"The market's expectations for BYD have been relatively pessimistic since mid-February."
At an internal sharing session in March, securities analyst Zhang Ming made this remark.
BYD's stock price has experienced a considerable period of correction. On January 11, 2024, BYD fell by 2.93%, dipping to a new low since 2022 with a low of 237.8 CNY per share.
This downturn prompted BYD to take measures to correct market expectations.
Firstly, in January, the Dream Day event was held to announce its intelligent layout, correcting the industry's perception that "BYD lacks intelligence".
Secondly, before the launch of the Honor Edition, BYD continued to adjust its terminal inventory and sales status through terminal discounts and proactive production cuts. After the launch of the Honor Edition, BYD's inventory-to-sales ratio returned to a healthy level. By the end of 2023, BYD's overall channel inventory exceeded 500,000 vehicles. After adjustments in January, February, and March, BYD's inventory-to-sales ratio returned to the range of 1.5-2.0.
Thirdly, continued efforts in high-end and export markets. In terms of high-end products, the Tengshi D9 in 2023 achieved a monthly sales volume close to 10,000 units. Subsequently, products like the Equation Leopard and the Aspire were launched, and export sales also increased. This year, there are still many new products to be released, such as the D9 upgrade in early March and the new N7 in early April, maintaining BYD's momentum in the high-end market.
BYD has always positioned itself as a globalized automotive company, aiming to catch up with Toyota. From March 5th to 12th, BYD's weekly sales reached 49,399 units, exceeding the combined sales of Volkswagen and Toyota during the same period.
However, in terms of how much profit each car sold can generate, BYD falls far short of its idol: BYD's net profit margin is 5.5%, while Toyota's exceeds 10%. To return to the peak of market value and even become a trillion-dollar automotive company, BYD still has a long way to go.
To gain market share, BYD has to resort to discounting.
In June 2022, BYD's A-shares and H-shares reached highs of 357.61 CNY per share and 331.74 Hong Kong dollars per share, respectively, before entering a downward trend. By February 2024, in a little over a year, BYD's A-shares and H-shares prices had fallen to 162.77 CNY per share and 167.80 Hong Kong dollars per share, nearly halving.
The peak in BYD's stock price was primarily due to the interim high point of 10,000 CNY per vehicle in profitability in the third quarter of 2022; the subsequent decline was influenced by Buffett's repeated reduction of holdings — Buffett's Berkshire Hathaway has reduced its holdings of BYD shares 13 times, decreasing its stake from 19.92% to below 8%.
Considering the industry trends in recent years, there are three main reasons for BYD's valuation decline:
Firstly, lagging behind in intelligence. Especially in the fourth quarter of 2023, leading players in intelligence, such as Xiaopeng and Huawei, made new breakthroughs, leading investors to worry about BYD's capabilities in intelligent products. Some "extreme" investors admitted, "Without intelligence, there is no future."
Secondly, market share and growth rate slowdown. The new energy industry has shown a significant slowdown in growth over the past 2 to 3 years.
Thirdly, the long-term prospects. While BYD is a top player in the domestic new energy market, the mentality of "if you can't beat them, give up" in Europe and the United States has slowed down the electrification process.
To address the capital market's doubts about market share, what can BYD do?
During a recent analyst exchange on the 2023 annual report, Wang Chuanfu stated, "The next three years will be a great decisive battle, with fierce competition and oversupply. This battle will undoubtedly be one of scale, cost, and technology. I believe that scale is the most important."
On February 19, the BYD Qin PLUS Honor Edition was officially launched, with its DM-i model entering the 70,000 CNY range for the first time, and EV models entering the 100,000 CNY range.
In late March, an internal source from BYD, Sun Xu, told Leifeng.com that since the launch of the Honor Edition on February 19, online traffic had increased by more than 200% in the first week. "From March 1st to 15th, the orders in the first half of the month were around 150,000, with more than 80,000 from Wang Dynasty and more than 60,000 from Ocean Net. The overall expectation has basically been met."
