For those who have been following Dolphin Jun, they would know that throughout 2023, Dolphin Jun was not optimistic about BYD. However, after a whole year of adjustments, starting from the beginning of 2024 (for details, see the performance review in the fourth quarter " "Price Butcher" BYD: Blood Battle with Bright Weapons, Dawn is Near"), Dolphin Jun has started to emphasize:

"In 2023, investing in BYD requires attention to chasing high risks, while in 2024, one should pay more attention to reversal opportunities."

And up to now this year, in a fierce new energy market, BYD does indeed appear somewhat unique. It is also the only new energy vehicle company covered by Dolphin Jun whose stock price is showing a positive increase.

The last in-depth analysis Dolphin Jun conducted on BYD was back in 2021 during the DM 4.0 cycle. Seizing this opportunity, Dolphin Jun will once again take a deep look at BYD, the unique player in China's new energy vehicle camp. This article focuses on:

I. What kind of ghost story did BYD encounter in 2023?

II. The more prices drop, the more money they make, what kind of reverse logic is this?

III. Price Butcher: The soul of vertical integration?

The detailed content is as follows:

I. What kind of ghost story did BYD encounter in 2023?

Starting in 2023, Tesla, with its strong advantage in high gross profit, decisively determined the Chinese new energy vehicle market for 2023 with a production-to-sales strategy, which has led to a substantial price war in the domestic automobile industry.

The actual result is an industry-wide price deflation under weakening penetration rates - whether it's the plummeting prices of lithium carbonate from its peak, or the prices of complete vehicles:

① Industry Ghost Story: Full-chain deflation + Chaotic battles in complete vehicles

Compared to the rising trend in 2020 and the rapid penetration in 2021 and 2022, in 2023, China's new energy industry, after rapid expansion in the previous two years and with the industry chain becoming more sound and mature, saw the gradual withdrawal of government subsidy policies for new energy, and after three years of rapid penetration, the growth rate of new energy vehicles slowed down. The combined effect of these three factors resulted in a chemical reaction where the entire automotive market experienced a bloody battle with prices deflating from top to bottom:

The decline in the cost of the core component of new energy vehicles, lithium carbonate for batteries: At the beginning of 2023, the average price of battery-grade lithium carbonate was 50,000 yuan/ton, but by 2024, it had dropped to nearly 10,000 yuan/ton Using an average battery capacity of 48kWh in the new energy vehicle industry, the cost reduction at the photovoltaic end has decreased by 12,000 to 14,000 yuan compared to the beginning of 2023, contributing to nearly half of the decline in the price of a single vehicle.

Intensified competition in the new energy vehicle industry, accelerating reshuffling: The mature supply system in the industry has made little difference between main manufacturers, and the demand and configuration of new energy vehicles have gradually become homogeneous. Economies of scale have become the decisive factor in the survival and cost status of new energy vehicles.

With most manufacturers prioritizing sales volume, price competition has further intensified. "Trading price for volume" may become the long-term price strategy for car companies.

② BYD's Ghost Story:

a. Diminishing advantage in hybrid technology: BYD, which has been leading the way in the new energy track and holding the first-mover advantage, has seen its advantage gradually diminish by 2023:

BYD's 2023 models and the 2024 Honor Edition models still use the DM 4.0 technology. Since the launch of DMI 4.0 technology in 2021, the comprehensive range has reached 1100km-1300km, with a maximum fuel consumption of 3.8L/100km, far exceeding similar competitors. However, it has been over 3 years since the introduction of DM 4.0 technology, and the technical advantage of DMI 4.0 is gradually being caught up by competitors.

Compared to hybrid competitors launched in 2023, although BYD's DMI 4.0 technology still has an advantage in fuel consumption, it has begun to lag behind in comprehensive range and fuel consumption compared to the new generation Thunderbolt hybrid system-equipped Galaxy L6/Galaxy L7.

As more competitors such as Leapmotor, Geely Galaxy, and Deep Blue launch models targeting BYD's affordable hybrid models, BYD's market share of plug-in hybrid models continues to decline, dropping from a high of 68% in 2023 to a low of 34% in January 2024.

b. The high-end pure electric shortcoming that cannot be filled: In the process of the declining market share of hybrids, BYD has not opened up the situation in the pure electric market.

