"Can 'Smart Driving Equality' Really Create Another BYD?

Following the previous article by Dolphin Research on the value of BYD COMPANY's "Smart Driving Equality" and the objectives behind the strategy, you can refer back to the article titled "Soaring 30%! What is BYD's 'Smart Driving Equality' really selling?." As of the close on February 26, BYD's stock price has risen by 18% compared to the day of the press conference, indicating a high level of market recognition for BYD's "Smart Driving Equality" strategy, which has also been factored into BYD's current stock price to some extent.

In this article, Dolphin Research will focus on two questions that were not fully answered in the previous analysis:

Will BYD's "Smart Driving Equality" bring about a revaluation opportunity for the new energy industry? What are the core beneficiaries?

Given that BYD seems quite expensive, has the current stock price fully accounted for the impact of this round of "Smart Driving Equality"? Does the stock still have potential for further upward movement?

1. Will BYD's "Smart Driving Equality" bring about a revaluation opportunity for the new energy industry? What are the core beneficiaries?

For the smart car industry at the terminal level, Dolphin Research expects that the investment focus in 2025 may center on two tiers: "Smart Driving Cost Equality" and "Smart Driving Technology Leadership." Players capable of reducing the cost of high-speed NOA to a sufficiently low price and those who continue to lead in smart driving technology may benefit from the transition of vehicle valuation from electrification to intelligence.

However, Dolphin Research needs to emphasize that the commercial logic of cost-driven smart driving penetration (like BYD) and technology-driven smart driving upgrades (like XPeng, Li Auto, Huawei) are fundamentally different in terms of the valuation transition brought about by "intelligence."

① BYD, the leader in "Smart Driving Equality": Expected to enjoy the opportunity for increased sales and market share certainty in 2025 brought about by this wave of smart driving penetration:

BYD is using this wave of "Smart Driving Equality" concept to accelerate consumer education on smart driving, rapidly increasing consumer attention to smart driving, and making it a core factor in car purchasing decisions. The turning point for smart driving is arriving faster than expected, marking the official transition of competition in the electric vehicle industry from the first half of "electrification" to the second half of "intelligence" in 2025 In this round of transformation, Dolphin Research believes that new energy vehicle companies without advantages in cost and technology in intelligent driving, as well as fuel vehicle companies, will face increased speed and probability of elimination:

Dolphin Research expects that traditional fuel vehicle companies will continue to be accelerated in elimination this year (due to the triple impact of BYD's intelligent driving equality + DMI 5.0 technology's leading fuel consumption advantage compared to fuel vehicles + increased national subsidies from the policy side). If other independent new energy vehicle models priced between 100,000 to 200,000 yuan do not keep up with the pace of intelligent driving, it may also lead to a decline in sales and a drop in market share for new energy vehicles.

As one of the first pioneers of "intelligent driving equality," BYD is expected to enjoy a relatively high certainty of sales and market share increase by 2025 due to the downward trend of intelligent driving.

However, $GEELY AUTO(00175.HK), as the closest follower of BYD, is expected to propose specific plans for low-end models equipped with high-speed NOA as early as March this year. Although Dolphin Research predicts that the implementation time will likely also be this year, there may still be a time lag of about six months compared to BYD. During this time lag, Dolphin Research believes that Geely's market share may face the risk of decline again (potential buyers of Geely may adopt a wait-and-see attitude after the press conference and may turn to directly compete with BYD, which is expected to have a significant impact on Geely's order volume). It is recommended to pay attention to the adjustment opportunities after Geely's stock price retracement due to the impact of BYD's "intelligent driving equality."

② However, Dolphin Research remains optimistic about vehicle companies that are still at the forefront of intelligent driving technology and continue to lead, as they are expected to benefit from this round of valuation switching in intelligent driving:

Dolphin Research previously mentioned in the article "The Ultimate Question: Can FSD Really Support a 15 Trillion Tesla?" that in this wave of intelligent evolution trend, domestic leading players closely following the end-to-end route, such as XPeng, Li Auto, and Huawei's automotive series, may have more opportunities. After leading the iteration of intelligent driving technology, leading vehicle companies are more likely to follow Tesla in initiating a software payment model (passengers are more likely to pay for truly high-level intelligent driving rather than ordinary high-speed NOA functions, requiring a shift from assistance to becoming an assistant, thus needing the role of intelligent driving technology leaders) The leading companies in intelligent driving technology can see opportunities for increased sales and market share on the hardware side, but more importantly, they may enjoy a shift in overall valuation from being based on electrification to being based on intelligence (switching from hardware valuation based on selling cars to a sum-of-the-parts valuation of hardware + intelligent driving software - where software business has high valuation potential).

