BYD: Stability is key, the big brother is still the big brother!

$BYD COMPANY(01211.HK) released its Q3 2024 results after the Hong Kong stock market closed on October 31, Beijing time. The key points are as follows:

1. Automotive gross margin rebounded quarter-on-quarter, exceeding market expectations: This quarter, due to the ramp-up of the DMI 5.0 model, the main plug-in hybrid models shifted from the Honor version of the Qin Plus/Destroyer 05 to the higher-priced Qin L/Seal 06 under DMI 5.0, driving up the average selling price.

Meanwhile, the per-vehicle cost showed a downward trend due to the release of scale effects and the decline in upstream raw material lithium carbonate costs, ultimately leading to an automotive business gross margin (including battery business) that exceeded expectations.

2. Net profit per vehicle continued to rebound quarter-on-quarter, but slightly below expectations: The net profit per vehicle in Q3 was CNY 9,300, an increase of CNY 600 quarter-on-quarter, primarily driven by the rebound in automotive business gross margin.

However, this quarter, due to high growth in the three expense categories (especially R&D and sales expenses), the quarter-on-quarter increase in net profit per vehicle was still slightly below market expectations.

3. Significant growth in the three expense categories: This quarter, both R&D and sales expenses showed a high growth trend, reaching historical highs! The high increase in R&D expenses is expected to be mainly used for investments in high-end models and intelligence, as BYD urgently needs to address its shortcomings in intelligence. The high increase in sales expenses is expected due to increased sales volume, leading to higher rebate costs for dealers, along with increased marketing expenses due to the intensive launch of DMI 5.0 models this quarter.

4. Acceleration of capitalized construction in Q3: Although capital expenditures remained low in Q3, BYD accelerated the capitalization of construction in progress (with a quarter-on-quarter decline of CNY 25.7 billion), resulting in an increase in net fixed assets (with a quarter-on-quarter increase of CNY 33 billion), while depreciation and amortization continued to increase quarter-on-quarter.

Overall view of Dolphin Jun:

Overall, BYD delivered another solid performance in Q3, with the automotive business gross margin (including battery business) increasing by 3.2 percentage points quarter-on-quarter to 25.6%, again exceeding market expectations.

In terms of net profit per vehicle, Q3 net profit per vehicle was CNY 9,300, slightly below the market expectation of CNY 9,600. The main reason for the lower-than-expected figure was the significant quarter-on-quarter growth in BYD's three expense categories this quarter, but the R&D expenses were mainly used to address high-end and intelligence shortcomings, which is not a major issue.

However, in Q3, BYD made a one-time large capitalization of construction in progress, leading to a significant increase in net fixed assets. The market may be concerned that depreciation and amortization will continue to rise quarter-on-quarter in Q4, potentially impacting BYD's profit releaseDolphin Jun originally expected that for BYD, as the previous wave of capacity investment was nearing its end, the subsequent increase in amortization expenses due to the slowdown in capital expenditure would also slow down. With the sales volume guaranteed by the new product cycle initiated by the DMI 5.0 technology advantage, BYD would benefit from the decline in per-vehicle amortization costs brought about by the increase in sales scale, thus releasing profits on the financial statements and supporting BYD's performance in the second half of the year.

However, based on Dolphin Jun's rough calculations, with fourth-quarter sales expected to be between 1.35 million and 1.5 million vehicles, although overall amortization costs will continue to rise quarter-on-quarter, the per-vehicle amortization is still expected to decline by 0.04 to 0.16 thousand yuan in the fourth quarter due to explosive sales, which will still positively enhance the gross profit margin, albeit not as significantly as previously anticipated by Dolphin Jun.

Therefore, under the pressure of accelerated capitalization of construction projects on per-vehicle amortization costs, even if the decline is still not large in the case of explosive sales in the fourth quarter, the key to whether the gross profit margin can continue to rise significantly quarter-on-quarter lies in whether the unit price can increase significantly. Instead, the focus should be on the progress of BYD's high-end and overseas models.

