BYD: "Super Profits" Counterattack Against Buffett's Selling Pressure

On the evening of March 28th Beijing time, BYD.SZ released its full-year performance for 2022 after the market closed. Dolphin Jun paid close attention to the changes in the second half of the year and the fourth quarter. The key points are as follows:

1. BYD.HK's full-year revenue was 424.1 billion, with a net profit of 16.6 billion, an increase of nearly double and more than five times respectively compared to the previous year. The explosive performance was revealed in the guidance at the end of January, and is not the incremental information of this performance;

2. From the incremental information, besides the stable performance of the unit price brought by the original car price increase, there is another factor that cannot be ignored, which is that BYD Electronics.HK’s electronic product OEM rebounded very quickly;

3. The profit explosion obviously has a higher gold content: mainly due to the scale effect which not only helped BYD further develop the scale effect of the production side, leading to an accelerated decline in the depreciation and amortization expenses in the second half of the year, but more importantly, the bargaining power on the procurement side began to be quickly reflected.

During the second half of the year, while lithium ore prices continued to rise, the gross profit margin of the new energy peers generally accelerated its collapse, BYD was able to reduce material costs by 1.6 percentage points against the trend through its procurement bargaining power.

Dolphin Jun roughly calculated that the gross profit margin of BYD's automotive business should have improved further in the fourth quarter, and should have reached 23% now, which perfectly interprets that explosive sales is the key to profits and profit margins.

1. At present, the cost side is the only place where the scale effect has not yet been clearly reflected: In addition to administrative expenses, the growth rate of research and development and sales expenses is very fast. The fast growth in research and development can be understood because BYD wants to do too many things and pave the way for the future. However, on the sales side, after-sales service has rapidly surged in the second half of the year, increasing by 600% year-on-year. We can track the company's detailed explanations to see if it can stop the expansion in the future.

2. Competing expectations are more critical: obviously, as the overseas market is still in the process of expanding, the competition expectations in the domestic market are more critical. In addition to the old opponent Geely, who intends to stir up BYD's hybrid electric vehicle market with its new "Galaxy" series, Tesla's price reduction and price sinking has also put pressure on BYD's prices. Recently, BYD has started to reduce prices to compete with its opponents, but luckily, the recent decline in lithium ore prices (close to 250,000 yuan/ton) has brought certain advantages to price reductions.

Dolphin Jun's overall view:

Since the full-year revenue and profit have been announced in advance, the value of this annual report mainly lies in understanding the quality of BYD's revenue and profit growth.

From the marginal incremental information, although many of the unexpected revenue comes from low-margin BYD Electronics, the information revealed by the released profit is that, with the guarantee of explosive sales, BYD has locked in a "money-making physique":

After the explosive sales of the cars, in addition to the scale effect of the production side that can already be seen in the first half of last year’s accelerated release in the second half of the year, what is more important is that the scale effect on the procurement side has also begun to be quickly released, and it was achieved under the constantly rising lithium ore prices, which brought about a single-car profit of at least 2,500-3,000 yuan.

On the issue of sales and gross profit after the intensification of competition in the market this year, BYD has started to lower prices to expand sales. From the current price reduction range, the decline in lithium ore prices, and the increase in market share of BYD since the beginning of the year, it is not necessarily the case that BYD's gross profit margin has fallen significantly.

Based on current market expectations, the sales volume of around 2.7 million vehicles in 2023 is implied by the seller's revenue and profit margin guidance for the same year, corresponding to a monthly sales volume of 220-230 thousand, close to the average monthly sales volume in the fourth quarter. The return on equity implies that it may be down slightly compared with the second half of 2023, but year-on-year improvement is still possible.

Corresponding to the current PE (TTM) of 72 times, it can only be said to be gradually approaching a reasonable level, depending on how much selling pressure remains from Berkshire Hathaway, owned by Buffett, and whether it can push BYD's price into a more cost-effective position.

PS: BYD is a company with a complex business structure that includes Automotive, Mobile Phone Components and Assembly, Second-life Charging Batteries and Photovoltaics. However, the in-depth articles on BYD by Dolphin Jun in July last year, "BYD: The Best Battery-based Vehicle Manufacturer" and "BYD: Surviving Riches and Honours", have already helped readers identify the core issue. Although the business is diverse, the core focus should be on the automotive business. For those who want to know more about the company, you can read the above two analyses first.

This article is an original article by Dolphin Investment Research. Unauthorized reproduction is prohibited. Users who are interested are encouraged to add the WeChat account "dolphinR123" to join the Dolphin Investment Research Circle and exchange global asset investment views together!

The Dolphin analyst provides the following marginal information on BYD's annual performance:

I. Overview of BYD

In addition to the well-known car sales business, BYD also has a consumer electronics OEM business, such as mobile phones, operated by BYD Electronics, as well as other small and miscellaneous businesses.

Starting in 2022, BYD merged its previously separately disclosed battery business into its entire vehicle sales business, which greatly affects the clarity of the company's financial statements.

As the battery business contains two fast-growing businesses, the power battery and energy storage business, after the two merged, it is not possible to clearly see the single car sales volume and single car gross profit situation of the entire vehicle business, only a rough estimate can be made.

