BYD: Will it become the next Evergrande?

The automotive industry is in an uproar recently: Great Wall Motors' Chairman Wei Jianjun's statement "the Evergrande of the auto industry already exists, it just hasn't exploded yet" instantly ignited public debate.

Although no names were mentioned, all eyes are on BYD, which has liabilities of 594.3 billion yuan. Meanwhile, BYD launched the largest price cut in history during the "618" shopping festival, with 22 models seeing discounts of up to 53,000 yuan, directly causing a major dip in the new energy vehicle sector.

This move has made investors uneasy: on one hand, there's the overwhelming "Evergrande comparison," and on the other, a fierce price war. What's really going on with BYD?

Dolphin Research had already briefly discussed BYD's motivations for launching the price war in BYD: Slaughtering New Energy, the 'Price Butcher' Strikes Again!.

But regarding the "Evergrande of the auto industry" remarks, investors' concerns about$BYD COMPANY(01211.HK) have lingered. Today, Dolphin Research will take a detailed look at BYD's debt situation—is it a real crisis or just unwarranted pessimism?

1. First, the truth about the debt: Is a 75% debt ratio high in the auto industry?

Many are shocked by the figure "BYD's debt of 594.3 billion yuan," but the reality might be different from what you think.

First, let's compare within the auto industry:

① New energy vehicle makers like ZEEKR and Nio have debt ratios exceeding 85%, with Nio as high as 87%. ZEEKR's high debt ratio is mainly due to continuous losses from high initial investments in the new energy vehicle sector, a single financing structure (dominated by debt financing), and heavy reliance on related-party transactions.

② Among traditional automakers, Volkswagen and JAC Motors also have debt ratios around 70%.

③ BYD's debt ratio in 2024 is around 75%, which is only moderately high in the auto industry—about 10 percentage points higher than Great Wall Motors, which made the comparison, but lower than ZEEKR and Nio.

2. BYD vs. Evergrande? What are the key differences behind their high debt ratios?

When further breaking down the debt ratio, we can categorize liabilities into two main types:

① Interest-bearing debt: The main culprit behind Evergrande's collapse

This primarily consists of bank loans and bond financing, which require interest payments. Compared to supply chain financing, this method is "more expensive" and requires rigid repayment. Extending interest-bearing debt can easily trigger a crisis of confidence in the company, leading to a vicious cycle: debt extension → loss of trust across the supply chain → customers losing confidence (e.g., homebuyers avoiding Evergrande's unfinished projects) → banks/investors losing confidence (making refinancing difficult and triggering rigid withdrawals) → stricter regulatory policies (tightening control over presale funds and limiting debt expansion) → worsening cash flow.

As seen in Evergrande's case, excessively high interest-bearing debt not only incurs high interest costs but also poses greater risks when problems arise compared to operational liabilities.

② Operational liabilities: BYD's secret weapon or ticking time bomb?

Taking BYD as an example, its operational liabilities mainly consist of accounts payable and other payables. BYD primarily delays payments to upstream suppliers, which doesn't require interest payments to suppliers for delayed settlements.

This reflects the company's bargaining power in the supply chain (the stronger the bargaining power, the longer the company can delay payments to suppliers without interest). Of course, there are exceptions—some companies delay payments because they genuinely can't afford them, becoming deadbeats.

BYD's accounts payable are colloquially known as "Dlink." Since there's no rigid repayment pressure, BYD can extend payment terms to suppliers during cash flow shortages, effectively obtaining interest-free financing.

A breakdown of BYD's debt structure clearly shows that operational liabilities dominate, with minimal interest-bearing debt:

a. Interest-bearing debt as a percentage of total liabilities has dropped from 32% in 2020 to just 7% now.

b. Accounts payable under operational liabilities reached a record high of 43% of total liabilities in Q1 this year.

c. Other payables under operational liabilities mainly consist of external receivables (98.6%, classified as current liabilities), with a small portion being dealer deposits.

