Buffett Abandoned? BYD Submitted Dominantly

On the evening of October 28th, BYD.SZ released its Q3 report for 2022, with the following highlights:

1. Confirming the money-making machine? BYD.HK's Q3 net profit attributable to shareholders reached RMB 5.7 billion, which is basically in line with the previous forecast. The profit for the quarter is already the sum of the past four quarters, but more importantly, the quality of this profit is very high, with most of it contributed by the automotive business.

**2. Gross margin improvement: ** BYD's gross margin, which has been criticized for sticking to its cost rate, has shown significant improvement this quarter, with a single quarter gross margin directly rising by five percentage points year-on-year. Dolphin Analyst estimates that behind this improvement, there are three factors: the price of battery metals in Q3 declined from the high level in Q2, the effects of Q1's price increase began to fully enter the Q3 delivery orders, and after the increase in delivery volume, depreciation expense ratios continued to be compressed.

**3. Breaking out of the ASP decline range, driving up both automotive sales and single-car prices, and driving high-speed revenue growth: ** BYD's new energy vehicle sales have reached 540,000, with monthly sales in September exceeding 200,000. Moreover, the company is still striving to increase delivery volume to 280,000 vehicles by the end of the year. Q3 market share has further climbed above 28%, while the delivery of some higher-priced cars started in the first half of the year, and the increase in BYD's single-car price began to drive revenue growth.

**4. Profit from automotive business: ** Although BYD's R&D and sales expenses are still rising, the rapid rise in gross profit margin and income growth in this quarter has led to a 470% increase in automotive business profit and RMB 5.3 billion for net profit attributable to shareholders.

5. Mobile phone parts and assembly business out of the trough: After coming out of the low period caused by the epidemic in Q2, BYD Electronics, which is mainly engaged in mobile phone manufacturing, is rebounding in terms of revenue and profit indicators. However, given the outstanding performance of the automotive business, the relative importance of this sector has become lower.

Dolphin Analyst's overall view:

In this quarter, BYD has demonstrated the momentum that a leader in domestic new energy vehicles should have in terms of sales, income and profit release. Moreover, from the product line perspective, except for the high-end series, BYD has gradually covered the relatively complete price range with the Dynasty family, the marine biological family, the naval ship family + TENCENT Smart in its portfolio.

This quarter, BYD has fully anticipated the gold content of its Q3 performance by publishing its sales volume month by month and early profit forecast. However, the stock price during this period still showed a downward trend. Perhaps it is because the current valuation is too high, there is pressure from investors like Buffett, and next year is a year of competitive change, the market is probably not willing to take a high position and may see certain defects.

From the fundamental point of view, the key is to understand the issue of the competitive change next year, such as when the competition for the price range above RMB 300,000 reaches saturation, the price of new energy vehicle companies in this segment will decline, subsidies will exit, consumption will decline, and key penetration rate of new energy vehicles crosses 30%, and how next year can continue to shine. Dolphin Analyst will continue to pay attention to BYD's judgment on next year's competition in the conference call and share the conference call summary in the communication group. Interested friends are welcome to add WeChat "dolphinR123" to join the Dolphin investment research group and get the conference call summary for the first time.

What does Dolphin Analyst focus on for BYD's third quarterly report?

BYD is a company with a complex business structure, covering businesses such as automobiles, mobile phone components and assembly, secondary rechargeable batteries, and photovoltaics:

For more articles related to this, please refer to Dolphin Analyst's in-depth articles on BYD released last year, "BYD: The Best Electric Vehicle Manufacturer" and "BYD: Stable Growth After Skyrocketing."

Currently, battery and energy storage businesses have been included in the automobile business. The second-largest business, the mobile phone components and assembly, is mainly listed separately in BYD Electronic. Dolphin Analyst calculates the data excluding BYD Electronic to approximate BYD's automotive business data.

In addition, BYD's automobile sales volume and impressive net profit have been disclosed in advance. This quarter, we will observe the source of profit release, the trend of vehicle prices, and other details through more detailed data.

With the above categorization, we are focusing on the following issues:

Auto Business Growth Rate: BYD's auto business has a complex vehicle structure, including not only gas vehicles but also new energy vehicles, including passenger vehicles and buses. Despite the sales volume being revealed, the revenue growth of the auto business is still uncertain. Therefore, we focus on the change in revenue growth of the auto business.
Auto Business Profit: Is the net profit of over 5 billion in the third quarter from BYD Electronic or the automotive business? Is it the release of operating leverage or the improvement of gross profit margin?
Mobile Phone Components and Assembly: Although the mobile phone components and assembly business are not the core of BYD's valuation, it is currently the core of its performance and covers many businesses with significant volatility. Therefore, we will understand the performance of this business from the perspective of BYD Electronic.
Overall Performance: Many factors influence the overall performance of BYD. Hence, we are concerned about changes in the overall performance growth rate and profitability.

