BYD Briefing: Boosting Profits with High-End, Cost-Saving in Low-End, and Remaking BYD Through Internationalization.

Below is a summary of the BYD 4Q22 earnings call, for interpretation of the earnings report please refer to "BYD's "lucrative counterattack" against Buffett's selling pressure"

Key Highlights:

1) Sales target: BYD's 2023 sales target is "maintain 3 million vehicles, compete for 3.6 million vehicles".

2) Competitive attitude: The company has pricing power in the CNY 100,000 to CNY 200,000 range, and hopes for stable and healthy competition, rather than a situation where all players struggle to survive. In competition, the priority is speed, followed by technology, and then strategy;

3) BYD's Three Major Opportunities in the Chinese Auto Market:

a. Deep penetration of new energy vehicles in the auto market. It is expected that the penetration rate of new energy will reach 40%-45% by 2023, with 8.5-9 million vehicles sold.

b. Reconstruction of the pattern of high-end new energy brands. The market share of high-end brands is 15-20%, with BYD's Tang/EA/Monster brands all priced above CNY 350,000, and Tang's monthly sales expected to reach 20,000 by the end of the year.

c. Export (overseas markets). Avoiding the U.S., South Korea, Germany, Japan, and France, and focusing on regions with fewer local brand players, such as Southeast Asia, Europe, and South America. The export approach mainly focuses on containerized component exports and localizing four major processes.

Management Comments:

Company Performance and Industry Status:

Sales in 2022 were CNY 424.06 billion, a year-on-year increase of 96.2%; net profit attributable to the parent company was CNY 16.622 billion, a year-on-year increase of 445.8%; the proportion of automotive-related products in the company's total revenue rose from 59.66% to 76.57%; the market share of new energy vehicles reached 27% in 2022, an increase of 10% year-on-year.

The Chinese auto industry faced many difficult challenges in 2022—structural chip shortages, high raw material prices, slower supply-side pace, and also suppressed car consumption demand.

According to the data from the China Association of Automobile Manufacturers, China's automobile production and sales in 2022 were 27.021 million vehicles and 26.864 million vehicles, an increase of 3.4% and 2.1% year-on-year, respectively.

Among them, new energy vehicles continued to grow explosively. In 2022, China's combined production and sales of new energy vehicles reached 7.058 million and 6.887 million, respectively, an increase of 96.9% and 93.4% year-on-year, and the production and sales of new energy vehicles have ranked first in the world for eight consecutive years. The penetration rate of new energy vehicles for the year reached 25.6%, an increase of 12.1 percentage points year-on-year, which marks China's new energy vehicles have entered a period of comprehensive market expansion.

Company Business Introduction:

Technological innovation is the core driving force for high-quality development of our business. Our Group adheres to a "two-legged" strategy of pure electric and plug-in hybrid, and has successively launched disruptive technologies such as blade battery, DM-i super hybrid, e-platform 3.0, CTB battery and body integration, and DM-P monarch hybrid, which support our business to achieve leapfrog development. Drive the technological transformation of the new energy vehicle industry.

In the field of pure electric vehicles, the Group launched the CTB battery-body integration technology in May, which makes the blade battery and the body more closely integrated and improves the vehicle torsional stiffness to over 40000N·m/°, helping to upgrade vehicle safety and making the upper limit of fuel vehicles the lower limit of electric vehicles.

In the field of plug-in hybrid vehicles, the Group launched the DM-P King of Hybrid, further solving the contradiction between performance and efficiency, and balancing the three ultimate experiences of speed, safety, and efficiency to meet the different car needs of consumers in different scenarios.

Relying on the continuous iteration and innovation of the Group's core technology, the passenger car business of the Group has gradually formed a multi-brand gradient layout constructed by the BYD brand, Tengshi brand, YW brand, and professional personalized brand, while continuously exploring new paths, developing new drivers, and creating new heights for the Group's new energy vehicle business. As the Group's first passenger car brand, the BYD brand has gradually formed two major series of products, namely the Dynasty series named after dynasties and the Ocean series named after marine life and warships.