Currently, for $XPeng(XPEV.US), Dolphin Research acknowledges that XPeng's investment logic this year still revolves around the large product cycle brought about by cost reduction and advantages in intelligent driving, especially given that the attributes of the M03 and P7+ have been validated, along with the potential for intelligent driving technology licensing.

XPeng has a relatively strong certainty for the year 2025 as the year of intelligent driving, but the current stock price corresponds to a 2025 P/S ratio that is already close to 1.8-1.9 times, which has already factored in high expectations for intelligent driving and sales. It is recommended to wait for opportunities after a price pullback.

As for $Li Auto(LI.US), Dolphin Research believes that there are still opportunities to continue monitoring Li Auto's reversal at this point. Currently, due to market concerns regarding:

① The basic sales volume of Li Auto, the extended-range L series faces challenges from new models like Aito M8 and M9;

② Insufficient confidence in the volume of pure electric products due to the failure of Mega, especially in the absence of information on new pure electric models;

③ The recognition of Li Auto's intelligent driving capabilities has not been fully priced in, leading to a certain expectation gap;

Although Li Auto's stock price has already risen by 13.2% since the official announcement of the new pure electric model i8, the current 2025 P/S ratio is only around 1.1 times. However, Li Auto's intelligent driving capabilities remain in the first tier, and with advantages in computing power (essentially cash flow, as Li Auto has sufficient cash on hand for investment) + data (currently leading in the number of high-level intelligent driving models) + algorithms (relatively sufficient talent reserve in intelligent driving), the strong lead in intelligent driving technology may allow it to enjoy greater valuation uplift from this round of intelligent driving catalysts. It is recommended to continue monitoring Li Auto's undervalued reversal opportunities.

③ At the same time, it is beneficial for the intelligent driving industry chain priced between 100,000 to 200,000 yuan, enjoying high certainty opportunities:

Dolphin Research believes that BYD's entry into intelligent driving is expected to trigger a ripple effect, especially in the price range of 100,000 to 200,000 yuan, prompting companies like Chery, Geely, Changan, and Great Wall to quickly follow suit in intelligent driving, driving investment opportunities in the supply chain of the 100,000 to 200,000 yuan intelligent driving market. When the terminal competition intensifies and the penetration rate of intelligent driving increases, the certainty of the upstream supply chain is the strongest The domestic intelligent driving industry chain, driven by BYD's delivery of at least 2-3 million intelligent driving vehicles this year, will further reduce costs for intelligent driving hardware and accelerate technological iteration, potentially making mid-to-low-end intelligent driving (hardware and software capable of achieving high-speed NOA) a standard configuration in this price range, significantly increasing the penetration rate of L2-level intelligent driving.

For the upstream industry chain, domain control and lidar are the main components with higher value in intelligent driving hardware:

① Perception end:

a. Lidar: The competitive landscape of the lidar track has basically stabilized, and it is expected to move towards a dual-strong leadership. BYD still mainly relies on external procurement, focusing on leading Hesai Technology $Hesai(HSAI.US) and Robosense $ROBOSENSE(02498.HK).

b. On-board cameras: Apart from some self-supply, BYD's external suppliers mainly include Lianchuang, Sunny Optical, etc. Companies like Weir Shares, Sunny Optical, Yutong Optical, and Lianchuang Electronics will directly benefit when these companies expand their intelligent driving solutions into the sinking market.

② Execution end:

a. The chip industry still has significant opportunities for domestic substitution: Chips are high-value components in intelligent driving, but currently, Nvidia occupies a large share. Focus on the domestic substitution of intelligent driving chips this year, particularly on BYD's industry chain leader Horizon Robotics $HORIZONROBOT-W(09660.HK).

According to market research, BYD's Dpilot 100 platform still mainly uses Nvidia's Orin N chip, supplemented by the J6M chip (which has a worse POC effect than Orin N). However, Horizon still has advantages in cost-performance ratio and solution maturity in the 100,000 to 200,000 yuan price range, with a focus on the technological breakthroughs and cost reduction capabilities of the Horizon J6 chip.

b. Domain control and intelligent cockpit: BYD's supply chain includes $BYD ELECTRONIC(00285.HK), But the recent increase in stock prices reflects some expectations.