With these issues in mind, let's analyze BYD's 2022 Q3 report in detail.

I. BYD: High-speed driving with no brakes

Whether it's consumer goods or manufacturing, the market likes the scale effect of revenue: a large enough sales volume means that the backend can dilute the factory's amortization, depreciation, and low prices facing suppliers, and the front end can dilute the company's internal research and development promotion, and even management and other inputs. Moreover, after diluting these endogenous research and development, management costs and other costs, products may tolerate a lower gross margin level.

At present, although BYD has not yet achieved the level of diluting the front-end three fees, at least the expansion of income has been done properly: relying on DMI super hybrid, blade battery, e 3.0 pure electric platform plus CTB new technology, the cars launched since 2021 are all super competitive, running all the way and blooming all the way.

1. Automobile sales:

In addition to the continued volume increase of DM platform models, the pure electric models on the e3.0 platform have also contributed to the boost. The company's sales of new energy vehicles in the third quarter of 2022 reached 540,000 units, a year-on-year increase of 197%.

Since traditional fuel cars stopped production and supply in March this year, the company's sales are all new energy vehicles. Even taking into account the base of fuel cars last year, the company's automobile sales growth rate is still over 160%.

Looking at the sales structure, both pure electric and hybrid power are balanced and in a high-speed growth channel. Throughout the industry, in the third quarter, BYD continued to consolidate its dominance in plug-in hybrid vehicles, and the market share of pure electric vehicles seems to have a slow upward trend.

2. Power battery and energy storage installation:

With the soaring automobile sales, BYD's power battery and energy storage installation (including self-supply and external supply) had reached 23.5 GWh in the third quarter, a year-on-year increase of 120%. However, compared with the nearly 200% sales growth rate of new energy vehicles in the same period, the growth of energy business seems to be slightly difficult.

3. Revenue: Running faster than sales growth, single vehicle price is no longer a drag

In the third quarter, excluding BYD Electronics, BYD's revenue was 89.6 billion yuan, a year-on-year increase of 170%. Basically, it has come out of the embarrassing period when low-priced new energy vehicles accounted for too high a proportion and revenue could not run faster than sales.

With the addition of relatively high-priced models updated and newly launched in the first half of this year, such as the Han DM-i and DM-p, as well as the sea lion in the sea creature series, the single vehicle price is no longer a drag, and revenue growth is even running faster than sales growth.

In a previous in-depth article, Dolphin Analyst once searched for BYD's core. Among them, it was mentioned that the revenue structure and gross profit structure of BYD, and the core contribution of automobile and mobile phone business exceeded 90% of revenue and gross profit. Therefore, in the absence of direct disclosure of automobile business revenue and gross profit by the company, Dolphin Analyst approximated the data after deducting the mobile phone business (BYD Electronics listed on the Hong Kong Stock Exchange as the operating entity) as the automobile business data. Mainly observed the trend, not entangled in specific absolute values. 4. The sudden surge in gross profit margin: If the high growth in revenue can be roughly estimated by the sales volume and unit price of each model that has been released in advance, it is not surprising that the good news of net profit has been released in advance. The real core of this quarterly report is still to observe the quality of profitability, and the answer to this question in the third quarter is unequivocal: "the profitability is of very high value."

Excluding BYD Electronics, the company's gross profit for the quarter was RMB 20.4 billion, which is a true scale effect released by the company after its revenue growth, and the gross profit margin has increased from 17.8% in the previous quarter to nearly 23%.

Dolphin Analyst estimates that the increase in gross profit margin, in addition to the fixed cost dilution mentioned in the previous article "BYD is about to usher in a glorious turnaround as a profitable machine", is due to the slight decrease in raw material prices in the previous quarter and BYD's price increase vehicle orders for the first quarter (which digest a large amount of historical orders in the second quarter) have been delivered in the third quarter, jointly promoting the gross profit performance to greatly exceed market expectations.

Please note that after the price increase in February and March, Dolphin Analyst estimates that BYD should have started to deliver some of the orders for the price increase.

5. Net profit: even if the cost control ability is insufficient, it cannot resist the significant release of gross profit

In the case of BYD (excluding electronics) where the gross profit margin increased by five percentage points on a month-on-month basis, the net profit margin of the parent company increased by less than two percentage points, which is equivalent to a large increase in gross profit margin being eroded by cost expenditures.

