BYD: The King of Competition Under Siege, Has the Former 'Butcher's Knife' Become a Double-Edged Sword?

$BYD COMPANY(01211.HK) released its Q2 2025 earnings for the Hong Kong stock market after hours on the evening of August 29, Beijing time. Key points are as follows:

1. Significant decline in car sales gross margin! Scale effect hindered: BYD's actual car sales gross margin in the second quarter was only 18.7%, a decrease of 5 percentage points from the previous quarter's off-season 24%! The gross margin hit a new low since 2023.

The main reason for the decline in gross margin was the increase in per-car amortization costs. Due to capital expenditures reaching a peak again this quarter, expected for overseas capacity expansion, but sales were mediocre under the constraints of the "anti-involution" price war, the scale effect of sales was not released, leading to an increase in per-car amortization costs, which in turn caused a significant decline in car sales gross margin.

2. Per-car net profit significantly below expectations: Regarding the per-car net profit that investors are also concerned about, the market expected a per-car net profit of 8,200 yuan this quarter, but BYD's actual per-car net profit was only 4,900 yuan, a decrease of 4,000 yuan from the previous quarter's off-season 8,700 yuan!

The core reason for this significant decline in per-car net profit, besides the decline in per-car gross margin, is mainly due to the massive investment in R&D expenses, as BYD is fully betting on the next major product cycle.

3. R&D expenses continue to surge: In the second quarter, BYD's R&D expenses were 15.4 billion yuan, an increase of 1.2 billion yuan from the previous quarter, significantly exceeding the market expectation of 12.6 billion yuan. BYD is still heavily investing in intelligence and the next new product cycle.

4. Core profit margin also hit a new low: Looking at BYD's per-car core profit situation (core operating profit = total gross profit - three expenses), BYD's per-car core operating profit declined even more severely, with per-car core operating profit dropping from 6,000 yuan in the previous quarter's off-season by 3,000 yuan to only 2,500 yuan, also hitting a historical low since 2022.

The fundamental reason is still the massive investment in R&D expenses. The core operating profit margin also decreased by 2 percentage points from the previous quarter's 3.3% to 1.4% this quarter.

Dolphin Research's View:

Overall, BYD's second-quarter performance severely missed market expectations, with both gross margin and net margin reaching historical lows since 2023.

Dolphin Research believes the core reasons behind BYD's significantly below-expectation financial report are:

① The scale effect of sales was not released under the vertically integrated heavy asset model:

However, BYD's new product cycle performed mediocrely, and the leading gap of DM 5.0 technology has been caught up by peers, leading to a significant decline in the market share of plug-in hybrid models:

In the article "BYD: Will it become the next Evergrande?", Dolphin Research has emphasized that BYD is highly dependent on supply chain financing + its highest degree of vertical integration, requiring the highest sales growth. During periods of high sales growth, the scale effect is released, per-car depreciation and amortization decrease, also bringing the release of profit margins (BYD's higher gross margin compared to peers) and high growth in ROE, but when sales decline, per-car depreciation rises rapidly, making the income statement look very unattractive.

In 2025, the new wave of product cycles initiated by the "Intelligent Driving Equality" strategy performed mediocrely, and the demand for high-speed NOA from essential users is not high (low usage scenarios, and affected by the Xiaomi intelligent driving incident).

On DM5.0 technology, BYD's technological lead has been directly caught up by peers, also leading to a significant decline in the market share of plug-in hybrid models.

② BYD's price war is restricted by "anti-involution", giving peers a time window to seize BYD's market share

Since BYD's DM5.0 advantage has been caught up by peers, and peers are currently adopting the strategy of "lower price, higher configuration, larger space" to seize BYD's market share:

a. Geely directly targets BYD's popular models with "close combat";

For example, Xingyuan targets Seagull and Dolphin, Galaxy L7 & Starship 7 target Song Plus DM, Galaxy A7 targets Seal 06/Qin L DM, etc. Since Geely's Thor electric hybrid has caught up with BYD's DM 5.0 technology, and in terms of intelligent driving, Geely has also released "Thousand Miles Vastness" to target BYD's "Eye of the God".