PE and PS multiples of intelligent driving supply chain companies

2. Is BYD, which seems very expensive, currently fully priced in the impact of this round of "intelligent driving equality"? Does the stock price still have the potential to continue rising?

BYD's stock price has surged 56% since this year's lowest point, and the increase since February this year has approached 43%. Investors are more concerned about whether BYD's current stock price has been fully priced in and whether there is still room for further increases.

Dolphin Research believes that BYD's valuation this year is mainly influenced by the following three factors:

① The competitive speed of BYD in intelligent driving within the 100,000-200,000 yuan range:

Dolphin Research believes that the core point of BYD's strategy this year still lies in "intelligent driving equality," focusing on defending and further expanding the sales base below 200,000 yuan. Currently, BYD still has a leading advantage in sinking high-speed NOA into models priced between 70,000-150,000 yuan, just as BYD created a leading hybrid "technological gap" through the DM 5.0 technology in 2024.

However, the relative advantage of the DM 5.0 technology gap lasted only about six months before being largely caught up by competitors like Geely's new generation of Thor hybrid technology, resulting in lower-than-expected sales at the end of last year and the beginning of this year, as well as a valuation downgrade. (The lowest stock price at the beginning of 2025 dropped 22% compared to the highest stock price driven by DM 5.0 technology in 2024).

As a result, BYD began a new round of promotions at the end of December 2024 and the beginning of 2025, but the overall promotional efforts in the fourth quarter were not significant, mainly focusing on price reductions for older models in the first quarter, which is expected to negatively impact the average selling price and gross margin of vehicles in the first quarter of 2025.

Therefore, Dolphin Research believes that this round of "intelligent driving equality" market is very similar to the previous "DM 5.0" in driving BYD's stock price. The time difference in technology is key, which means that the speed of low-level intelligent driving vehicles and mass production directly competing (mainly in the 100,000-200,000 yuan price range) will be particularly important in 2025 (especially whether high-speed NOA can be applied to ultra-low-end models). Once competitors also start mass production of high-speed NOA in low-priced models, BYD may still face declining sales and market share, again resorting to "price for volume" to cope with intensified competition, and the gross margin of the automotive business will still face continued pressure.

② The potential launch of BYD's pure electric E4.0 platform may bring incremental upgrades for pure electric models:

However, there are still potential discrepancies in sales expectations for 2025. Dolphin Research believes that BYD may launch the new plug-in hybrid technology DM 5.0 in 2024, and the next-generation pure electric platform E4.0 may be introduced in 2025, supported by the significant increase in energy density of BYD's new generation blade battery. It is expected that the range and charging speed of pure electric models on the E4.0 platform will be significantly improved, and the upgrade of pure electric models may also bring substantial replacement increments.

Reflecting on BYD's update in 2024, which only involved the hybrid DM 5.0 technology while the pure electric technology remained at the previous generation E3.0 Evo platform released in 2022, this led to a decline in the market share of pure electric vehicles. The proportion of pure electric vehicles in BYD's sales structure dropped from 52% in 2023 to 41.5% in 2024. Dolphin Research believes the main reason is the delay in the mass production of BYD's new generation blade battery (originally planned for mass production and release in 2024).

BYD plans to release the second generation blade battery in 2025 and has already accelerated the depreciation of the battery production line (starting in 2023, BYD began adjusting the depreciation period of some battery production lines from five years to three years), which is expected to facilitate the early deployment for the mass production of the new generation blade battery.

The energy density of the new generation blade battery is expected to increase from the previous generation's 140 Wh/kg to 190-210 Wh/kg, essentially matching the energy density of CATL's Shenxing Plus battery. It is also expected to release a 1000V high-voltage platform, which will further drive significant improvements in the range and charging speed of BYD's pure electric models.

③ Can the cost of BYD's upgrade to intelligent driving hardware be offset by economies of scale and supplier cost reductions, and will it put pressure on gross margins:

According to company guidance, the additional intelligent driving features will work with suppliers to keep the hardware costs within 4% of BOM. Dolphin Research predicts that the Dpilot 100 and 300 are expected to increase hardware costs by about 4-5k and 7-8k respectively. Assuming this cost is entirely borne by BYD (without shared burden from the supply chain), it is expected to have a negative impact of about 3 percentage points on the gross margin of the automotive business.