If the overall expense situation of the company is also verified, it can be seen that the research and development expenses and sales expenses have grown too fast this quarter, and the dilution of front-end research and development and sales expenses by scale effects, as mentioned by Dolphin Analyst at the beginning of the text, has not been achieved. With such a large volume of revenue and such a fast revenue growth rate, BYD still cannot effectively dilute the current fast-growing research and development and sales expenditures, and improving operational efficiency is likely to be a question that BYD will have to continue to answer.

2. Mobile Phone Parts and Assembly: Comprehensive Recovery

After the disturbance caused by the epidemic in the second quarter, the mobile phone parts and assembly (contributing approximately 20%-25% of revenue) have fully recovered in the third quarter.

In the third quarter, the mobile phone parts and assembly business operated by BYD Electronics achieved revenue of RMB 27.5 billion, directly turning from negative growth in the quarter to a 30% increase year-on-year.

Profitability has also rebounded. In the third quarter of 2022, BYD Electronics had a gross profit margin of 6.5%, which, although lower than the same period last year, has significantly recovered from the low point of the second quarter.

This quarter, BYD Electronics achieved RMB 600 million in net profit attributable to shareholders, with a profit margin of 2.2%, an increase of 17% year-on-year. It has already emerged from the worst period at the end of last year and earlier this year.

3. Overall Performance: An Outstanding High Achiever

With soaring sales and rapidly released profits, BYD can be said to be the top student in the whole A-share market:

[1] Revenue and Net Profit Attributable to Shareholders: In the third quarter of 2022, the company achieved revenue of RMB 117.1 billion, an increase of 116% year-on-year. The soaring revenue mainly came from the soaring of the automotive business.

The company's overall net profit attributable to shareholders was RMB 5.7 billion, a year-on-year increase of 350%. This quarter, the automotive energy business contributed RMB 5.3 billion. This is completely different from the embarrassing situation in the past where BYD sold cars but did not make money, and relied on OEMs to make up for profit, and the quality of profit is very high.

According to Wind's consistent expectations of the sell-side, the market clearly underestimated BYD's revenue and profitability: The market currently predicts BYD's full-year revenue to be close to RMB 400 billion, and its net profit attributable to shareholders is expected to be over RMB 12 billion. In the first three quarters, it has achieved RMB 270 billion and RMB 9.3 billion, respectively.

The company has already said that it intends to produce 280,000 units per month by the end of 2022 in order to cope with the pre-subsidy withdrawal order blitz. Currently, monthly deliveries have just exceeded 200,000 units, and the accelerating growth on a month-on-month basis has become a definite trend. According to Dolphin Analyst's estimation, the market may have underestimated the revenue by RMB 15 billion, and the profit by nearly twice for the fourth quarter. BYD is on the way to exceeding market expectations. 【2】Cars and Electronics Online, Rapid Growth in Overall Gross Margin

BYD's gross profit this quarter was RMB 22.2 billion, up over 200% year-on-year, with a gross margin of 19%. Both the automotive and BYD Electronics businesses contributed to the improvement in gross margin, but the automotive business had the fastest improvement in gross margin.

【3】Persistent High R&D and Sales Expenses, Slow Release of Operating Leverage

Lower Expense Ratio, Release of Profit Margin. The company's expense ratio this quarter was 10.6%, up year-on-year and quarter-on-quarter.

1) The main problem is sales expenses: The company's sales expenses in the third quarter were RMB 4.6 billion, with a sales expense ratio of 4%, which exceeded 4% for the first time in four years. It is indeed surprising that the sales expenses can be so strong in the face of such high revenue growth.

2) Continuous high R&D expenses: R&D expenses in the third quarter were RMB 5.45 billion, the highest of the three expenses. However, as the company needs to maintain continuous R&D investment in batteries, intelligence, and new vehicle development, it is not surprising that R&D expenses have remained high in a high-growth market with expanding revenue.

3) Only management expenses reflect the release of operating leverage: The company's management expenses this quarter were over RMB 2.7 billion, with an expense ratio of 2.3%. After a large release of income, this part of the expense ratio has remained relatively low.

Summary: Do market accept high-quality and high-quantity top students?

From the perspective of the third-quarter performance, BYD's answers can be described as high-quality and high-quantity, with good sales volume and the beginning of profit release in the automobile business. However, under BYD's high valuation, the market is currently more concerned about the uncertainty of next year's new energy landscape. When subsidies are withdrawn, production capacity is concentrated, and Tesla's leading position is challenged by price cuts, how much turbulence will this bring to the market? Currently, it seems unclear.

In addition, with Buffett's selling pressure weighing on BYD, the market seems to be relatively conservative about its performance due to its high valuation.

< End of article >

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