BYD's Q2 gross margin significantly declined, Morgan Stanley asked: With such strong overseas sales, what about profit contribution?

The latest financial report shows that BYD's revenue in the first half of the year has surpassed Tesla for the first time, but the gross profit margin has decreased from 18.78% in the same period last year to 18.01%. The gross profit margin in the second quarter also fell by 3.8 percentage points quarter-on-quarter to 16.3%.

According to news from the Chasing Wind Trading Desk, Morgan Stanley stated in its latest research report that BYD's gross profit margin in the second quarter hit a new low since the second quarter of 2022, and the contraction in profit margins directly led to a decline in per-vehicle profitability, with the per-vehicle profit in the second quarter dropping from 8,800 yuan in the first quarter to 4,800 yuan, nearly halving.

However, the report also pointed out that the most puzzling aspect of this performance is that the strong growth in overseas sales, favorable exchange rate factors (especially in the European market), and the continuously expanding production scale, which should have boosted profits, do not seem to be reflected in the financial report.

This contrast surprised Morgan Stanley analysts, who began to investigate whether there might be certain "one-time" or "concentrated accrual" negative factors in the second quarter financial report.

Unexpected Pressure on Profit Margins, Three Factors Eroding Profitability

BYD's core financial indicators in the second quarter sharply contrasted with the market's high expectations. The financial report shows that the company's quarterly net profit was 6.4 billion yuan, not only a 31% decrease quarter-on-quarter but also a 30% decline year-on-year, significantly lower than Morgan Stanley's previous forecast of 10 billion yuan.

The significant contraction in gross profit margin has become the key factor eroding profits. A quarterly gross profit margin of 16.3% is the lowest level since the second quarter of 2022, and it is worth noting that at that time, BYD's sales were only about one-third of what they are now.

The decline in profitability is more intuitively reflected in per-vehicle profit. The report pointed out that excluding the profit contribution from BYD Electronics, the per-vehicle profit of BYD's automotive business in the second quarter was only 4,800 yuan, far lower than the 8,800 yuan in the first quarter, returning to the lowest point since the first quarter of 2022.

According to Morgan Stanley's analysis, the pressure on profit margins mainly comes from three aspects. First is dealer rebates. To stimulate sales, BYD provided rebates for the vast majority of vehicles sold in the Chinese market in the first half of this year, which directly eroded per-vehicle profits.

Second is rising costs. The "Heavenly Eye" advanced intelligent driving system promoted by the company has enhanced product competitiveness but also significantly increased per-vehicle manufacturing costs, while the sales increase it brought has not been sufficient to fully cover these additional expenses.

Third is price competition. The fierce price war in the domestic market continues, and BYD's further price cuts since late April have directly pressured profit margins.

The Profit "Mystery" Amidst High Overseas Growth

What truly confounds analysts is the discrepancy between the strong performance of overseas business and the overall weak profits. Morgan Stanley specifically emphasized in the report that BYD's global expansion narrative has not changed due to this quarterly report. For example, in the past month, its new car registrations in Europe have tripled year-on-year and continue to surpass Tesla.

However, the higher average selling prices, more favorable exchange rate gains, and greater economies of scale that should have come from this overseas high growth were not reflected in the second quarter's profit statement, constituting a profit "mystery."

The report's analysis stated that this phenomenon is "surprising" and has led analysts to question whether there are undisclosed one-time factors or whether the company chose to concentrate on digesting negative costs in the second quarter in preparation for larger cost reductions starting in the third quarter (i.e., "financial bath").

Until the company provides more details, this uncertainty may give reasons for market bears. The report believes that potential catalysts to soothe investor sentiment in the future may include a seasonal rebound in sales, new models released before and after the Chengdu Auto Show, and whether overseas operations can achieve a real recovery at the profit level.

Currently, although BYD's Hong Kong stock price has pulled back 27% from its year-to-date high, it has still risen 29% year-to-date. Morgan Stanley expects that in the short term, the "tug-of-war between bears and bulls" surrounding BYD's stock price will continue