The Dynasty series perfectly combines advanced technology with national trend culture, creating a trendy and intelligent new energy vehicle, and has five major family-style products: Han, Tang, Song, Qin, and Yuan.

a. Han, as one of the high-end flags of China's independent brand, has continued to be hot since its launch and has been widely recognized and praised by the market. In April 2022, the Han family was fully upgraded, and DM-i Super Hybrid and DM-p King of Hybrid were added to provide consumers with more high-quality choices, helping the sales of Han family models to continue to set new highs and further drive the upward mobility of its price center. Han family models sold well throughout the year, won the annual sales champion of China's B+C-level cars, and continued to help the brand move up.

b. As the flagship large SUV of the Group, the new Tang was fully upgraded this year and its monthly sales continued to climb, leading the large SUV market by a large margin.

c. Under the empowerment of DM-i Super Hybrid, the sales of the Song family continued to climb month by month, and it won the annual retail sales champion of China Passenger Car Association.

d. Among the Qin family, Qin PLUS, as its hot-selling product, has broken the monopoly of joint venture brands on the A-level car market.

e. As the first A-class running SUV equipped with E-platform 3.0, Yuan PLUS has grown rapidly since its launch in February, leading the A-class pure electric market.

The Ocean series adopts the design concept of marine aesthetics, with a younger product positioning to further meet the diversified consumption needs of customers. In the Ocean Life series,

The pure electric new species Dolphin was launched, equipped with e-platform 3.0. It was continuously hotly sold throughout the year and remained the sales champion of the A0-level market.

The pure electric sports coupe, the Seal, was officially launched in July. It was based on the E-platform 3.0 and the CTB battery-body integration technology. With excellent handling, safety, and comfort, it was recognized by the market. Since its launch, its sales have climbed rapidly and have broken ten thousand units for three consecutive months. In the "Warship Series", the destroyer 05 and the frigate 07 will be launched successively this year. With the support of DM-i hybrid power and marine aesthetic design, the product matrix of the Group will be further improved.

In May, the "Tengshi" brand was officially renewed, building its core competitiveness with leading new energy and safety technologies, intelligent and luxurious product quality, and user ecological service system, further improving the Group's brand building. The Tengshi brand is committed to meeting the diversified needs of consumers in the new era, shaping a new luxury product matrix from multiple dimensions such as vehicle design, performance tuning, and internal and external details, covering the fields of MPV, SUV, sedan and urban sports cars. The first model under the new Tengshi brand, Tengshi D9, integrates luxury, intelligence, power, and safety. Since its launch in August, it has received more than 50,000 orders this year, setting a new benchmark for China's new energy luxury MPV value.

The All-New High-End "Yangwang" emerged under the promotion of disruptive technology, opening up the million-level new energy market with its unique technological innovation. Yangwang will apply the Group's cutting-edge technological achievements and innovative design concepts, provide users with extreme safety, extreme performance, and extreme experience based on extreme driving scenarios, reshape the value concept of high-end brands in the new energy era, and strengthen the Group's brand influence in the high-end market.

BYD actively lays out overseas markets, accelerating the development of markets in Europe, Asia Pacific, the Americas, and other regions, and enters the forefront of sales in many markets, favored by consumers worldwide.

In February, Yuan PLUS was pre-sold simultaneously in Australia and was loved by local consumers, with hot orders.

In July, the Group held a brand release conference in Tokyo, officially entering the Japanese passenger car market, and BYD ATTO 3, BYD SEAL, BYD DOLPHIN and other three models were unveiled.

In September, the Group held a new energy passenger car release conference in Europe, launching the Han EV, Tang EV, and Yuan PLUS models for the European market, which debuted at the Paris Motor Show in October.