According to the latest sales data on April 1st, sales of BYD's Wang Dynasty and Ocean Net in March were 286,700 units, an increase of 151.4% month-on-month and 46.5% year-on-year.
However, the orders for Wang Dynasty and Ocean Net in April will be lower than in March due to the Qingming Festival holiday. At the same time, the popularity of the Honor Edition will decrease in April. However, the delivery volume in April will exceed that of March due to severe shortages of certain models, such as the Qin PLUS Honor Edition with a range of 55 kilometers (priced at 79,800 CNY).
In terms of subcategories, the price reductions for the Qin, Song Pro, Yuan, and Han DM-i are quite appropriate, with decreases ranging from 20,000 to 30,000 CNY. Among these, the Qin emerges as the biggest winner on Wangchao.com. There are no notably lagging models on Wangchao.com, with performance being more balanced.
In the realm of oceanic web, Destroyer 05 emerged as the indisputable dark horse. The Song Plus family also proved formidable, selling 41,569 units in March, edging out the Qin family by around 1,000 units and becoming BYD's best-selling model.
However, the growth performance of the Seagull and Dolphin models was not as pronounced. The former showed a slight lack of enthusiasm due to a modest price reduction of around 3,000 CNY, while the latter's increase in features (upgraded independent rear suspension) didn't quite match the sincerity of the price drop.
The Sea Lion family faced a similar situation, with its price reduction and facelift in the Honor Edition not being as impressive as its sibling models.
Speaking of the Dynasty Web, its performance appears more balanced because there are two "difficult brothers" in the oceanic web - the Frigate 07 and the E2 Honor Edition.
These two models are somewhat marginalized, with sales of only 1,170 and 1,300 units respectively. They are essentially lying flat, lacking attention and discussion.
On the day BYD released its 2023 financial report (March 26th), it also launched the Yuan UP.
Yuan UP boasts a range of 300 to 400 kilometers. Industry insiders estimate that monthly sales of Yuan UP should reach around 20,000 units, potentially becoming a hit. However, Yuan UP might exert some pressure on the Dolphin and Yuan PLUS.
From a data perspective, both the Dynasty Web and the Oceanic Web remain the mainstays of the group's sales, accounting for 94% of total sales. The performance of these two webs is crucial to the final outcome of BYD's scale battle.
The Beijing Auto Show may showcase the DM-i 5.0, with more surprises expected by year-end.
In the second quarter, there are several noteworthy highlights: one being the release of the new Qin L, based on the DM-i 5.0 platform. The Qin L, expected to be unveiled at the Beijing Auto Show on April 25th, will target the A+ sedan market, competing with models such as the Volkswagen Sagitar and the Toyota Corolla.
According to securities analyst Liu Guo, "The release of the Qin L is delayed, as BYD has to consider delivering orders for the Honor Edition."
The target for Qin L is expected to be around 10,000 units per month, but pricing will be a key consideration. As a large sedan, the launch of the Qin L will impact the Sea Lion, with its high-end configurations overlapping with the lower-end configurations of the Sea Lion and the Han.
In terms of pricing, with the introduction of the Honor Edition models, the price range has shifted down by 10,000 to 20,000 CNY. Consumers now have two choices: to buy last year's configuration models at a discount of 10,000 to 20,000 CNY, or to buy updated models with better performance and larger space at last year's prices.
Sun Guo stated, "In addition to the Qin L, the Han L and the Tang L will also be launched successively. The Song L uses the Horizon J5 chip, and the subsequent L series has two choices - Horizon J5 or NVIDIA Orin, which will significantly enhance autonomous driving capabilities."
Therefore, in the market below 200,000 CNY, BYD will further squeeze the sales of joint venture fuel vehicles and second and third-tier models.