At the same time, Geely's new cars also play cards with lower prices closely against BYD's popular models, and this strategy is directly effective, launching multiple popular models during BYD's price war restricted time window.

b. XPeng Mona successfully created a popular model through excellent product definition (user-oriented thinking) + marketing strategy upgrade + high-level city NOA sinking to the 100,000-150,000 yuan price range, also seizing a certain share.

c. Leapmotor B series (100,000-level) also played cards against BYD.

In the highly competitive domestic environment, BYD's "price war" trump card is restricted by "anti-involution", forcing BYD to fully bet on overseas and intelligence, but these two areas of massive investment further dragged down this quarter's gross margin and per-car net profit:

① Capital expenditure reached a peak again this quarter, expected due to the construction of overseas factories, but also led to a further increase in per-car amortization costs, dragging down per-car gross margin:

This quarter, due to BYD's continued significant increase in capital expenditure, capital expenditure reached a historical high, leading to a 11 billion yuan increase in fixed assets to 280.8 billion yuan. According to Reuters, BYD has already reduced production in domestic factories, and Dolphin Research believes this record-high capital expenditure is due to increased investment in overseas factory construction.

This high capital expenditure also led to a continued increase in fixed amortization costs, and in the absence of scale effect release this quarter (dragged down by domestic factors), the increase in per-car amortization costs dragged down the car sales gross margin, which decreased by 5 percentage points to 18.7%.

② R&D expenses continue to surge:

In the second quarter, BYD's R&D expenses were 15.4 billion yuan, an increase of 1.2 billion yuan from the previous quarter, significantly exceeding the market expectation of 12.6 billion yuan, also leading to a per-car net profit of only 5,000 yuan this quarter, significantly below the market expectation of 8,200 yuan.

In terms of intelligence, intelligence has always been a significant shortcoming for BYD, and BYD is also heavily investing in R&D expenses, fully betting on the second half of intelligence.

BYD's current partners in intelligent driving hardware include NVIDIA, Horizon Robotics, Texas Instruments, Huawei, etc., and the company's supply chain solutions and self-developed solutions are equally important, but the strategic direction is mainly towards self-development, with layers of increased investment in the second half of intelligence.

According to HiEV Garlic Car Research Institute, besides self-developed algorithms, BYD is also planning to develop its own intelligent driving chips internally. It is expected that BYD will start from mid-to-low-end chips and gradually achieve self-development of intelligent driving chips, thereby further enhancing technical autonomy and cost control capabilities.

While peers like XPeng have already lowered city NOA to the 100,000-150,000 yuan price range (Mona M03), and Leapmotor has also announced that city NOA assisted driving will be implemented by the end of the year, BYD is also accelerating its progress, investing heavily in the next new product cycle as electrification innovation is nearing its end.

From a valuation perspective, the current stock price of BYD corresponds to Dolphin Research's estimated 2025 PE multiple of nearly 21-22 times, which is still not cheap, especially when BYD's price war is still restricted in the second half of this year, relying solely on overseas cannot save the domestic downturn. It is expected that the stock price will adjust after this significantly below-expectation financial report.

As for BYD's investment value, if viewed from a longer perspective, it largely depends on the iteration of the new product cycle at the beginning of next year, the high growth of overseas sales lifting the gross margin, and the progress speed in the next intelligence competition.

PS: BYD is a company with a complex business structure, covering automotive, mobile phone components and assembly, secondary rechargeable batteries, and photovoltaics, but Dolphin Research's in-depth article on BYD completed in July last year "BYD: The Best Battery-Making Automaker", "BYD: After the Surge, Seeking Stability in Wealth" has already identified the core, with too many and too complex businesses, but the core is still the automotive business. For those who need to understand this company, you can first review our above two analyses.

Below is a detailed analysis:

I. Significant decline in car sales gross margin!

Every time earnings are released, the market is still most concerned about BYD's automotive business gross margin situation. Although BYD's sales performance in the second quarter was very average, the trend was upward compared to the first quarter's off-season (up 14.4% to 1.145 million units), so the market's overall gross margin expectation was not too bad.

The market expected that due to the impact of promotional activities in the second quarter, the car sales gross margin would decrease by 1.7 percentage points from the previous quarter to 22.1%, but the actual car sales gross margin in the second quarter was only 18.7%, a decrease of 5 percentage points from the previous quarter's off-season 24%! The gross margin hit a new low since 2023.