In November, the Group held a conference in Sao Paulo, Brazil, launching the Song PLUS DM-i and Yuan PLUS two models. Adhering to the concept of win-win cooperation, the Group works with multiple global high-quality dealer partners to provide local consumers with high-quality new energy automotive products and services.

With the continuous deepening of overseas layout, the Group's first wholly-owned passenger car factory overseas officially landed in Thailand in September, promoting the internationalization of the passenger car industry and steadily rooting the layout worldwide.

In the field of pure electric buses, the Group deepens the market layout, launches high-quality products with leading technology, optimizes the operation model, and works with many partners to continuously improve the quality of urban public transportation services, leading the global electric bus reform. This year, the Group developed the passenger and public transportation markets in areas such as Hefei, Jinan, and Fuzhou in China, promoting the steady development of the domestic new energy passenger car industry. At the same time, the Group further develops overseas markets, officially enters countries such as Indonesia and Mauritius, and helps to achieve local dreams of green transportation and clean energy. In the field of urban rail transit, the Group is steadily promoting the development of the cloud track with completely independent intellectual property rights and the low-volume cloud bus in order to solve the problem of urban microcirculation and the last kilometer, providing effective solutions for global urban traffic congestion governance. In terms of the cloud track project, the cloud track body of Sao Paulo, Brazil was officially offline in March, bringing a more efficient and intelligent urban transportation experience to Brazil. In terms of the cloud bus project, the Dawangshan cloud bus in Hunan Province was launched for trial operation in September, and the first cloud bus municipal line in Pingshan, Shenzhen was officially opened in December, providing local residents with a new and better travel experience.

Under the guidance of market-oriented strategies, the Group actively promotes business progress in external cooperation, industrial investment, and capital operation, and promotes the Group's long-term, continuous, and healthy development.

A. In terms of external cooperation, the Group reached a cooperation agreement with the world's leading artificial intelligence computing manufacturer NVIDIA in March in the field of intelligent driving technology. The two sides complement each other's advantages and develop together; the Group also signed a global strategic cooperation agreement with Shell, taking the lead in cooperation in China and Europe, and plans to expand the cooperation relationship globally to promote energy transformation. In December, the Group and UzAuto, the largest automotive group in Central Asia, established a joint venture focusing on the production of new energy vehicles and related components, accelerating the promotion and development of local new energy vehicles.

B. In terms of industrial investment, the Group further deepened its layout in the fields of new energy vehicle electrification and intelligence based on its own business, relying on its deep understanding of the entire industry chain and technological accumulation, helping to implement the Group's strategic planning and ensuring the stability and safety of key links in the supply chain. The Group empowers industry partners with each other, strengthens and expands the industrial ecology, and achieves win-win cooperation.

C. In terms of capital operation, during the year, the Group implemented an employee shareholding plan, established and improved a mechanism for sharing interests between workers and owners, and improved the long-term and effective incentive and constraint mechanism of the Group to enhance employee cohesion and corporate competitiveness, and thus bring higher efficiency and more sustainable returns to shareholders.

The energy storage business is divided into large-scale storage and household storage. The large-scale storage area is mainly in China and the United States, accounting for more than 90%, and the domestic market for household storage is 50-60GWh, mainly through bidding by central enterprises. In the bidding of central enterprises, BYD accounts for 58%. BYD is a system supplier of large-scale energy storage, which can decide what shape of battery to use. In this way, the production line of automotive batteries and large-scale energy storage can be merged, and only the formula may be different, and the shape is the same, so the production capacity competitiveness is stronger.

CEO Wang Chuanfu said that the company's opportunities for the future are three-fold.

