by Buffett? BYD confidently hands in the paper"

August 31, 2022 Conference Call "BYD: Using procurement to lower prices to digest subsidy decline, next year's annual production target is 4 million vehicles (conference call minutes)"

August 30, 2022 Financial Report Review "The moment of tearing off labels: Is BYD about to undergo a magnificent transformation into a "money-making machine"?"April 28, 2022 Financial Report Review "BYD: Sales Guaranteed, Smoothly Pass the Year-End Assessment"

March 30, 2022 Conference Call "High-Tech Innovation Boosts Product Upgrades, BYD's 2022 Sales Still Strong (Meeting Minutes)"

March 30, 2022 Financial Report Review "'Torn' BYD: Selling Cars is Easy, Making Money is Difficult"

October 28, 2021 Financial Report Review "Beyond Sales, BYD Falls Short of Expectations"

August 28, 2021 Financial Report Review "BYD: Performance Falls Short of Expectations, Investment Logic Discounted"

Hot Topic

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

In-Depth Analysis

August 10, 2021 "BYD Stock (Part 2): After the Surge, Seeking Stability in Wealth?"

July 23, 2021 "BYD Stock: The Best Battery-Making Vehicle Manufacturer | Dolphin Research"

Risk Disclosure and Statement in this Article: Dolphin Research Disclaimer and General Disclosure