BYD doesn't want to leave the iron throne.

Author: Zhou Zhiyu

Editor: Zhang Xiaoling

For BYD and Wang Chuanfu, 2023 is a year worth celebrating.

Being the global leader in new energy vehicles for two consecutive years, BYD is one of the few car companies that have achieved their sales targets. It is expected that the net profit attributable to shareholders will exceed 30 billion for the first time, and BYD has entered the "top tier" globally.

And without any surprises, BYD will replace Tesla and become the "king of pure electric vehicles" worldwide in 2024.

However, despite the outstanding performance in reality, BYD's stock price has been declining continuously, with a 23% drop in the full year of 2023, which is a 45% decrease compared to its trillion-dollar peak.

Over a decade ago, Wang Chuanfu decisively made BYD go "all in" on new energy, initiating full-stack self-research and establishing its current position as the sales champion. However, as the second half of the new energy vehicle era approaches, whether BYD can continue to dominate has become a question in the minds of investors.

How to further advance in intelligence, high-end, and internationalization is the focus of BYD's future efforts, as well as the key to whether BYD can stand shoulder to shoulder with Volkswagen on the world stage as a new energy vehicle company. This is a confrontation between the new era and the old era.

Differences

After the end-of-year price cuts to stimulate sales, BYD broke through the 340,000 mark in December. With a total of 3.0244 million vehicles sold throughout the year, a year-on-year increase of 62.30%, BYD has become the leader among global new energy vehicle companies.

In addition to sales, BYD achieved a net profit of 21.4 billion yuan in the first three quarters, a year-on-year increase of 129.47%; the gross profit margin of the automotive business has also steadily increased from 17.29% at the end of 2021 to 22.2% in the third quarter of 2023.

According to institutional expectations, BYD's revenue is expected to exceed 652.5 billion yuan in 2023, and the net profit attributable to shareholders will exceed 30 billion yuan. It will also surpass SAIC Motor Corporation and become the most profitable car company in China.

BYD has also become a "triple crown" winner, taking the top spot in both sales and brand in the Chinese automotive market. It has undoubtedly surpassed Tesla in the global market and become the leader in global new energy vehicle sales.

All of this has made BYD one of the few car companies that can consistently surprise the market in terms of sales and financial data, and these surprises are built on a high base. In addition, with the expected recovery of the consumer electronics industry, BYD's mobile phone manufacturing business also has good growth prospects.

However, these surprises have not been reflected in the stock price. In the whole year of last year, BYD's A-share stock price fell by nearly 23%, lower than the performance of the WIND Automobile Industry Index during the same period (down 0.43%), and also lagging behind popular automobile stocks such as Changan Automobile, NIO, and Li Auto. Compared to the trillion-dollar market value in mid-2022, BYD's market value has shrunk significantly.

Investors have divergent views on BYD's future. Optimists believe that as a company that is still rapidly developing and poses a threat to Tesla's global leadership in new energy vehicles, BYD is currently undervalued. Using the discounted cash flow (DCF) method, BYD is a trillion-dollar company.

Pessimists believe that BYD's price-to-earnings ratio (PE) exhibits obvious cyclical stock characteristics, and investors should not fall into the "undervaluation trap" and lower their target price for BYD. Even the most aggressive ones, such as UOB-KayHian, Singapore's largest brokerage firm, have recently given a "sell" rating on BYD.In the past six months, the short interest in BYD's H shares has risen to over 4% of the freely tradable shares, and even exceeded 6% in the past two months. This means that more investors are betting on a further decline in BYD's stock price.

Although BYD's stock price rebounded slightly at the end of December, rising from a low of 182.85 yuan per share to around 190 yuan per share, several fund managers believe that this is just institutions rebalancing their positions at the end of the year and does not have sustainability.

Some investment bankers also analyzed that the decline in BYD's stock price is due to the change in investors' expectations for BYD's growth. After three years of rapid growth, BYD's current performance has not exceeded investors' expectations.