The first is the continuous deepening of electrification. Currently, the market is showing a trend of holding onto money and waiting to buy, but the penetration rate of new energy has already reached 35%, and the popularity of new energy is still high, especially for consumers who purchase or replace cars in the first to third-tier cities, who hardly consider fuel vehicles. Further increase in the penetration rate of new energy is the opportunity for new energy vehicle companies in the next three years. The trampling of fuel vehicle prices has caused a second collapse of prices. The contradiction between dealers and automakers, joint ventures, and Chinese and foreign parties has intensified. Against this background, it is estimated that the penetration rate of new energy for the whole year will reach 40-45%, and the monthly sales may exceed 50%. The total sales for the whole year are expected to be 8.5-9 million. The second opportunity is high-end brands, which are not necessarily priced higher but rely on design and technology over configuration. This presents an opportunity for Chinese brands, as luxury brands like BBA hold only 15-20% market share, whereas brands like Tengshi break 15,000 in sales, boast strong customer satisfaction, and receive high praise for features like comfort and NVH.

The third opportunity is export - brands that can succeed in China can raise prices by 20% when going overseas and still remain competitive due to the fierce competition in China's domestic market. By honing their skills in China's competitive market, these brands can enter foreign markets with confidence and few competitors.

Japanese cars once had a strong presence in Southeast Asia, but they have now fallen behind due to the high degree of cultural and ethnic integration between China and Southeast Asia. Chinese appliances and smartphones have made similar inroads in these regions.

In Europe and South America, countries like Brazil, Argentina, Chile, and Mexico boast few local brands, presenting a prime opportunity for Chinese car companies to expand overseas. All regions outside a few car company strongholds remain ripe opportunity for Chinese automakers.

In summary, BYD is best positioned to take advantage of three opportunities facing the industry: deep penetration of new energy, reshuffling of high-end brands, and exports.

Q&A Session

Q1: Is it possible for BYD's sales volume and market share guidance for this year to surpass that of Volkswagen during the gasoline era?

A1: In January and February 2023, sales volume decreased by 800,000 units YoY, with a 100,000 unit increase in new energy sales and a 900,000 unit decrease in fuel vehicle sales. This means our market share has climbed to 12-13%, surpassing Volkswagen (FAW-Volkswagen + SAIC Volkswagen -Audi) at 9%.

In 2020, China produced 20 million passenger cars, with a GDP growth rate of 3.5%, and automobile growth rate of 3-4%, enough to match GDP growth and maintain stable prices.

The full-year target for BYD is a starting point of 3 million vehicles, aiming for double growth to reach 3.6 million. In the 100,000-200,000RMB price range, BYD has the right to set prices and seeks stability, rather than creating dissatisfaction among consumers.

Q2: How do you evaluate the industry competition and BYD's opportunities and attitude in the competition?

A2: Speed is crucial - as competitors and the market quickly change, companies must match this pace. Nokia, as a mobile phone manufacturer, was beaten by rivals who adapted faster than they did. Automakers must adapt even faster. First, speed; second, core technology; third, a clear strategic vision. Internal conviction is key - fossil fuels are no longer a viable option, and selling both electric and fuel vehicles is not a recipe for success. Hesitation and ambiguity are fatal mistakes. Speed, technology, and strategy are the three factors that will determine a company's market share in the future. Q3: What is the future development direction and technological path of pure electric and plug-in hybrid vehicles, and how to maintain competitive advantages, especially in the field of plug-in hybrids?

A3: By the end of this year, Tengshi will achieve 20,000 units of monthly sales, and D9 will achieve 10,000 units of monthly sales. In addition, there are several other vehicle models, and Tengshi will take a leading role in profitability in the future. We will also provide Tengshi with more technology. We have 60,000 engineers, including 60% with master's or doctoral degrees, and 700-800 graduates from Tsinghua University and Peking University. In the past, we couldn't hire Tsinghua and Peking University graduates, but we seized the opportunity to recruit more talents this year.

In the past, the industry relied on management to drive development. OEMs only focused on styling and engine production, while other tasks were handled by suppliers such as Bosch and ZF because of their high specialization efficiency. However, now that the industry has undergone a transformation and the times have changed, Tire1 and OEMs are engaged in a game of interests. But BYD is different. We have a unified goal, and there are no communication barriers.