From an overall valuation perspective, BYD (1211.HK) currently has a stock price corresponding to a PE ratio of about 20 times for its automotive business in 2024, which is at a relatively reasonable level. Whether it can continue to rise mainly depends on ① whether fourth-quarter sales can exceed the market's relatively saturated expectations; ② whether high-end and overseas (especially overseas) developments can drive the fourth-quarter automotive business gross profit margin beyond expectations.

PS: BYD is a company with a complex business structure, covering automotive, mobile phone components and assembly, secondary rechargeable batteries, and photovoltaics, among other businesses. However, the in-depth articles on BYD completed by Dolphin Jun last July, "BYD: The Best Battery Manufacturer Among Automakers" and "BYD: Seeking Stability After a Surge," have already identified the core. The business is too diverse and complicated, but the focus remains on the automotive business. Those who want to understand this company can first review the above two analyses.

Here is the detailed analysis:

I. Automotive Business Gross Profit Margin Exceeds Market Expectations! Driving Per-Vehicle Net Profit Recovery

1. Automotive Business (Including Battery Business) Gross Profit Margin Recovers This Quarter

Every time performance results are announced, the market is most concerned about BYD's automotive business gross profit margin. Last quarter, the gross profit margin for the automotive business declined significantly due to the price reduction of the Honor version, while this quarter, the market generally believes that the DMI 5.0 models will start to ramp up production in the third quarter, leading to an increase in both volume and price, thereby driving a recovery in the automotive business gross profit margin.

From the actual situation this quarter, it is indeed as the market expected; the gross profit margin for the automotive business (including a rough estimate of the battery business) reached 25.6% in the third quarter, an increase of 3.2 percentage points quarter-on-quarter, exceeding the market expectation of 22.9%.

Dolphin Jun will analyze the reasons for the quarter-on-quarter recovery in gross profit margin from the perspective of per-vehicle economics:

1）Average price per vehicle: In the third quarter, the average price of cars was 138,800 yuan (including rough estimates for battery business), a quarter-on-quarter increase of 3,000 yuan, mainly due to:

a) The DMI 5.0 model began to ramp up production in the third quarter, gradually replacing the lower-priced Glory version models:

As the DMI 5.0 model ramped up, the main plug-in hybrid models, the Glory version Qin Plus/Destroyer 05 (which saw a 9% decline in share), switched to the DMI 5.0-based Qin L/Seal 06 (which saw a 16% increase in share). The Qin L/Seal 06 is priced 14,000 to 20,000 yuan higher than the Qin Plus/Destroyer 05.

In terms of repricing, BYD raised the price of the volume models Song Plus/Song Pro by 3,000 to 6,000 yuan, which also contributed to the increase in average price. (However, for relatively high-priced models (such as Seal 07/Han DMI), the pricing was lowered, which will be discussed later by Dolphin Jun.)

b) This quarter, BYD's high-end models (Denza + Yangwang + Fangcheng Leopard) and overseas performance remained relatively weak:

High-end models (Denza/Yangwang/Fangcheng Leopard) and overseas models typically enjoy a higher average selling price (ASP) per vehicle, but this quarter, the share of high-end models and overseas models in the sales structure continued to decline, dropping from 15.3% in the second quarter to 12.3%, a decrease of 3 percentage points. The overseas model share saw a significant decline, dropping 2.3 percentage points to 8.4% this quarter.

In terms of mid-to-high-end model performance, BYD's models priced above 200,000 yuan also showed weak sales, with their share in the model structure declining by 3.2 percentage points quarter-on-quarter. The main reason for this decline was the drop in the share of mid-to-high-end plug-in hybrid models in the sales structure (a quarter-on-quarter decline of 2.5 percentage points).

Finally, the pricing of the main models under DMI 5.0 and the replacement of lower-priced Glory versions offset the negative impact of the decline in the share of overseas and high-end models, resulting in a quarter-on-quarter increase of 3,000 yuan in average revenue per vehicle.