Technologically, DM-i 5.0 products will reduce the fuel consumption of electric vehicles to 2.9 liters per 100 kilometers, with a full tank and full battery range reaching 2000 kilometers.
Wang Chuanfu stated at an analyst meeting, "BYD's current monthly volume of DM-i 4.0 is very high, with demand exceeding supply just from the Qin PLUS and Destroyer 05 alone. Switching is very difficult for us. DM-i 5.0 can sustain the popularity of our products for at least 1 to 2 years."
Beyond DM-i 5.0, under the E platform, E4.0 will gradually debut by the end of this year or next year (Yuan UP mentioned above is still based on E platform 3.0).
E platform 3.0 was launched on September 8, 2021, and has been around for 2.5 years. Under this platform, there is both the Dolphin, which dominates the small car category, and the Sea Lion, which is dubbed the "Model 3 killer," as well as the Tengshi N7.
Depreciation and amortization, the biggest pressure in the first quarter.
BYD's Honor Edition slashed prices with a price knife against a group of competitors, with the ultimate goal of lowering prices and increasing market share to generate more profits.
How to track BYD's overall profitability and where the core points affecting profitability lie?
Some may think that BYD's price war will be its "seven-injury fist" - with the Honor Edition overall dropping by 20,000 to 30,000 CNY, will it put pressure on terminal profits?
The conclusion is not necessarily.
Price reductions are not rigidly transmitted because the transaction price at the terminal includes guided prices plus terminal discounts. For example, although the Honor Edition prices are 20,000 to 30,000 CNY lower than the guided prices of the Champion Edition from 2023 to 2024, the new Honor Editions do not have additional discounts at the terminal. Terminal discounts for Champion Edition models may range from 10,000 to 20,000 CNY.
In addition, deliveries of the Honor Editions started in March, and the duration of marginal weakening is relatively short. Therefore, the downward adjustment of individual vehicle prices does not have a very significant impact on the business.
Secondly, there is the reduction in supply chain costs.
BYD has a large sales volume and has certain pricing power in the procurement chain, which lowers costs. The major change between Honor Edition and Champion Edition models is the adjustment of core product materials. The cost reduction of product materials gives the Honor Edition room for price reduction, and it will not have a significant impact on the profitability of the Honor Edition.
For new forces, pricing and gross margins of car companies receive more attention. However, for a company like BYD with a sales volume of 3 million vehicles, depreciation and amortization have a higher impact on per vehicle profitability and are a crucial factor.
An analyst told Leifeng.com that depreciation and amortization are important indicators affecting BYD's profitability. In the third quarter of 2023, BYD had fixed assets worth 200 billion CNY, with the total fixed assets for the year reaching 230.903 billion CNY. Calculated according to BYD's depreciation policy, the quarterly depreciation rate is around 5%, resulting in a depreciation and amortization expense of around 11.5 billion CNY for the quarter.
In the fourth quarter of 2023, the overall sales volume was 950,000 vehicles, while BYD's cumulative sales volume for the first quarter of 2024 reached 620,000 vehicles. Considering other depreciation factors, a rough algorithm suggests that the depreciation and amortization per vehicle for BYD will increase from 11,000 CNY to around 18,000 CNY. Therefore, in the first quarter of this year, BYD faces significant pressure due to the increase in depreciation and amortization, leading to an additional cost of 7,000 to 8,000 CNY per vehicle.
According to statistics from "Late Financial News," for every vehicle sold in the fourth quarter of 2023, BYD could earn a net profit of 9,000 CNY. If depreciation costs remain high, it will greatly affect BYD's profitability per vehicle.
For BYD, the first quarter is a "stress test." If sales in the second quarter return to over 900,000 vehicles, the depreciation and amortization per vehicle will return to 11,000 CNY.
This also explains why Wang Chuanfu believes that "scale is the most important." Cars benefit from economies of scale, and only with sufficiently high sales volume can fixed asset investments be continuously diluted, and gross and net profits be increased.
