Investment Thesis

We remain cautious on BYD, despite its continued growth in topline and bottom line in 2Q and its resilient margin. This is because industry conditions have further deteriorated recently, with total auto sales declining yoy for two consecutive months. The above-industry growth of EVs won’t sustain for long, as EV penetration surpassed 50% in July. BYD’s high valuation of 21x 2024 PE has already priced in its industry leadership, and may face downward pressure once EV sales begin to slow.

Introduction

BYD (OTCPK:BYDDY) (OTCPK:BYDDF) is a Chinese EV maker. In 2023, the company sold over 3 million cars globally, surpassing Telsa as the world’s largest EV makers by volume. The company also manufactures batteries, car components, car electronics, and power semiconductors in-house, making it one of the lowest-cost car manufacturers in the world.

I initiated coverage of this stock in April, acknowledging its clear leadership in the China EV industry. However, I was cautious about its earnings headwinds due to price discount, weak demand, and overcapacity. Despite these challenges, BYD showed remarkable resilience in 1H24 performance.

Thanks to its launch of the highly fuel-efficient 5th generation DMI engine for plug-in hybrid (PHEV) vehicles, its PHEV sales grew by 40% yoy in 1H24, a significant turnaround from the 9% yoy decline in the first two months prior to the model launch. This new product has enabled BYD to maintain its share in a highly competitive market.

Chart 1: BYD car sales in 1H24

2Q Result Review

BYD reported solid 2Q results, with revenue up 26% yoy and net profit up 30% yoy.

Chart 2: BYD’s 2Q results summary

The results are roughly in line with sell-side forecasts but much stronger than its EV peers, such as Li Auto. Even Tesla has suffered a 20% yoy decline in its China sales in 2Q.

Chart 3: Tesla 2Q sales in China dropped 20% yoy

Gross margin remained surprisingly stable, despite a deep price cut on honor editions in March. The scale of the economy, lower battery costs, and BYD’s unique vertical integration model may help alleviate some of the pressure. Operating expenses also grew at a slower rate than revenue, thanks to the company’s tight control on expenses.

Outlook remained to be challenging in domestic market

While BYD outperformed its peers in 1H due to better cost control and superior products, it is unlikely to be immune from weak domestic demand and intense price competition forever.

Total auto sales declined yoy for two consecutive months in June and July, despite EV sales growing at over 30% yoy. The divergence was because foreign brands (mostly internal combustion engine vehicles) were being squeezed out of the China market by domestic EV manufacturers due to harsh price competition. Without an end to the price war, BYD is unlikely to see a sustained margin recovery, in my view.

BYD is on track to meet its 500,000 overseas sales targets in 2024, having reached 270,000 in the first seven months. However, the relatively high margin overseas market accounted for only 14% of its total sales. Therefore, its positive impact on margin will be limited. Further, as the EU imposed a 17% additional tariff on BYD, while the US and Canada slapped a 100% tariff, the export business also faces increasing headwinds until BYD’s overseas production base is up and running.

Valuation

BYD is currently trading at a 21x 2024 P/E ratio, which seems a bit stretched for a carmaker. Except for Tesla, most large automakers are trading at single digit P/E. We recognize that investors are willing to pay a premium for BYD because it is a pure play in the EV industry, which has shown higher growth compared to the overall auto-market. However, as EV penetration surpassed 50% in July 2024, its faster-than-industry growth may not be sustainable for too long, in my view.

Chart 4: BYD’s valuation

Chart 5: BYD’s valuation comparison with other automakers

Risks

Risks to our call include the government launching more tax cuts and subsidies for EV buyers, which seems unlikely in the near term due to China’s ongoing negotiations with the EU on car subsidies.

The cooperation between BYD and Huawei on autonomous driving solutions is also encouraging, but the product will only be adopted in one high-end model, the Bao 8 hybrid SUV.

Conclusion

BYD delivered a solid 2Q result but did not exceed market expectations. Notably, its margin remains stable despite heavy price discounts. Its net profit growth of 30% has also exceeded its revenue, indicating positive operating leverage and tight control on expenses. The outlook remains challenging for both the EV industry and BYD, given weak consumption and sustained industry overcapacity. Hence, we remain negative on the stocks.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.