2）Average cost per vehicle: Decline in raw material prices and release of scale effects

In the third quarter, the average cost per vehicle was 103,000 yuan, a quarter-on-quarter decrease of 2,000 yuan. Dolphin Jun believes that the main factors for the decline in average cost per vehicle are:

① The price of upstream raw material lithium carbonate continued to decline, leading to a decrease in electric vehicle manufacturing costs;

② In terms of average cost allocation per vehicle, although BYD's capital expenditure continues to slow down, Dolphin Jun observed that BYD accelerated the conversion of construction projects to fixed assets in the third quarter (with construction projects decreasing by 17.6 billion yuan quarter-on-quarter), resulting in a significant increase in net fixed asset value (up 33 billion yuan quarter-on-quarter)However, according to Dolphin Jun's rough calculations, although the total amount of depreciation and amortization has increased due to the rise in the original value of fixed assets, the per-vehicle amortization cost still shows a downward trend on a quarter-on-quarter basis, despite the DMI 5.0 model's hot sales driving BYD's quarterly sales to increase by 15% quarter-on-quarter. Dolphin Jun estimates that the per-vehicle amortization cost will decline by about 1,000 yuan this quarter.

3）Per-vehicle gross profit: The per-vehicle price increased by 3,000 yuan quarter-on-quarter, while the per-vehicle cost decreased by 2,000 yuan quarter-on-quarter. In the last three quarters, selling one car generated a gross profit of 36,000 yuan for BYD, an increase of 5,000 yuan quarter-on-quarter. The overall gross margin from selling cars (including battery business) rose from 22.4% last quarter to 25.6% this quarter.

2. Per-vehicle net profit has rebounded under the pull of automotive gross margin, but the high growth of the three expenses is lower than market expectations

Regarding the per-vehicle net profit, which is also of concern to investors, this quarter's per-vehicle net profit is 9,300 yuan, an increase of 800 yuan quarter-on-quarter, with the main reason for the rebound still being the improvement in automotive gross margin.

However, the market expected BYD's per-vehicle net profit to be 9,600 yuan this quarter. The main reason for the per-vehicle net profit being lower than market expectations is that the three expenses this quarter were significantly higher than market expectations.

Specifically:

1) R&D expenses: Investment in high-end and intelligent features continues to grow significantly, reaching a historical high!

In the third quarter, R&D expenses reached 13.7 billion yuan, significantly higher than the market expectation of 12.2 billion yuan, increasing by about 4.7 billion yuan quarter-on-quarter, reaching a historical high!

Dolphin Jun estimates that the reasons for BYD's high growth in R&D expenses this quarter are:

① New high-end models are being launched in the third and fourth quarters, and BYD has increased its technical investment in high-end models: such as the Tengshi debuting on the Yi Sanfang platform;

② BYD continues to increase its investment in intelligence: Historically, the shortcomings of BYD's mid-to-high-end models have been in the area of intelligence. Recently, BYD announced a strategic plan aiming to achieve mass production of self-developed algorithms in vehicles by November this year, with a full rollout of all-scenario intelligent driving functions, including highways and urban areas, by mid-next year. They plan to extend high-level intelligent driving (highway NOA) technology to models priced between 100,000 and 200,000 yuan, achieving equality in intelligent driving.

BYD's accelerated investment in intelligent driving and addressing shortcomings is also well understood:Currently, although BYD's high-end models still have advantages in electrification compared to competitors, they lag behind in intelligence compared to hybrid competitors like Huawei and Li Auto, leading to a continuous erosion of market share for high-end hybrids.

At the same time, in the 100,000 to 200,000 yuan mass-market segment, advanced features are gradually becoming common in models priced around 150,000 yuan (such as XPeng Mona and Leapmotor models). Although BYD still has a technological gap in hybrid technology DMI 5.0, it is expected that this gap will gradually narrow with competitors next year (for example, the new generation of Thunder God hybrid is expected to go into mass production in 2025). BYD's sales base may also be affected due to deficiencies in intelligent driving technology, making it urgent for BYD to address its shortcomings in intelligence.