With both price wars and efforts to move upmarket, how can the 5.5% net profit margin be improved?
Wangchaowang and Haiyangwang are the backbone of BYD's sales. However, despite such strong growth in sales revenue, BYD's net profit margin is only 5.5%, and the high-quality profitability brought about by scale is not significant. In the context of China's new energy market, which is characterized by subsidy-driven trends and widespread losses, this figure is already quite impressive.
However, when compared to Toyota's 11.6% net profit margin in the 2023 fiscal year, this performance is still significantly lower.
Therefore, the profitability of high-end brands such as Tengshi, Yangwang, and Fangchengbao is becoming increasingly important, carrying the hopes of the entire village's profits. According to a leading securities analyst, "Yangwang is estimated to have a net profit margin of 20%, while Tengshi and Fangchengbao are close to 15%."
The new Tengshi N7 was officially launched on April 1st, with four versions available at prices ranging from 239,800 CNY to 329,800 CNY. Chairman Wang Chuanfu candidly admitted, "The original front face of the Tengshi N7 was rather ugly, but after the redesign, it will perform very well."
On April 6th, the brand-new intelligent luxury flagship sedan, the Z9GT, from Tengshi, underwent road testing in Stuttgart, Germany. Spy photos of the new car's overseas testing have been circulating online, and combining these with official information, the Z9GT is squarely aimed at the Porsche Panamera.
However, the high-end series "Tang" only accounts for 4.2% of total sales. "Yangwang" and "Fangchengbao" began delivery in November 2023, but their contribution to performance still needs time.
According to Guolian Securities statistics, BYD's highest market share models in 2023 are priced between 80,000-120,000 CNY and 120,000-150,000 CNY, accounting for 65.0% and 70.5% respectively; models priced between 50,000-80,000 CNY, 150,000-200,000 CNY, and 200,000-250,000 CNY have market shares of 32.9%, 26.0%, and 38.4%.
BYD aims high but remains in the mid-range market. This significantly affects BYD's upward brand movement.
On the other hand, because intelligence is not the core selling point in the price range of mainstream models, it somewhat affects the market's valuation premium for intelligence.
BYD's stock price has experienced significant retracement in the early stage, largely due to the shortcomings in intelligence. Objectively speaking, there is a gap between BYD's intelligent driving technology and that of top-tier players such as Xiaopeng and Huawei.
According to Wang Chuanfu, "We must have what others have, but we need to develop features that are more unique to BYD, providing an excellent user experience without too many safety risks, without crossing the bottom line of regulations."
From this standpoint, it can be inferred that BYD's intelligent driving solution will not be as aggressive as those of top-tier players like Xiaopeng and Huawei.
(BYD's research and development of intelligent driving began in 2015 in collaboration with Baidu. Starting in 2019, BYD began investing in and collaborating externally while also conducting independent research and development, with collaborations with companies such as Momenta, DJI Automotive, and HoloMatic.)
Since the beginning of this year, Xiaopeng's sales have been dismal, and the response to Ji Yue, which has Baidu's technological endorsement, has been mediocre. This indirectly indicates that while intelligence is important, it is not the decisive factor.
According to Leiphone, Tengshi will soon introduce Urban NOA, and there will also be some unique BYD features such as valet parking.
According to internal BYD experts, intelligent driving will be primarily promoted in high-end models, such as Han, Sea Lion, and Guardian, priced above 150,000 CNY. However, in the future, BYD models priced above 100,000 CNY will also be equipped with the "God's Eye" intelligent driving system.
Expanding overseas is another profitable path for BYD.
There are mainly two ways for automakers to go overseas: firstly, manufacturers directly export and sell through local dealers, with a target of reaching 500,000 units. This export target should be the easiest to achieve because export growth is relatively fast; secondly, parallel exports, where vehicles are registered domestically and then exported as used cars. This approach is relatively straightforward, and the ideal situation is to achieve this model.