Looking at different models, in 2023, BYD's pure electric sales volume seems to be increasing, with market share steadily rising from less than 20% to over 25%. However, looking closely at the structure of pure electric sales: the main contribution to the incremental sales comes from the launch and hot sales of the low-priced pure electric small car Seagull in 2023. During the peak sales period, monthly sales exceeded 50,000 units, contributing 42% to the increase in pure electric sales in 2023. However, the pricing of the Seagull model is only 70,000 to 90,000 yuan, and the booming sales of the Seagull model further lowered the ASP of pure electric models.

On the other hand, among the pure electric models priced above 200,000 yuan, BYD's performance is very mediocre, with rare single products selling over 10,000 units per month, and there is no standout product.

The result of the resonance between points (a-b) is the unstoppable price decline:

On one hand, in response to the challenge in hybrids, starting from February 2023, BYD successively launched champion edition models, with prices for the entire series reduced by 4,000 to 98,000 yuan compared to the original version, driving the overall price band downwards. By November 2023, after the inventory pressure increased, the prices of the already low champion edition models were reduced again.

On the other hand, after the comprehensive selling price of pure electric products moved downwards following the price band shift: when the incremental models are mainly the Seagull priced at 70,000 to 90,000 yuan, and the situation where pure electric single-car prices above 200,000 yuan cannot be broken through, the price of pure electric vehicles is also declining.

In 2023, BYD did not escape the industry-wide curse of price deflation.

II. The more the price drops, the more money is made, what kind of reverse logic is this?

Among all the companies observed by Dolphin, the result of rapid price decline is the squeezing of the gross profit margin of the entire vehicle manufacturer. Even Tesla, whose gross profit margin soared to over 30% during its peak period, is no exception, let alone companies like Nio, Xpeng, and Li Auto.

If the ghost story of BYD mentioned earlier was something Dolphin expected at the beginning of the year, what was unexpected is the "reverse trend" of BYD's automotive (including) business gross profit margin: from a single-car economic perspective, since 2023, the single-car price has continued to decline, but the gross profit margin of the automotive (including battery business) has been rising all the way.

Due to the price reductions of the champion edition in 23 and the honor edition in 24, BYD's single-car price has dropped from 170,000 yuan in the first quarter of last year to 140,000 yuan in the first quarter of this year. However, the gross profit margin of the automotive (including battery business) has risen from 21% in the first quarter of last year to 28% in the first quarter of this year, almost reaching a historical high!

In comparison, Tesla, another leader in new energy vehicles, has shown a continuous decline in the gross profit margin of its automotive business despite the trend of declining car prices. It has dropped from 19% in the first quarter of last year to 16.4% in the first quarter of this year, almost halving compared to the peak period of around 30% gross profit margin.

Another curious question from Dolphin is, why, as leading players in the new energy vehicle sector with a trend of intense competition and declining unit prices, have carmakers shown drastically different trends in gross profit margins? How did BYD achieve a dominant gross profit margin?

When considering this question, the typical answer would be economies of scale. However, upon closer examination, even as Tesla increased its sales volume during the price reduction process, why did Tesla not benefit from economies of scale, resulting in a simultaneous decline in gross profit margins?

In fact, upon further analysis, Dolphin found that by 2023, BYD's automotive business not only did not benefit from amortized economies of scale, but instead, as sales volume increased, the per-vehicle amortization costs also rose.

Even after excluding the depreciation of over 3.35 billion due to the rapid technological advancements in power battery assets and the reduction of the amortization period from five years to three years, in 2023, as BYD increased its car sales from less than 2 million to nearly over 3 million, the per-vehicle depreciation not only increased in rate but also in absolute value, surpassing a thousand yuan per vehicle in 2023.

As the per-vehicle price continued to decrease, the increase in the depreciation cost rate relative to the per-vehicle price became more pronounced.

The underlying reason is quite understandable: in the past two years, BYD has significantly increased its capital expenditure, tripling it in 2021 and 2022, and continuing to grow at a high level in 2023.