2) Sales Expenses: Third-quarter sales expenses also saw significant growth, exceeding market expectations of 8.5 billion

Third-quarter sales expenses reached 9.6 billion, exceeding market expectations of 8.5 billion, an increase of 2.1 billion compared to the previous quarter, also reaching a historical high.

Dolphin Jun estimates that the reasons for the significant increase in sales expenses are:

① BYD mainly adopts a dealership model for mid-to-low-end models, and the commissions paid to dealers increase significantly with rising sales.

② Increased marketing expenses for the launch of DMI 5.0 in the third quarter: The concentrated launch of DMI 5.0 models in the third quarter led to an increase in marketing expenses.

3) Management Expenses: Third-quarter management expenses were 4.7 billion, slightly exceeding market expectations of 4.5 billion

Third-quarter management expenses were 4.7 billion, an increase of about 800 million compared to the previous quarter, slightly exceeding market expectations of 4.5 billion, with a relatively reasonable increase.

Finally, although the overall gross profit margin improved by 3.2 percentage points due to the increase in gross profit margin from the automotive business, the significant increase in the three expense categories this quarter resulted in a core operating profit margin of 5.9% for the third quarter, which only increased by 0.6 percentage points compared to the previous quarter.

3. Automotive Revenue (including battery business) slightly below market expectations

Excluding BYD Electronics, BYD achieved revenue of 157.6 billion yuan in the third quarter of 2024, slightly below market expectations of 158.3 billion yuan, mainly due to the average price of vehicles being slightly lower than market expectations, as explained by Dolphin Jun above.

4. Will the accelerated conversion of construction projects in the third quarter impact profits in the fourth quarter?

In Dolphin Jun's previous article, "BYD: Don't be fooled by its 'mask'," he mentioned the potential impact of depreciation and amortization on BYD's subsequent financial statements: Due to the slowdown in capital expenditures leading to a deceleration in subsequent amortization expenses, combined with the scale effects released from increased sales volume,This will lead to the release of profits on the financial statements.

However, this quarter, BYD made a one-time large transfer of construction projects to fixed assets, resulting in a significant increase in the net value of fixed assets. Investors are most concerned about whether this will affect the release of profits in the fourth quarter.

Dolphin Jun conducted a rough estimate. First, based on the expected sales for the fourth quarter, BYD's contract liabilities (approximated as orders on hand) reached a historical high in the third quarter. At the same time, the high increase in inventory in the third quarter was also to prepare for the peak season in the fourth quarter. According to third-party institutions, BYD is expected to have an order volume exceeding 500,000 units in October, and sales in the fourth quarter are expected to continue to grow significantly. Based on the current sales and order trends, Dolphin Jun estimates that BYD's sales in the fourth quarter will reach 1.35 to 1.5 million units, an increase of 15% to 32% quarter-on-quarter, driving the total sales for 2024 to about 4.1 to 4.25 million units.

Since the transfer of construction projects to fixed assets was basically completed in the third quarter, and capital expenditures have slowed down due to the completion of previous capacity construction, it is expected that the original value of fixed assets will not change much in the fourth quarter (Dolphin Jun estimates an increase of about 25 billion). Assuming a slight increase in the depreciation rate (an increase of 1% compared to the first half of 2024), Dolphin Jun expects the per-vehicle amortized cost to continue to decline by 0.04 to 0.16 million yuan in the fourth quarter under the explosive sales (based on the expected sales of 1.35 to 1.5 million units), which will still positively enhance the gross profit margin, although the increase will not be as large as previously expected by Dolphin Jun.

Therefore, under the pressure of the accelerated transfer of construction projects to fixed assets, even if the expected decline is still not large during the explosive sales in the fourth quarter, whether the gross profit margin can continue to increase significantly quarter-on-quarter will still depend on a substantial increase in unit price. Attention should be paid to BYD's progress in high-end and overseas models.