Dolphin Research compared data with peers and found that other payables are a unique issue for BYD. The account is large, and BYD hasn't disclosed detailed breakdowns. Based on past annual reports, it's primarily payments to equipment suppliers (interest-free liabilities) to support rapid capacity expansion, aligning with BYD's rapid production growth since 2021.

Clearly, as BYD solidifies its position as the "top player" in the new energy vehicle industry, it has replaced high-risk, high-cost "interest-bearing debt" with low-risk, interest-free "operational liabilities," now widely known as "Dlink."

Looking at the interest-bearing debt ratio (interest-bearing debt/total assets) and net cash levels across automakers, Nio is actually the most at risk, with the highest interest-bearing debt ratio and very little net cash on hand. Net cash is the safety cushion for automakers during price wars and product failures.

From this perspective, Nio is in a precarious position, while Li Auto, even if its product positioning falters, still has over 100 billion yuan in net cash, giving it higher tolerance for operational mistakes.

BYD, on the other hand, has a relatively high safety cushion, with an interest-bearing debt ratio of around 5% (among the lowest in the industry, lower than Great Wall's 9%) and net cash levels among the highest (second only to Changan and Volkswagen).

3. What exactly is "Dlink"?

The question then arises: unlike Evergrande, which relied heavily on interest-bearing debt and off-balance-sheet liabilities (debt disguised as equity), BYD's real issue lies in its widely known "Dlink" (heavy reliance on operational liabilities). So, what exactly is the "Dlink" model?

From official information, suppliers can issue "Dlink" for BYD's accounts payable:

BYD uses its credit to issue an "electronic IOU" to suppliers. Suppliers can either wait for payment upon maturity or take the IOU to banks/financial institutions—or even directly to BYD—for early cash conversion, but they must pay discount interest themselves.

Typically, suppliers have three ways to handle "Dlink":

a. Wait for payment: Receive payment from BYD after a few months, but cash recovery is slow.

b. Pass it upstream: Use the IOU to pay their own suppliers.

c. Early discounting: Take it to a bank or BYD for early cash conversion, paying discount interest.

(Note: BYD offers a "cash discount" product where suppliers can apply on the Dlink platform. After approval, they receive early payment at a discounted rate set by BYD.)

The key point: Because BYD has a high credit rating (AAA), suppliers can get lower discount rates from banks (based on BYD's credit) compared to ordinary commercial bills. If they go directly to BYD, the rates are even lower!

This means BYD uses its credit to help suppliers get early payments, with suppliers bearing the discount interest. If BYD provides the discounting service, it can even earn some interest or "supplier payment discounts."

This is why BYD hardly needs high-interest loans (high risk, high cost)—its supply chain acts as an "interest-free bank." Although criticized as "borrowing from suppliers to lend back to suppliers," this is essentially a reflection of BYD's strong bargaining power in the industry.

4. How common is the Dlink practice?

To be conservative, Dolphin Research included BYD's other payables in the comparison (other automakers have minimal amounts in this category, and BYD's disclosures are unclear). BYD's accounts payable days reached nearly 7 months in 2024, the highest among automakers.

This means BYD's payment delays to suppliers are indeed long. But the question is whether this reflects strong sales, high turnover, and supply chain bargaining power—or genuine inability to pay.

Banks that have conducted due diligence assign BYD's accounts payable an AAA credit rating, indicating confidence in BYD's repayment ability.

Is this supply chain financing method common? Dolphin Research reviewed other automakers and found it very common. BYD stands out because of its large accounts payable volume and the inclusion of other payables (with unclear disclosures) in the calculation, pushing its payable days to the highest among automakers.

Industry data for 2024 shows that among China's top 10 automakers (e.g., BYD, Geely, Great Wall, SAIC, Chery, GAC, Dongfeng, Changan, FAW, SAIC-GM-Wuling), at least 8 have publicly operated their own supply chain financing platforms.