Analysts from securities firms also pointed out that after the decline in purchase tax subsidies at the end of 2022, market sentiment began to shift, and even BYD would find it difficult to escape the overall market trend.

Defending the Title

In just three years, BYD's position in the new energy market has undergone a dramatic transformation. It has gone from being a challenger to a title defender.

BYD's success lies in its strong manufacturing capabilities. Through a "car-sea" strategy, during the initial stage of market explosion, its diversified product lineup can meet the diverse needs of consumers. Its vertically integrated industrial chain and strong execution capabilities enable BYD to control costs effectively and achieve significant economies of scale.

BYD has also gained high growth, high market share, and unprecedented recognition from consumers and investors due to its first-mover advantage.

However, investors in the market are skeptical about whether the past three years of success can be translated into long-term advantages for BYD.

Over the past 11 years, the performance of BYD's A-share stock price has shown a clear correlation with its price-to-earnings ratio (P/E ratio). When its P/E ratio is high (above 50), BYD's stock price tends to rise significantly, and it falls when the P/E ratio declines, showing obvious cyclicality. During the same period, Toyota's P/E ratio revolved around a central value of 15 times, with its scale, profitability, and stock price rising together.

In the Chinese auto market, listed car companies have experienced periods of booming sales and soaring stock prices. Some have even seen their stock prices increase tenfold in just 16 months, while others have struggled in the hands of capital. There are only a few consistent winners in the market.

Among several typical car companies, as of January 11th, BYD's P/E ratio (TTM) was 19.98, Toyota's was 9.97, and Tesla's was 69.03. Compared to BYD's PE ratio of over 280 times when it had a trillion-dollar market value, BYD has clearly experienced a "valuation regression." From a valuation perspective, investors currently view BYD as returning to the traditional manufacturing industry, rather than seeing it as a technology company with high growth potential like Tesla, even though Tesla's revenue and profits still come mainly from car manufacturing.

Furthermore, currently, 90% of BYD's global sales are in the Chinese market, higher than Tesla's 33%. In terms of revenue, nearly 80% of BYD's global revenue comes from the Chinese market, far exceeding Tesla's 25%. BYD cannot avoid the pressure reflected in revenue and profitability due to investors' concerns about the further intensification of competition in the Chinese market.In the hybrid market, which is the core market for BYD, its competitiveness has been weakened as Geely, Great Wall Motors, and SAIC Roewe continue to exert their efforts. Prior to the December promotion, BYD's hybrid models had experienced consecutive MoM negative growth for two months. The online announcement of price reductions and promotions that started at the end of November focused on the Dynasty series, which has a higher proportion of hybrid models. In the mid-to-high-end market, BYD, which is striving to move up, has not yet established absolute dominance.

Even though the capital market is optimistic about Wang Chuanfu and believes that the new energy vehicle industry will still experience high growth in the future, it also recognizes BYD's position as the "leader" in the new energy vehicle market. However, behind the "glorious 2023," there are hidden concerns among investors about whether BYD can sustain its profitability and avoid falling into the dilemma of "increasing revenue without increasing profit."

Moreover, with Huawei's widespread adoption of its technology through various partnerships, will the "Huawei camp" also target the market below 200,000 yuan? Can BYD continue to maintain its pricing power in the mainstream market? These factors have intensified investors' concerns.

According to data from the China Association of Automobile Manufacturers, the cumulative wholesale volume of new energy passenger vehicles in 2023 was 8.864 million units. BYD's market share reached 33.99%, further increasing from the end of last year's 27%.

This also means that BYD has reached the finish line ahead of time in the midst of the transformation of the new energy vehicle industry—a market that is highly competitive and approaching maturity, where the market share of leading players is only about 30%. For BYD to improve investors' and the market's perception of it, it needs to steadily increase its market share and stabilize its profitability.