Having discussed the key aspects of BYD's automotive business financial report that investors are most concerned about, let's look at the progress of BYD's automotive business from several other indicators:

5. BYD's sales continue to rebound quarter-on-quarter driven by DMI 5.0, but overall market share has slightly declined.

The company sold 1.14 million vehicles in the third quarter, a quarter-on-quarter increase of 15%. The quarter-on-quarter sales growth in the third quarter was mainly due to the gradual launch and delivery of DMI 5.0 models starting in May, which boosted sales. This quarter, the main plug-in hybrid models have switched from the Glory version of Qin Plus/Destroyer 05 to the Qin L/Seal 06 under DMI 5.0.

Dolphin Jun previously mentioned in-depth about BYD's strategy for plug-in hybrid models under 200,000 yuan:

First, leverage the leading technological advantage of DMI to address the core pain points of this price segment: achieving excellence in range and fuel consumption to capture market share in the hybrid market;

As the technological advantage narrows, BYD will use "the same technology, at a lower price," leveraging its vertically integrated scale advantage. Due to its superior gross profit margin, it will adopt a pricing strategy to ensure sufficient capacity utilization for its heavy assets in the backend, thereby maintaining its market share in hybridsFrom the results of this quarter's market share, BYD's overall market share has slightly declined, decreasing by 1.3 percentage points quarter-on-quarter. The market share of plug-in hybrids has remained stable, while the decline in market share is mainly due to a 2.8 percentage point drop in the market share of pure electric models.

Looking at specific price segments:

1）In terms of hybrid models, this quarter, the DMI 5.0 model has indeed driven a rebound in the market share of hybrid models priced below 200,000 due to its technological advantages (low fuel consumption + high range), with a quarter-on-quarter increase of 2.7 percentage points. However, the market share of hybrid models priced above 200,000 continues to decline (down 2.8 percentage points quarter-on-quarter), and BYD's hybrid market share has basically stabilized.

Dolphin Jun believes the reasons for the decline in market share of mid-to-high-end hybrid models are:

① Product rhythm issue: There were few new products launched in the third quarter, and they have not yet ramped up production.

In terms of high-end model launches (Denza + Yangwang + Fangchengbao), only the Denza Z9 and Yangwang U9 were launched in the third quarter, with Yangwang mainly serving a high-end positioning role and not contributing actual sales, while the Denza Z9 only began deliveries in September, contributing little to third-quarter sales.

For the main mid-to-high-end models, the Han DMI and Tang DMI, the Han DMI under DMI 5.0 was only launched on September 6, and the third quarter was not a complete delivery season, while the new Tang DMI is expected to be launched in the fourth quarter.

② Intensified market competition, but BYD still lacks core competitiveness in high-end positioning:

In the mid-to-high-end model segment, although BYD benefits from technology platforms like Yi San Fang, users of mid-to-high-end models have higher demands for intelligence. Compared to competitors Aito and Li Auto, BYD still falls short in intelligent driving.

In terms of marketing and channels, direct sales models are generally more beneficial for establishing a high-end brand image (as both Li Auto and Nio adopt direct sales models). Initially, BYD's three high-end brands also adopted direct sales, but in June 2024, Denza and Fangchengbao announced the initiation of their first channel recruitment, indicating that Denza and Fangchengbao will gradually transition to a direct sales + dealership channel model.

Currently, Dolphin Jun has observed adjustments BYD is making in terms of high-end positioning:

1. Price Reduction: For high-end models, BYD reduced the price of its Fangcheng Leopard 5 by 50,000 yuan in July, which indeed led to a rebound in sales, but is not beneficial for the long-term establishment of brand perception.

Dolphin Jun found that BYD has continued to lower the pricing of relatively high-priced hybrid models, such as the Seal 07 and Han DMI 5.0 new models, compared to the old versions (with the Seal DMI's price reduced by 6.7%-11% compared to the old version, and the starting price of the Han DMI reduced by 2.4%).