Looking at the production capacity that BYD has built up over the years:

a) Excessive production capacity suspicion: If not considered surplus, the automotive production capacity is at least equivalent to BYD's sales target, which is quite abundant;

In the past two years, despite the fact that the battery production capacity supplied externally has not truly been fully utilized (based on information gathered, external battery supply may only account for around 5% of BYD's Fudi battery sales), by the end of 2023, the battery production capacity has reached around 450GWh. Even considering factors such as multiple shifts in many factories, the actual production capacity still significantly exceeds Dolphin's estimate of the real demand from internal and external customers for Fudi batteries.

Note: The translation is based on the provided content and may not cover the entire context.

b) Distribution of Flour Production Capacity: The main issue lies in the distribution of production capacity. While the distribution of automobile production capacity is relatively normal (although still far behind Tesla's highly concentrated capacity in Shanghai), the distribution of battery production capacity is scattered all over the place, which is quite peculiar.

From what Dolphin has learned, a likely factor is that in recent years, as new energy is encouraged by policies, various regions are fiercely competing to attract investment. As a leading domestic player, BYD's actual result is the scattered distribution of production capacity.

In this scenario, from an enterprise perspective, managing these scattered production capacities would pose considerable challenges in supply chain management and material transportation.

So, as the unit price of bicycles continues to decline and the depreciation cost of bicycles continues to rise, the source of the increase in gross profit margin becomes very clear - the reduction in variable costs:

① Decline in Lithium Carbonate Prices: The average battery capacity of BYD bicycles is 30kWh (with an average battery capacity of 40kWh for pure electric vehicles and 18kWh for plug-in hybrid models). The average price of lithium carbonate has dropped from 50,000 yuan/ton at the beginning of last year to about 10,000 yuan/ton in the first quarter of this year.

Dolphin estimates that BYD's cost reduction at the battery end is approximately 7,000 yuan.

② Scale Sales Purchasing Power:

BYD's sales volume exceeded 3 million units in 2023, a year-on-year increase of 62%. Higher sales volume means that BYD has stronger purchasing power in raw materials procurement.

③ Cost Reduction through Component Reduction:

In addition, the champion version launched by BYD in 2023 generally saw a price reduction of around 10,000 yuan; however, unlike the 2024 Honor version, the champion version did not reduce components. In 2023, while reducing prices, the champion version generally reduced components such as adjusting battery capacity, motor power, and central control screen size to reduce costs, maintain profit margins, and explore lower prices.

As a result, in 2023, the variable cost per bicycle decreased by 18,000 yuan, not only completely offsetting the decline in bicycle prices and the increase in bicycle depreciation but also leaving a surplus to achieve higher gross profit margins.

④ Increase in High-end and Overseas Market Share:

Starting in 2023, BYD accelerated its layout of high-end and overseas markets. In 2023, the combined sales volume of high-end and export models reached 380,000 units, a year-on-year increase of 476%. The proportion of high-end and export models in BYD's overall sales volume also increased from 11% in the first quarter of 2023 to 22% in 2024.

High-end and export models have higher gross profit margins, which to some extent have lifted BYD's overall gross profit margin level.

III. BYD's Soul: Vertical Integration?

In fact, the above three points can qualitatively explain the situation where BYD's single-car prices are falling, the single-car spread cost rate is rising, yet the gross profit margin is increasing. Many industry peers have similar operations, so why is it that only BYD can go against the trend?

Furthermore, upon deeper investigation, Dolphin believes that behind the significant price reduction to boost sales or increase gross profit margin lies a more profound reason, which is the complete vertical integration in terms of scale sales, especially the deep integration in the battery industry chain.

Comparing the layout of BYD and Tesla in the three core technologies of electric vehicles, it can be observed that Tesla's self-production layout of the most core battery technology in the era of electrification is relatively late. Currently, Tesla's self-developed 4680 battery is partly self-produced and partly outsourced to Panasonic and CATL. However, the slow ramp-up affects its ecological barrier integrity, which also leads to its cost reduction speed falling short of expectations.