Therefore, Dolphin Research's prediction for BYD in 2025: ① From the perspective of sales expectations for 2025:

BYD's sales target for 2025 is between 5 to 6 million units. Dolphin Research believes that the target of 5 million units is relatively achievable this year, considering the lead of "smart driving equality" and the approximately six-month lag in low-level smart driving (highway NOA) implementation among peers. Therefore, under a neutral assumption, Dolphin Research expects BYD's new energy vehicle sales to reach 5.55 million units this year.

Under an optimistic assumption, Dolphin Research sets BYD's sales target to the maximum (6 million units), which implies:

a. If peers have not started mass production of low-level smart driving by 2025, BYD will have nearly a year of time advantage, allowing it to continue enjoying expansion in sales and market share based on its existing customer base;

b. The E4.0 platform may be launched in 2025, and after a significant improvement in battery range (supported by the substantial increase in energy density of the new generation blade battery), the replacement of pure electric models may still bring considerable incremental sales, leading to a rebound in pure electric market share.

c. The progress of overseas expansion is on schedule, and under an optimistic assumption, Dolphin Research expects it to potentially reach 800,000 units, a year-on-year growth of nearly 50% (BYD set a goal in its March 2024 earnings meeting to double overseas sales each year, with a target of 1 million units in 2025).

② However, from the perspective of expected automotive gross margins in 2025, there are still significant discrepancies in the market. Dolphin Research believes that the likelihood of BYD's gross margin exceeding market expectations in 2025 is relatively high:

The market is currently concerned about the risk of continued decline in BYD's automotive business gross margin due to the lack of price increases for smart driving enhancements. Assuming no shared burden from the supply chain, the expected negative impact of smart driving enhancements on automotive business gross margin is about 3 percentage points.

However, Dolphin Research believes the market overlooks two factors, leading to a higher likelihood of BYD's automotive business gross margin exceeding expectations in 2025:

a. BYD's smart driving primarily adopts a system integration solution, which will pass cost pressures onto suppliers: According to research, BYD requires major suppliers to reduce prices by about 10%-20% by 2025. BYD still possesses strong pricing power against suppliers and has been reducing the number of suppliers. As sales increase, orders are allocated to a smaller number of suppliers, creating an incentive for suppliers to "exchange price for volume." Dolphin Research believes suppliers may bear a negative impact of 1.5-2 percentage points.

b. Scale effects reduce per-vehicle fixed costs, releasing gross margins:

Dolphin Research previously discussed in "BYD: Don't Be Deceived by Its 'Mask'!" and "[BYD: The Final Battle! In the article, it is detailed how amortization and depreciation affect BYD's gross margin, and that BYD's previous round of intensive capital expenditure has basically ended, with a continued trend of slowdown expected in the future.

Looking at the trends for 2024, even with an expected decline of 18,000 yuan (an 11% year-on-year decline) in per vehicle revenue, BYD is still expected to achieve a quarter-on-quarter increase of around 3 percentage points in real gross margin (after adjusting for impairments and the impact of depreciation and amortization on gross margin). This is still driven by the advantages of vertical integration and scale effects in releasing per vehicle amortization. Dolphin Research expects BYD to replicate this trend this year, therefore, Dolphin Research anticipates that it is very likely that BYD's automotive business gross margin will remain flat with 2024, which implies:

a. Release of scale effects, with a decrease in per vehicle depreciation and amortization costs contributing a release of 1.4-1.5 percentage points to gross margin (positive uplift);

b. Supply chain price reductions offset the negative impact of increased features in smart driving without price increases on automotive business gross margin by 1.5 percentage points;

③ Valuation:

a. Neutral Expectation

Finally, based on the neutral expectation for 2025, Dolphin Research estimates BYD's target price at HKD 435 based on SOTP valuation (Dolphin Research expects BYD's net profit attributable to the parent company to be 55 billion yuan in 2025 under neutral expectations, implying a PE multiple of 21 times for 2025), which still has about a 12% upside compared to the current stock price.

b. Optimistic Expectation

Under optimistic expectations, Dolphin Research switches to the DCF valuation method. In the second half of the competition, we have not yet seen negative factors affecting BYD's potential to become one of the top 5 automakers in the future. We believe that under optimistic expectations, BYD will become the next "Toyota" enterprise in China. Therefore, Dolphin Research expects BYD's global sales to reach 10.3 million units by 2030 (similar to Toyota), while under stable competition, the automotive business gross margin will reach around 26%, also trending towards the stable competition gross margin of Toyota

Finally, under optimistic assumptions, Dolphin Research estimates based on DCF valuation that the target price for BYD is HKD 565 (Dolphin Research expects BYD's net profit attributable to the parent company to reach RMB 62.4 billion in 2025 under optimistic expectations, implying a PE ratio of 24 times for 2025), which still has about 44% upside potential compared to the current stock price.

