Nomura: BYD's performance hit bottom in Q2, with technological upgrades and overseas expansion gaining momentum, expected to reach a profitability inflection point in 2026

Nomura Securities pointed out in a recent research report that BYD's performance may have bottomed out in the second quarter of 2025. Although intensified competition in the domestic market has put short-term pressure on the company's profitability, its continued investment in technological upgrades and rapid expansion in overseas markets are accumulating momentum for a potential profit turning point in 2026.

According to news from the Chasing Wind Trading Desk, analysts Joel Ying and Ethan Zhang from the firm stated in a report released on September 1 that BYD's second-quarter performance was below market expectations, significantly impacting its profitability. During the period, the gross profit margin (GPM) fell to 16.3%, the lowest since the third quarter of 2022; the operating profit margin (OPM) dropped to 1.4%, setting a new low in the past five years.

Analysts believe this is mainly due to the incentives paid in advance to dealers to cope with competition, the negative operating leverage effect caused by capacity growth not keeping pace with business scale, and the continuously soaring R&D expenses.

However, this is seen as a painful period of strategic adjustment. Nomura believes that BYD is leveraging its substantial R&D investment for a significant upgrade of its technology platform in 2026, while its overseas market expansion momentum is exceptionally strong, becoming a key engine to hedge against domestic market pressures. Although Nomura has lowered its profit forecast and target price to 133 yuan, it maintains a "buy" rating, clearly stating that 2026 will be a crucial year for the company to regain growth momentum and reach a profit turning point. As of the time of writing, BYD's stock price fell 3.82% to 109 yuan, indicating a 22% upside potential based on the target price.

Second Quarter Performance Under Pressure, Profitability Hits Multi-Year Low

According to Nomura's report, BYD faces severe challenges in the second quarter of 2025. During the quarter, the company's operating profit margin was only 1.4%, a significant year-on-year decline of 3.9 percentage points and a quarter-on-quarter decline of 1.9 percentage points, marking the lowest level in at least the past five years. The gross profit margin also fell to 16.3%, under pressure as well.

There are several main reasons for the decline in performance. First, to cope with fierce market competition, the company paid dealer rebates in advance. Second, as capacity rapidly expanded, the growth rate of its business scale did not keep pace, leading to negative operating leverage effects. Additionally, the company's investment in R&D continued to increase, with R&D expenses in the second quarter rising 71% year-on-year and 8% quarter-on-quarter, further squeezing profit margins.

Data shows that BYD achieved a net profit of 6.4 billion yuan in the second quarter, a year-on-year decline of 30% and a quarter-on-quarter decline of 31%. Nomura's calculations indicate that its profit per vehicle has sharply dropped to below 5,000 yuan, the lowest level in the past three years, clearly reflecting the operational difficulties faced by the company in that quarter

Domestic Market Strategy Faces Setbacks, Awaiting Strategic Transformation in 2026

Nomura stated that BYD's "Smart Driving Equality" initiative launched in 2025 has not achieved the expected results. Market feedback once again confirms that in the Chinese automotive market, especially in the mass market below 200,000 RMB, price remains a more decisive factor in attracting consumers than smart driving features.

The report believes that a series of key traffic accidents have also heightened consumer awareness of the limitations of L2-level assisted driving systems, making their value contribution to vehicle models limited. Meanwhile, the government's push for "anti-involution" has also restricted BYD's ability to leverage its market pricing power to respond to competitors' challenges.

For these reasons, Nomura expects BYD's performance for the remainder of 2025, particularly in the Chinese market, to achieve only "gradual improvement." However, the report emphasizes that the lessons learned from the challenges in 2025 will prepare the company well for its key strategies in 2026. As a leader in the Chinese electric vehicle market, there are expectations for BYD to turn the situation around in 2026.

Overseas Expansion Becomes a Highlight, Strong Growth Offsets Domestic Risks

While facing challenges in the domestic market, BYD's overseas business is becoming its "new engine" for growth. The report describes overseas sales as "coming to the rescue" and is expected to help the company achieve further growth.

Data shows that BYD's overseas sales reached 464,000 units in the first half of 2025, with cumulative sales of 545,000 units in the first seven months, representing year-on-year growth of 128% and 133%, respectively. With the company's second overseas factory in Brazil starting mass production in July 2025, and the roll-on/roll-off fleet for exports increasing to 8 ships (as of the end of August 2025), its overseas growth potential is being further unleashed.

According to data from the European Automobile Manufacturers Association (ACEA), in the first seven months of 2025, BYD's new car registrations in the EU increased by 251% year-on-year, reaching 58,000 units. Nomura expects that as competition in the domestic market continues to intensify, BYD will further strengthen its global layout in the coming years, and these efforts will ultimately bear fruit in the long term.

Downgraded Profit Forecast, Maintains "Buy" Rating

Considering the challenges in the domestic market and the positive outlook for the overseas market, Nomura has downgraded BYD's core financial forecasts for the fiscal years 2025 to 2027. Specifically, the passenger vehicle sales forecast has been lowered by 10-11%, total revenue forecast has been reduced by 9%, and both gross margin and operating profit margin forecasts have been cut by 2%.

As a result, the bank has also correspondingly lowered its net profit forecast for BYD for the fiscal years 2025 to 2027 by 27-30%. After adjustments, Nomura expects BYD's revenue compound annual growth rate (CAGR) during the fiscal years 2024 to 2027 to be 15%, and the profit CAGR to be 18%.

Despite the downgraded forecasts and target price, Nomura still maintains a "Buy" rating for BYD. The report concludes that although the "Smart Driving Equality" strategy in 2025 has not been effective and market sentiment is unlikely to see substantial improvement in the short term, BYD is expected to achieve a turnaround in 2026 through new strategies and continued expansion in overseas markets, further solidifying its position as a top global automotive manufacturer. ** The new target price of 133 yuan given by the bank corresponds to a 23 times forecasted price-to-earnings ratio for 2026.