5. Why the "next Evergrande" accusations? Are GMT's claims valid?

The "next Evergrande" narrative originated from short-seller GMT, which accused BYD of having massive "off-balance-sheet liabilities," with two main arguments:

a. Classifying payables over 90 days as "interest-bearing debt" rather than operational liabilities:

GMT's short report compared BYD's payable days (~127 days) with the global auto industry average (45-60 days) and Tesla (~60 days). However, BYD's supply chain financing model and payable management are common in China's auto manufacturing sector.

China's manufacturing industry often uses "notes to extend payment terms"—common in appliances, phones, and even BYD's upstream battery sector. BYD's use of supply chain financing tools (commercial bills, factoring) to optimize cash flow is standard industry practice, entirely different from Evergrande's "debt disguised as equity."

b. GMT claimed accounts receivable factoring is "hidden interest-bearing debt":

Most of BYD's receivables come from dealers (its primary sales network), who only pay after selling cars. To get cash earlier, BYD "discounts" these receivables to financial institutions (called "factoring").

While this makes the balance sheet's debt ratio appear lower, the company may still be on the hook for repayments (especially with recourse factoring, where BYD covers dealer defaults), creating "hidden liabilities."

Although GMT called this "off-balance-sheet debt," dealer-centric automakers commonly do this:

a. Geely and Great Wall also use receivable factoring.

b. As long as dealers sell cars, "recourse" isn't triggered (BYD doesn't have to cover defaults).

c. This is industry practice, not unique to BYD.

The core reason is that automakers typically give dealers 30-90 days of credit upon delivery. Dealers only repay after selling to end customers.

Compared to direct sales where consumers pay automakers upfront, dealer models have longer receivable turnover and slower cash recovery, prompting automakers to use factoring for early cash flow optimization.

6. The risk of supply chain financing: Sales are the only sword of Damocles

The Achilles' heel of BYD's heavy reliance on supply chain financing is that it must maintain high sales growth, as its model depends on its dominant position in the new energy vehicle supply chain, requiring it to firmly hold the "top new energy player" market position.

The risk transmission path of BYD's model is straightforward:

a. Short-term buffer: BYD still dominates the auto supply chain. If sales slow (see BYD: Slaughtering New Energy, the 'Price Butcher' Strikes Again!), it can push inventory to dealers and use receivable factoring to ease cash flow. But long-term, this may strain dealer finances.

This isn't sustainable. The market has already seen "0-kilometer used cars"—dealers holding unsold models, including those non-compliant with new battery standards. Dealers' cash flow is generally tight, which could lead to long-term liquidity issues.

b. Long-term risk transmission:

If dealers struggle to repay, BYD may face risks from factoring receivables (possibly with recourse), turning off-balance-sheet items into interest-bearing debt. This would strain BYD's net cash and force it to further delay supplier payments, potentially triggering a supply chain domino effect where the "Dlink" model becomes unsustainable.

BYD's supply chain financing risk transmission path

c. The double-edged sword of heavy-asset models: As discussed in Dolphin Research's deep dive BYD: The Final Battle!, BYD's vertical integration is a double-edged sword. During high sales growth, economies of scale lower per-unit costs, boosting margins (BYD's higher gross margins vs. peers) and ROE. But if sales decline, per-unit depreciation rises sharply, severely impacting profitability.

Summary: Payment delays are just the surface—sales are the lifeline

Thus, whether it's BYD's heavy-asset model or its reliance on supply chain financing, both hinge on high sales. As long as sales grow rapidly, all is well. But if growth stalls or declines, it could trigger a liquidity crisis, battering BYD's financial statements. This is why BYD must keep waging price wars and maintaining high asset turnover.