From the perspective of per-car economics, the core issue of the decline in gross margin is still the increase in per-car costs:

1) Per-car price: Increased due to the rise in the proportion of overseas and high-end models

In the second quarter, the per-car price increased by 4,000 yuan to 137,000 yuan, mainly due to the rise in the proportion of overseas and high-end models, offsetting part of the impact of second-quarter promotional discounts.

① The proportion of overseas and high-end models increased by 1.8 percentage points in the second quarter, offsetting part of the price reduction impact

In the second quarter, BYD's overseas performance was still good, with overseas sales of 247,000 units, a 20% increase from the previous quarter, accounting for 22% of the model structure, offsetting part of the price reduction impact.

In terms of high-end progress (Denza + Yangwang + Fangchengbao), due to the launch of Denza N9 in the second quarter, the overall high-end proportion in the model structure increased by 0.7 percentage points to 6.1%, but the overall high-end progress is still relatively slow.

① Due to inventory backlog, promotional discounts continued in the second quarter

In the second quarter, due to inventory backlog, BYD continued to increase promotions for its models, and also began to significantly reduce prices for intelligent driving models, with actual price reductions of 5%-10%, as detailed in "BYD: Bloodbath in New Energy, the "Price Butcher" Strikes Again!".

2) Per-car cost: The increase in per-car cost is the main reason for the decline in car sales gross margin

In the second quarter, the per-car cost was 112,000 yuan, an increase of 10,000 yuan from the previous quarter, which is the main reason for the significant decline in car sales gross margin this time.

Dolphin Research previously emphasized in "BYD: Will it become the next Evergrande?" that BYD is highly dependent on supply chain financing + its highest degree of vertical integration, requiring the highest sales growth.

During periods of high sales growth, the scale effect is released, per-car depreciation and amortization decrease, also bringing the release of profit margins (BYD's higher gross margin compared to peers) and high growth in ROE, but when sales decline, per-car depreciation rises rapidly, making the income statement look very unattractive.

This quarter, due to BYD's continued significant increase in capital expenditure, leading to a 11 billion yuan increase in fixed assets to 280.8 billion yuan, and according to Reuters, BYD has already reduced production in domestic factories, Dolphin Research believes this record-high capital expenditure is due to increased investment in overseas factory construction.

But it also directly led to a continued increase in BYD's fixed amortization costs this quarter, and due to the constraints of the price war, the scale effect of sales was not released, also driving the per-car amortization cost to increase.

From the perspective of the half-year cost rate, BYD's amortization cost rate in the first half of 2025 increased by 3.2 percentage points to 11.3%, the core reason is still the increase in capital expenditure, but the scale effect of sales was not released, leading to an increase in per-car amortization cost, thereby dragging down the performance of the automotive business gross margin.

3) Per-car gross profit: The increase in per-car amortization cost dragged down per-car gross profit

This quarter, the per-car gross profit was 26,000 yuan, a decrease of 6,000 yuan from the previous quarter, and the increase in per-car amortization cost is still the main reason for dragging down per-car gross profit.

2. Per-car net profit also declined significantly due to massive investment in R&D expenses

Regarding the per-car net profit that investors are also concerned about, the market expected a per-car net profit of 8,200 yuan this quarter, but BYD's actual per-car net profit was only 4,900 yuan, a decrease of 4,000 yuan from the previous quarter's off-season 8,700 yuan!

Specifically:

1) R&D expenses: Still heavily investing in intelligence and the next new product cycle

In the second quarter, BYD's R&D expenses were 15.4 billion yuan, an increase of 1.2 billion yuan from the previous quarter, significantly exceeding the market expectation of 12.6 billion yuan. BYD is still heavily investing in intelligence and the next new product cycle.

In terms of electrification, BYD officially announced that its fifth-generation DM technology has evolved again, with NEDC fuel consumption per 100 kilometers significantly reduced by 10% to 2.6L.

In terms of intelligence, intelligence has always been a significant shortcoming for BYD, and BYD is also heavily investing in R&D expenses, fully betting on the second half of intelligence.