On the other hand, BYD, starting from producing secondary rechargeable batteries, has early completed the layout of core asset batteries. Through its subsidiary, Fudi Battery, BYD has achieved self-research and self-production of batteries, making the ecological barrier on the vehicle manufacturing end the most complete.

Compared to its peers, BYD does not need to pay the "Ningwang Tax" of 20% to CATL, which translates to retained profits within the entire automotive business.

1) Self-developed Batteries Increase Gross Profit Margin by 3-4 Percentage Points

Here, Dolphin mainly refers to the CATL battery business. How much does Fudi Battery contribute to the gross profit margin and net profit increment? Dolphin will split it into pure electric and hybrid models for a simple calculation:

a Pure Electric: Taking the Yuan Plus, the best-selling pure electric model in 2023, as an example, assuming the average battery capacity of Yuan Plus is 55kWh (with two battery versions of 50kWh/60.5kWh to choose from), BYD's internal battery production can be 20% cheaper than external procurement. Self-producing batteries can save costs by approximately 0.7 million yuan, contributing about 5-6 percentage points of gross profit margin increment to BYD.

b Hybrid: Taking the Song Plus DMI, the best-selling hybrid model in 2023, as an example, assuming the average battery capacity of Song Plus is 18.3kWh (mid-range version), BYD's internal production of batteries is 20% cheaper compared to externally sourced batteries. Producing batteries in-house can only save costs by about 0.2 million RMB, contributing approximately 1.6 percentage points to BYD's gross profit margin, which means that the incremental contribution of self-produced batteries to the gross profit margin of hybrid models is relatively small compared to pure electric models.

According to Dolphin's comparison breakdown, when hybrid and pure electric vehicles are combined at BYD, self-supplied batteries boost the overall automotive business by approximately 3-4 percentage points in gross profit margin. Compared to the overall 28% gross profit margin, self-developed batteries may not seem high, but the impact on the cost side needs to be considered.

(The calculation process is quite complex, those interested can discuss with the assistant)

2) How much does the battery business contribute to BYD's net profit margin?

In comparison to the boost in gross profit margin, the impact of the battery business on net profit is actually more significant. The logic here is also easy to understand: batteries are part of the B2B business, while vehicles are part of the B2C business, with the latter naturally corresponding to higher sales and administrative expenses. Moreover, with BYD's relatively small external supply volume, they mainly sell to BYD's vehicle business, so they don't require much in terms of sales expenses.

In terms of research and development, Freddie Battery is very cost-driven and focuses on lithium iron phosphate batteries, without spreading its research and development investment as widely as CATL.

Currently, CATL's net profit per watt-hour is 0.12 RMB/Wh, while the net profit per watt-hour for excellent second-tier battery manufacturers is 0.03 RMB/Wh. Dolphin compares BYD's battery market share in China, which is second only to CATL, with CATL's net profit per watt-hour for a simple calculation.

Under neutral estimation, assuming BYD's net profit per watt-hour is 0.8 RMB/Wh, Dolphin's calculation shows that the net profit per vehicle from in-house batteries will reach 2800 RMB in the first quarter of 2024, accounting for 42% of BYD's net profit per vehicle, with the overall battery business still contributing over half (54%) to the net profit margin. In this scenario, BYD's net profit from selling vehicles and batteries is almost evenly split.

Even under conservative assumptions, based on BYD's net profit per watt-hour of 0.5 RMB/Wh, the net profit per vehicle from in-house batteries will reach 1800 RMB in the first quarter of 2024, with the contribution of the entire external and internal battery business to net profit margin exceeding 30% Therefore, from the perspective of net profit contribution, it is more accurate to say that BYD is a battery + vehicle company rather than just a vehicle company.

3) What is the main advantage of the gross profit margin of BYD's hybrid models?

In fact, when it comes to hybrids, the contribution of batteries to the gross profit margin is not high. However, the gross profit margin of hybrid vehicles is not only generally higher than the overall gross profit margin, but BYD's hybrid gross profit margin is even higher. The main contributing factor comes from the design and construction of the BYD DM hybrid system:

The DM-I system adopts a single-gear plug-in hybrid design, still focusing on electric drive, replacing the gearbox with a single-gear reducer + direct drive clutch configuration. In contrast, Geely's Recharge system still needs to use a three-gear DHT gearbox, with the single-gear powertrain generally priced at 4000-5000 yuan, while multi-gear transmission assemblies are priced around 10,000 yuan. BYD's single-gear plug-in hybrid can save about 5000 yuan on the cost side.