At the shareholders' meeting in June last year, Wang Chuanfu confidently told shareholders that he was confident in gaining a higher market share in the next 3 to 5 years. To achieve this goal, BYD needs to accelerate the replacement of fuel vehicles together with its peers, expand the market, and continue to maintain its leading position in core technologies.

This is not an easy task.

Breakthrough

BYD needs to prove to the market that its success in the past three years is not just a one-time achievement but a result of being a "friend of time" and persisting in new energy for 20 years to finally welcome spring.

The rapid expansion of the company's scale in the short term, the vast upstream and downstream of the industrial chain, and how to ensure the quality of millions of vehicles on the road all test Wang Chuanfu's management capabilities.

BYD also needs to consider how to consolidate and enhance its brand influence and translate it into financial data. This is the key for Chinese domestic brands to remove the label of cost-effectiveness and surpass the past.

BYD needs a stronger brand power to break through the current development bottleneck. The brand power of any large-scale automaker requires long-term verification and sufficient patience to form.

Li Yunfei, General Manager of BYD's Brand and Public Relations Department, admitted that the new energy market was a blue ocean last year, but he believes it will become a red ocean in the next two years. BYD needs to be prepared in all aspects, including technology, products, and brand, as they are all challenging battles.

In the face of intensified competition in the mass market, BYD is simultaneously pursuing high-end, overseas, and intelligent markets, engaging in multiple fronts.BYD is still in the stage of layout in terms of high-end and overseas markets.

Xiong Tianbo, the General Manager of BYD's Formula Leopard, stated to Wall Street News that the short-term task of Formula Leopard is to establish the brand and form a systematic capability, which will ultimately be reflected in sales volume. Zhao Changjiang, the General Manager of Tengshi Motors, also expressed that Tengshi aims to stand firm among the top five global luxury electric vehicle brands in the future. With sales exceeding 1,500 units in December, it is also eagerly awaiting the conversion of the pre-order volume that exceeded expectations into actual sales.

In the overseas market, BYD continues to expand its presence. From the establishment of its first overseas electric passenger vehicle factory in Thailand in September 2022, to the announcement of its first electric passenger vehicle factory outside of Asia in Brazil in 2023, and the upcoming establishment of a factory in Hungary in Europe. Overseas sales are currently the most noteworthy aspect of BYD's financial growth.

In terms of intelligence, BYD has collaborated with companies such as Baidu, Momenta, and DJI. However, it is also adjusting the organizational structure of its intelligent driving business and accelerating the recruitment of senior talents in the intelligent driving industry to increase the proportion of self-developed intelligent driving technology. A BYD executive stated that BYD is accelerating its self-development in software and hardware, especially in high-end models where there will be more applications.

BYD's Executive Vice President, Li Ke, also admitted that BYD is not ahead of others in the field of autonomous driving at present, but BYD has the ability to launch more innovations in the next two to three years.

Including the Super Hybrid System, several of BYD's technologies will undergo upgrades and innovations in 2024. Wall Street News has also learned that BYD will hold a technology day in January, where its achievements in autonomous driving technology will be showcased.

The next three years are a critical period for automakers. Most automakers are accelerating their efforts to achieve scale and secure a ticket to the "finals". For BYD, it is a stage of "leaping over the dragon gate", which will determine whether it can break through its own bottlenecks and make a breakthrough in the second half of the intelligent era.

21 years ago, Wang Chuanfu, who had just started manufacturing cars, declared the ambitious goal of becoming the global leader by 2025. Many people thought it was just a story he told the market, and investors' enthusiasm for BYD quickly faded. Today, BYD has become an automotive company that cannot be ignored in the global industry and has a potential to challenge the position of Volkswagen Group.

In the century-old automotive industry, many waves have been stirred up, but only a handful have stood at the forefront. Now, with the momentum of new energy, BYD is accelerating the transformation of this industry along with players like Tesla. The battle for the future dominance of the automotive industry has already begun, and BYD must cross the current threshold in order to rise to greater heights.