c. Summary

Therefore, Dolphin Research believes that the current stock price has basically priced in the impact of "intelligent driving equality" under neutral expectations, but there is still potential for the stock price to evolve towards optimistic expectations. Especially if we see that the order volume for BYD's first batch of 21 models exceeds expectations, leading to delivery volumes that continue to exceed expectations, and the gross margin of the automotive business is offset by supply chain price reductions and scale effects after the negative impact of intelligent driving enhancements without price increases, BYD's stock price may still evolve towards optimistic valuations, especially during the period when peers' lower-tier intelligent driving has not yet been mass-produced.

However, even if it evolves towards the optimistic direction expected by Dolphin Research, the implied PE ratio for 2025 is still only 24 times. This pricing is still based on hardware automotive stocks, and whether the stock price can break through around HKD 565 under optimistic expectations will still depend on the transition from hardware to hardware + software valuations (similar to Tesla).

Therefore, from a long-term perspective (2026 and beyond), it is still necessary to pay attention to BYD's catch-up in intelligent driving technology, especially the R&D progress of urban NOA, whether it can ① completely switch to self-developed solutions; ② based on the nearly 300-400 intelligent driving model data collected in 2025 (especially since the single vehicle ASP is relatively low, making it easier to collect data from lower-tier cities compared to Tesla/Li Auto, and with intensive capital investment (intelligent driving team of 5,000 people), whether it can catch up with Tier 1-Tier 2 intelligent driving competitors on the end-to-end route. This is the key to establishing technological barriers in the second half of the intelligent competition, achieving software charging, and ultimately completing the valuation transition, but the catch-up in intelligent driving is not something that can be achieved overnight, Dolphin Research will observe as it progresses.

However, from a short-term perspective in 2025, Dolphin Research believes that the potential catalysts for BYD's stock price to evolve towards optimistic valuations are:

1) Orders and delivery volumes for new intelligent driving models exceeding expectations: In February, the focus remains on delivering old models (non-intelligent driving models) and clearing inventory, and users will still need to wait at least a week to test drive the new cars. However, Dolphin Research expects that after the inventory clearance ends and the 21 new intelligent driving models are launched in March-April, the order volume and sales momentum are expected to continue to show a month-on-month increase, possibly exceeding market expectations. It is recommended to continue observing the order volume and sales volume in the coming weeks 2) The performance for Q4 2024 will be announced on March 24, with the possibility of exceeding expectations;

3) BYD's new generation pure electric 1000V platform, along with the new generation of higher energy density blade batteries, may be launched in March;

4) After the concentrated delivery of the intelligent driving version models in 2025 (Q2 2025 and beyond), the automotive gross margin is expected to possibly exceed market expectations;

However, potential pullback risks still need to be noted:

1) Q1 2025 performance may fall short of expectations: Significant price reductions and promotions for older models, while the intelligent driving version models will only be launched on February 10, indicating that production capacity will still need time to ramp up, which may contribute little to the Q1 delivery volume. Additionally, according to research, BYD is still primarily clearing old inventory vehicles in January and February 2025, therefore the automotive unit price and gross margin in Q1 2025 are expected to be mainly negatively impacted by the clearance of old inventory, possibly falling short of market expectations.

2) The actual performance of BYD's intelligent driving: It is expected that 2 to 3 million intelligent driving vehicles will be on the road in 2025, with a potential increase in accident probability. If there are defects in the algorithms and chip computing power leading to large-scale recall events, it may directly impact BYD's "cost-performance ratio" moat in intelligent driving.

3) The following situation of intelligent driving peers: The mass production time of low-tier models with high-speed NOA intelligent driving is ahead of market expectations, which may pose a risk of significant stock price decline again.

Dolphin Research Historical Depth:

February 26, 2025 “Soaring 30%! What is BYD's 'Intelligent Driving Equality' selling?”

September 4, 2024 “BYD: Don't be fooled by its 'mask'!” July 11, 2024 "BYD: The Final Battle!"

July 4, 2024 "How Can the Price Butcher Still Make Big Profits? What Makes BYD Fight Fiercely Against Competitors?"

August 10, 2021 "BYD Company (Part 2): After the Surge, Seeking Stability in Wealth?"

July 23, 2021 "BYD Company: The Best Battery Manufacturer Among Automakers | Dolphin Research"