2) Sales expenses: Sales expenses were 6.2 billion yuan, reasonably controlled

In the second quarter, sales expenses were 6.2 billion yuan, below the market expectation of 7.8 billion yuan, and basically flat compared to the previous quarter. Dolphin Research expects this is mainly due to reduced rebates paid to dealers, as BYD's mid-to-low-end models generally adopt a dealership model.

3) Management expenses: This quarter was 5.5 billion yuan, slightly exceeding the expectation of 5.3 billion yuan, overall reasonably controlled

This quarter, management expenses were 5.5 billion yuan, slightly exceeding the market expectation of 5.3 billion yuan, an increase of 570 million yuan from the previous quarter, overall reasonably controlled.

Looking at BYD's per-car core profit situation (core operating profit = total gross profit - three expenses), BYD's per-car core operating profit declined even more severely, with per-car core operating profit dropping from 6,000 yuan in the previous quarter's off-season by 3,000 yuan to only 2,500 yuan, also hitting a historical low since 2022. The fundamental reason is still the massive investment in R&D expenses. The core operating profit margin also decreased by 2 percentage points from the previous quarter's 3.3% to 1.4% this quarter.

3. BYD's market share declined significantly under the constraints of the price war

From the quarterly tracking of BYD's market share performance, BYD's overall car sales market share has been declining since reaching a peak of 36% in the second quarter of 2024, with a more severe decline in the second quarter of this year, decreasing by 3% to only 31%.

The core reason for the decline is still the market share of plug-in hybrid passenger cars, with the plug-in hybrid market share decreasing by 11 percentage points from the previous quarter's 50.4% to only 39%. The core reason is that BYD's price war is restricted, and the core competitor Geely directly targets BYD's popular models with successive moves, such as Xingyuan targeting Seagull and Dolphin, Galaxy L7 & Starship 7 targeting Song Plus DM, Galaxy A7 targeting Seal 06/Qin L DM, etc.

Since Geely's Thor electric hybrid has caught up with BYD's DM 5.0 technology, and in terms of intelligent driving, Geely has also released "Thousand Miles Vastness" to target BYD's "Eye of the God". At the same time, Geely's new cars also play cards with lower prices closely against BYD's popular models, and this strategy is directly effective, launching multiple popular models during BYD's price war restricted time window.

At the same time, BYD also faces competition from multiple car companies such as Great Wall, Chery, XPeng, Leapmotor, etc., which are dividing BYD's market share during BYD's price war restricted time window.

In terms of pure electric models, after the launch of the e 3.0 EVO platform, the pure electric market share increased by 2.8 percentage points, and overseas models are mostly pure electric, stabilizing the basic market for pure electric.

This also led to a 13 percentage point decrease in the proportion of plug-in hybrids in BYD's model structure this quarter, with pure electric becoming the mainstream of BYD's sales.

4. But BYD is already de-stocking

At the same time, from BYD's inventory level this quarter, de-stocking has already started in the second quarter, with inventory decreasing by 8% from the previous quarter's 154.4 billion yuan to 140.8 billion yuan in the second quarter, and inventory turnover days also decreased from 90 days in the previous quarter to 77 days this quarter, with de-stocking still ongoing.

At the same time, from third-party data cross-verification, BYD has been reducing production and de-stocking since June, implementing measures such as the "circuit breaker" mechanism, SKU simplification, and accelerated rebates in June, with BYD's inventory coefficient in June also significantly decreasing compared to May.

According to research, BYD's current dealer inventory depth is close to 2.4 months, while the highest was close to 3.4 months.

5. Overseas performance continues to be good, capital expenditure significantly increased, expected to be preparing for overseas:

BYD has always been expected by the market in two directions: high-end and overseas. The high-end performance continues to be relatively mediocre, with a low probability of short-term breakthroughs (there may still be significant shortcomings in intelligence and brand strength).

This year, BYD's overseas trend continues to perform well, with overseas sales reaching 534,000 units from January to July 2025, and at this trend, it is expected that overseas sales can reach 900,000-1,000,000 units this year, offsetting the adverse impact of slowing domestic sales.

From BYD's continued increase in capital expenditure, reaching a historical high of 43.2 billion yuan, combined with BYD's domestic production reduction and previous additional issuance behavior,

it can also be clearly seen that BYD is still heavily investing in overseas capacity, as a key focus point, providing a high gross margin and net profit cushion for the future when the domestic automotive business is highly competitive.