In the next 2-3 years, BYD will still adopt a large-scale R&D personnel strategy to maintain its ability to undergo disruptive iterations. We will compete with engineers, vertical integration capabilities, market strategies, and economies of scale. As for any individual technology, it is not the most important aspect to us because we have a large talent pool, and we can draw upon necessary resources when we need it.

Q4: What are the differences in production capacity planning between BYD's domestic and overseas production? How is BYD's cooperation with Nvidia progressing?

A4: We need to provide global services, including R&D, global manufacturing, technical service, and after-sales service, to support global coordination.

Overseas plants are gradually being put into production. Currently, the proportion of overseas plants is not large, but it will increase over time. Overall, Chinese R&D and manufacturing still remain the core, mainly due to the advantages of the full supply chain.

Our main cooperation with Nvidia is in GPU chip manufacturing, and contract manufacturing is the main form. The ratio of future revenue from this cooperation will also become increasingly significant.

Q5: Can you elaborate on the opportunities and challenges for Chinese auto companies going global? What are the goals of BYD's international expansion?

A5: The automotive industry is the largest manufacturing industry, and the greatest risk is political risk. For example, we should not enter the US and Korean markets due to their high political risk. The political risks in the top five automotive powers, including Germany, Japan, and France, are also relatively high.

The second challenge is localization, namely keeping all four major processes (stamping, painting, welding, and final assembly) in the local area to avoid tariffs. We ship parts in containers to the local area, and complete the four major processes locally, which results in lower transportation costs and tariffs. The final assembly process relies heavily on manual labor and it is difficult to replace with machines.

The third challenge is R&D. We have sufficient engineers. Solar energy is a classical example. Europe created the market and Chinese people followed, leading to a decade of oversupply and unprofitability. However, Chinese people persevered, and expanding the electric vehicle market overseas should not be worse than the solar industry. BYD has accurate strategies and ambitious goals, and relies on hard work and perseverance. We have confidence in Chinese brands in the field of new energy exports and believe we can produce even more striking results than solar energy. Q6: What are the strategic priorities for different regions when going global? Is there a sequence in global penetration?

A6: From the experience of exporting to Thailand, China's electric vehicles have mature and advanced technology, which can quickly increase penetration rate. BYD exported 50,000 units to Thailand this year, with a 10% market share. The penetration rate in other areas may require 5 years, ranging from 1% to 5%, but areas with subsidies may only take 6 months, because the products are good, there is no need to worry about technology and quality.

We are also analyzing the experience in Thailand to see how long it will take BYD to achieve the same 1% to 10% penetration rate in other Southeast Asian countries. If it is fast enough, it may occupy Southeast Asia like mobile phones. It is difficult to provide specific data. We need to assess the specific market before we make any decisions, but we are confident that we can replicate the experience in Thailand globally.

Q7: What is the progress and plan for the intelligent driving business?

A7: We have 660,000 employees, and what we urgently need is the intelligence and automation of the production line. However, this poses regulatory issues. If we can use machines to replace people for the same work every day, we don't have to provide social security and accommodation - This is currently not possible.

Many people die in car accidents in China every year, but we have never received any complaints because my turning and braking comply with regulations. But if it is automatic driving, it is unclear. A single car accident can destroy an entire vehicle. No one wants to take responsibility - neither the government nor the factory wants to bear it. Currently only advanced driving assistance is available, and people still need to hold the steering wheel. It is unlikely to have unmanned driving until the issue of legal liability is resolved.

NVIDIA chips, including ADAS algorithms, are only for advanced driving assistance, and are being hyped up by capital. There are still very few applications for unmanned driving under special road conditions, so the market will gradually return to rationality. We are also cooperating with NVIDIA and have some supplementary functions that can reduce fatigue and prevent accidents, with a price increase of about 5,000 yuan for optional features.

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