7. Behind the price war: What game is BYD playing?

The sales slump is mainly domestic—overseas sales remain strong. Despite domestic subsidies and a new "autonomous driving for all" product cycle, domestic retail sales are lukewarm. The issue is that "autonomous driving for all" demand fell short (especially since highway NOA isn't a priority for budget buyers in the 70,000-150,000 yuan range), and competitors like Geely are gaining ground, taking share from BYD.

But Dolphin Research believes BYD still has overwhelming advantages in price wars. In Q1, even before autonomous driving models were discounted (new models were 10,000-20,000 yuan cheaper than older ones), BYD's auto gross margin was 24%, with per-unit net profit at ~9,000 yuan (see Dolphin Research's Q1 review BYD: Still the King, But Can It Keep Running?).

A 24% gross margin gives BYD ample room for further price cuts. There's a long way from zero-margin sales to unsellable cars and liquidity crises:

a. Sell at zero margin to maintain sales.

b. Sell at negative margin to preserve cash flow (as Leapmotor once did).

Only if cars become completely unsellable would liquidity dry up.

Given BYD's domestic and overseas product competitiveness, Dolphin Research believes it's far from desperate.

Comparing BYD with rival Geely:

1) BYD's per-unit core operating profit dipped in Q1 (~6,000 yuan), mainly due to weak sales (down 34% QoQ). Gross margins fell as scale effects waned, while R&D spending surged.

2) Geely's Q1 gross margin was ~15.8%, slightly up YoY. Its per-unit core operating profit (core operating profit = gross profit - three expenses, excluding subsidies) was ~4,000 yuan.

While this seems close to BYD, Geely's total revenue was only 42% of BYD's (less than half), with R&D spending at 23% of BYD's.

Thus, despite similar per-unit profits, Geely's R&D spending is far lower than BYD's at equal revenue scales.

BYD's soaring R&D reflects its strategy:

① Expanding urban NOA autonomous driving:

Accelerating urban NOA R&D to bring it to the 100,000-yuan price range. This responds to competition from Leapmotor and XPeng, which are using urban NOA to challenge BYD's core market. Budget buyers (70,000-150,000 yuan) are more price-sensitive and less impressed by highway NOA but would value affordable urban NOA (higher usage frequency). BYD aims to deploy urban NOA in this segment by late 2025/early 2026.

② Overseas growth to hedge domestic risks:

BYD is expanding overseas to gain first-mover advantage. If "autonomous driving for all" demand disappoints, high-margin overseas sales can subsidize domestic price cuts (using overseas profits to support domestic discounts), catering to price-sensitive buyers.

8. Is the price war's "golden pit" an opportunity or a risk?

Overall, BYD remains well-positioned to wage price wars, thanks to its vertical integration's margin advantages and overseas growth. The recent autonomous driving model discounts target budget buyers' demand for value. Dolphin Research sees no major short-term risks for BYD.

Long-term, however, BYD must deliver on urban NOA self-development, especially with Mona Max leading the 150,000-yuan urban NOA charge. By 2026, another "autonomous driving for all" battle will likely emerge, and BYD's next product cycle will likely focus here.

Amid excessive stock price declines due to price war fears and "next Evergrande" rhetoric (if BYD hits its 5 million vehicle sales target, the stock could bottom at ~320-340 HKD), this may present a buying opportunity—but with ample safety margins.

Dolphin Research already sees post-price-war order rebounds (up 10,000 WoW to 80,000), suggesting the price war is working short-term.

Conclusion: BYD isn't Evergrande, but its lessons must be heeded

BYD's high debt reflects its supply chain dominance, unlike Evergrande's "robbing Peter to pay Paul" model. But in the cutthroat auto industry, sales declines could turn supply chain financing into a liability.

Dolphin Research cautions: No one is safe forever in the tides of time.

Whether BYD weathers the storm depends on two things: Can it deliver autonomous driving on schedule, and can it truly break into overseas markets (the latter seems more certain)?

Do you think BYD can withstand the pressure? Share your thoughts in the comments!