2. Attempting Cooperation with Huawei to Address Smart Driving Shortcomings: BYD's upcoming mid-to-large SUV Leopard 8 will collaborate with Huawei on smart driving, expected to be equipped with Huawei's Gan Kun Smart Driving ADS 3.0, to fill the gap in intelligence.

However, smart driving cooperation can only serve as a short-term solution. From a long-term perspective, smart driving is gradually becoming a core competitive advantage for car manufacturers, and forming a self-research and self-production closed loop is beneficial for establishing barriers. Dolphin Jun also noted that BYD is accelerating its self-research in smart driving, and will closely monitor BYD's progress in this area.

3. Channel Adjustment: Tengshi and Fangcheng Leopard are transitioning from a fully direct sales model to a direct sales + dealership model. Although this is beneficial for short-term sales growth, it is not helpful for establishing a high-end brand perception.

2) In terms of pure electric models: The overall market share of pure electric models declined by 3 percentage points quarter-on-quarter, mainly due to a 2.5 percentage point decline in pure electric models priced below 200,000 yuan.

Compared to this year's hybrid technology, BYD has upgraded from DMI 4.0 to DMI 5.0 (lower fuel consumption, longer range), while there have been no significant updates in pure electric technology, leading to a decline in market share. In the fourth quarter, BYD may release the E4.0 pure electric platform, and Dolphin Jun will closely monitor BYD's breakthroughs in pure electric technology.

6. Slower Overseas Expansion in the Third Quarter, but Release of Overseas Capacity is Beneficial for Future Growth

BYD's two directions for improving gross margin: high-end positioning and overseas expansion. High-end positioning performed weakly this quarter, but overseas expansion also showed a trend of slowing down.

In the third quarter, BYD's overseas sales were 94,000 units, a decline from 105,000 units in the second quarter. The sales proportion in the model structure also dropped from 10.7% in the second quarter to 8.4% in the third quarter, a decrease of 2.3 percentage points.

From the perspective of BYD's export volume as a proportion of overall new energy passenger vehicle exports, the third quarter saw a 5% decline compared to the second quarter, partly due to the impact of EU tariff policies, and mainly because BYD's overseas factories began production successively. In the third quarter, overseas factories produced a total of 3,500 new energy vehicles, accounting for 4% of total overseas sales.

Currently, the production capacity of the factories in Uzbekistan and Thailand is ramping up. With the peak season in overseas markets approaching and new overseas production capacity starting to ramp up, it is expected that overseas sales will rebound in the fourth quarter.

Having discussed BYD's core automotive business performance, let's take a look at BYD's other business performances:

II. Energy business growth continues to accelerate

BYD's installed capacity for power batteries and energy storage (including self-supply and external supply) reached 55.2 GWh by the third quarter, a quarter-on-quarter increase of 29%, with energy business growth continuing to accelerate.

Breaking it down, the growth of the energy business this quarter mainly comes from a significant quarter-on-quarter increase in the energy storage battery business, with energy storage shipments reaching 20.8 GWh in the third quarter, nearly doubling quarter-on-quarter.

In terms of power battery business, the third quarter saw power battery shipments of 34.3 GWh, with a quarter-on-quarter growth of only 7%, lower than the 15% growth in new energy vehicle sales. This is partly due to the increased proportion of plug-in hybrid models this quarter (up 4 percentage points quarter-on-quarter) and partly due to the decline in the proportion of BYD's high-end models with higher energy capacity.

III. BYD Electronics business revenue exceeds expectations

In the third quarter, BYD Electronics, as the operating entity, achieved revenue of 43.6 billion yuan from mobile phone components and assembly business, exceeding market expectations of 42.7 billion yuan, with a gross profit margin of 8.5%, a quarter-on-quarter increase of 1.7 percentage points, slightly lower than the market expectation of 8.8%, possibly due to the increase in Apple's market share (iPhone upgrade cycle) and further expansion of electronic products for new energy vehicles.