According to Bernstein's calculations, BYD's internal manufacturing of most powertrain components (according to Caresoft disassembly, BYD's self-produced components can account for 65% of the total BOM), and using a simpler single-gear powertrain system, reduces costs by 0.5-1 yuan. If we consider the average price of BYD's hybrid models at 130,000 yuan, the incremental contribution to the gross profit margin reaches 4-8 percentage points.

Taking everything into account, assuming that BYD's self-produced power battery can save 20% compared to external procurement, the unit price of externally purchased LFP battery packs is 0.6 yuan/Wh. In 2023, the energy storage battery side will still be mainly shipped overseas (with 18Gwh of energy storage batteries shipped overseas in 2023, accounting for 65% of the total energy storage shipments). The unit price and gross profit margin of overseas energy storage batteries are relatively high. Referring to CATL's 2023 unit price of 0.87 yuan/Wh for energy storage batteries and a 24% gross profit margin for energy storage business, Dolphin Jun assumes that BYD's unit price for energy storage batteries is 0.69 yuan/Wh, with an energy storage battery gross profit margin of 22%.

Based on Dolphin Jun's hypothetical calculations, self-produced batteries will bring a 3-4 percentage point increase to the automotive gross profit margin. BYD's actual first-quarter automotive business gross profit margin is around 25%, and the remaining gross profit margin advantage may mainly come from the choice of hybrid technology route and the self-production of components under vertical integration. **

Focusing on the business logic and possible strategies under vertical integration, estimating the long-term value of the company based on the outlook of BYD's business. Stay tuned.

Historical articles by Dolphin:

In-depth Analysis

August 10, 2021 "BYD Company (Part 2): After the surge, seeking stability in wealth?"

July 23, 2021 "BYD Company: The best battery-making car manufacturer | Dolphin Research"

Financial Reports Season

April 29, 2024 Financial Report Review "BYD: Automotive business gross margin "killing in all directions", successfully crossing the trough?"

March 27, 2024 Financial Report Review ""Price Butcher" BYD: Bloodbath with shining weapons, dawn is not far away"

March 29, 2024 Conference Call "24-year sales target to increase by 20% on the basis of 2023"

October 30, 2023 Financial Report Review "BYD, speeding towards "money", is it enough?" 2023 August 28 Financial Report Review "BYD: The Embarrassment After the 'Windfall', What Ace is Left?"

2023 August 29 Conference Call "Company's Profit is Not a Problem Under Price War, Sany's Third Quarter Profit Will Be Better (BYD Minutes)"

2023 April 28 Financial Report Review "BYD: In the Electric Car Price War, Making Money is the Real Skill"

2023 March 29 Conference Call "BYD Minutes: High-end Supports Profit, Mid-to-Low-end Spreads Costs, Internationalization Reconstructs BYD"

2023 March 29 Financial Report Review "BYD: Counterattacking Buffett's Selling Pressure After the 'Windfall'"

2022 October 29 Financial Report Review "Abandoned by Buffett? BYD Hands in a Dominant Performance"

2022 August 31 Conference Call "BYD: Using Procurement to Suppress Prices and Digest Subsidy Decline, Annual Production to Reach 4 Million Vehicles Next Year (Conference Call Minutes)"

2022 August 30 Financial Report Review "The Moment of Tearing Labels: Is BYD About to Make a Magnificent Transformation into a 'Money-making Machine'?"

2022 April 28 Financial Report Review "BYD: Sales Volume Guaranteed, Smoothly Passing the Year-Opening Bottom Inspection"

2022 March 30 Conference Call "Black Technology Helps Product Upgrades, BYD's Sales Volume Remains Strong in 2022 (Meeting Minutes)" March 30, 2022 Financial Report Review "BYD: Selling Cars is Easy, Making Money is Hard"

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

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

Hot Topic

July 12, 2022 "Buffett Selling BYD? Case Solved"

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