In addition, each region has its own consumption characteristics and cycles, such as Eid al-Fitr. The period from before Ramadan to during Ramadan and extending to Eid al-Fitr is the peak consumption period for Ramadan.
Therefore, January to April is the peak season for consumption in the Middle East, Central Asia, and other countries, with a slight decline from May to July and a resurgence from August to October.
Industry insiders estimate that "BYD will sell 500,000 units through dealers this year, a target that will surely be exceeded, and parallel exports can also reach 40,000 to 50,000 units."
According to BYD's financial report, BYD's new energy passenger vehicles have entered more than 50 countries and regions including Japan, Germany, Australia, Brazil, and the United Arab Emirates in 2023. Models exported overseas include the Han EV, Tang EV, Yuan PLUS, Dolphin, and Sea Lion.
To expand overseas, BYD has spent a lot of money on purchasing roll-on/roll-off ships. BYD's first roll-on/roll-off car carrier has been delivered and made its maiden voyage. On March 29th, BYD held a groundbreaking ceremony for its 9,200-vehicle roll-on/roll-off car carrier in Jiangsu.
In the next two years, BYD will put another seven roll-on/roll-off ships into operation.
Wang Chuanfu said, "Going global is a good direction. However, now, due to geopolitical issues, globalization has become a fantasy. Going global must be localized to achieve long-term and sustainable globalization."
According to information from BYD's 2023 financial report investor communication meeting, BYD is confident in expanding into overseas markets. Its overseas sales in 2023 were about 250,000 vehicles, but it is expected that this year's overseas sales target will reach 500,000 vehicles, with a sales target of 1 million vehicles next year.
One question is: Will overseas sales double in the next three years? Is this target too aggressive?
How to become a model student who can "sell cars and make money"?
In summary, how will the market evaluate BYD in the medium to long term?
Four keywords: market share, high-end and overseas expansion, single-car profitability.
Wang Chuanfu said at an analyst conference, "Currently, BYD's PHEV and EV account for 16% of the entire market share, and in the new energy vehicle sector, the market share has reached 35%."
The latest data released by the China Passenger Car Association shows that in 2023, the cumulative retail sales of domestic passenger cars reached 21.699 million units. If BYD's market share can reach 20%, it corresponds to 4.33 million units.
With the European and American markets gradually slowing down their new energy strategies and returning to the development of fuel vehicles, the market is concerned about BYD's difficulty in entering the European and American markets. Southeast Asia, Eastern Europe, and other markets have nearly 30 million units in share. If BYD can capture 10% of the volume, overseas sales will reach 3 million units.
Zhang Ming told Leiphone, "If it's 7 million units, the market will believe that there is a possibility of BYD's single-car profit of 10,000 CNY, and a net profit of 700 billion CNY will be valued ten times at 7 trillion CNY. If the single-car profit reaches 15,000 CNY, it can achieve a performance of 100 billion CNY, corresponding to a valuation of 1 trillion CNY. Looking ahead, BYD's market value can anticipate 7 trillion to 10 trillion CNY."
BYD's ultimate goal is to become a global automaker like Toyota and Volkswagen.
Even though it has been criticized for its insufficient electrification performance, Toyota achieved a new sales record in 2023 with sales of 11 million units, and its overall performance approached $30 billion. The unit price of the car is around 180,000 CNY, and the single-car profit is around 19,000 CNY. At the close of the Tokyo stock market on January 23, its market value reached 48.7 trillion yen (approximately $328.8 billion), breaking the record for the market value of Japanese companies Volkswagen's total sales in 2023 reached 9.24 million units, with an average car price of around 270,000 CNY and a profit of 15,000 CNY per vehicle, making it the second-best-selling automaker globally. These two companies are exemplary models in both selling cars and making profits.
How much time will it take for BYD to achieve their level of success?
(Sun Xu, Liu Guo, and Zhang Ming are pseudonyms in the text.)