II. "Excessive" Revenue depends on OEM?

At the end of January, BYD had already announced a stunning full-year performance, with revenue and profit far exceeding market expectations at the time. The actual annual revenue was RMB 424.1 billion, which was basically the same as the company's previously announced figure of over RMB 420 billion, with a year-on-year growth rate of 96%. The annual net profit attributable to shareholders was RMB 16.6 billion, which was also within the range of the previously announced RMB 16-17 billion, and the profit growth was outrageous, more than five times that of the RMB 3 billion in the previous year. This year's annual performance announcement actually reveals the real essence of finding strong performance and looking at the true value of revenue and profit growth:

The revenue side is very robust, with good automotive revenue (although automotive revenue is difficult to bring significant expectations through frequent sales), and instead, the relatively unexpected revenue in the fourth quarter is BYD Electronic.

BYD Electronic's revenue in the fourth quarter reached RMB 36 billion, with a year-on-year increase from the worst quarter of -9% in the second quarter, and rapidly repaired to 56% in the fourth quarter. As the Android market's mobile phone shipments were very poor last year, the market originally had no expectations for this part of the business.

The company explained that although Android phone production was indeed affected, it expanded to North American major customers and new structural components for consumer electronics. At the same time, IoT products, including game hardware and drone shipments, had good growth.

However, although the revenue growth of this business is good, the marginal changes in profit performance are not outstanding, and the OEM business is still relatively thin. Due to the gross profit margin, the net profit margin of the parent dropped from 2.2% in the fourth quarter, to 1.7% with a corresponding net profit of 600 million yuan, which is the same as the previous quarter.

Second, the automotive industry: The correct solution to releasing the profit of the powerful automobile manufacturing industry.

Excluding BYD Electronic, BYD's fourth-quarter revenue was RMB 120.3 billion, an increase of 152% year-on-year, exceeding the sales growth rate of the same period of 138%.

The key here is that the gross profit margin of BYD in the fourth quarter after deducting BYD Electronic actually withstands and maintains at the level of 22.8% in the third quarter.

Considering the high price of lithium ore in the fourth quarter, most domestic new energy vehicles peers have generally suffered from worsened losses, and there are almost no peers who can maintain their gross profit margins from a quarter-on-quarter perspective.

Especially from the perspective of the hardcore core operating profit (income - cost/additional taxes - three fees) that Dolphin Jun focuses on in the fourth quarter, after deducting the company's financial structure, foreign exchange gains and losses, investment gains and losses, government subsidies, asset and credit impairment, and even the impact of the decline in BYD Electronic's gross profit margin, BYD's overall core operating profit margin still rose, from 6.2% in the third quarter to 6.3% in the fourth quarter.

Looking at the annual data disclosed by the company for incremental information, Dolphin noticed a very clear trend:

1. In the spending items that are highly correlated with costs - the cost of goods and services and amortization expenses, last year, when Dolphin shouted out BYD's "money-making machine" turning point in the first half of the year, BYD only saw the release of production scale effect on the production side, which means the increase in production capacity utilization rate + the exploding sales of new energy vehicles, continuously diluting its amortization expenses, and bringing about a production-side scale effect.

2. By the second half of 2022, another layer of scale effect could already be clearly seen: After the explosion in car sales, its bargaining power as a single major customer in procurement could allow it to continuously suppress procurement costs in the face of a sharp rise in lithium mine prices, bringing about a 1.6 percentage point increase in gross margin.

This proportion seems small, but the problem is that the sales revenue of cars is relatively large, with car and battery business revenue reaching as high as RMB 220 billion in the second half of the year, bringing with it a YoY gross profit release of RMB 3.5 billion, while a decrease in amortization ratio would bring about another RMB 4.2 billion in profit release.

As of the end of the fourth quarter, while BYD has seen a surge in auto sales, aside from administrative expenses, it has not yet reflected the expected scale effect on the entire cost side, especially in terms of sales expenses, under the soaring after-sales expenses, which has further exacerbated the uneconomic scale:

a. First is the sales expense: Q4 auto sales expense was RMB 5.7 billion, with high growth in auto sales, the expenditure on sales expense increased faster than the income from car sales, and the expense ratio reached 3.6%, which was a full percentage point higher than the same period last year.

Dolphin broke down the composition of sales expenses in the second half of the year and found that one of the most exaggerated spending items was after-sales service fees, which grew nearly 600% YoY in the second half of last year and contributed close to half of the sales expenses. This may depend on how the company explains the surge in after-sales service fees.

b. R&D expenses, the largest expenditure on the cost side, of course, are still growing at a high rate: RMB 7.9 billion in Q4, up more than 180% YoY; BYD is currently working on too many directions in R&D.

For example, in terms of automotive-related technology, there are blade batteries, CTB battery and vehicle integration, DM-i/p, automatic parking, in-car intelligent DiLink, and others such as Mo Fan energy storage, large-sized photovoltaic modules, N-type batteries, etc., and high R&D investment is understandable.

In addition, Dolphin noticed that, like Geely, BYD capitalizes some of its R&D investment, although the proportion of R&D expenses capitalized last year has fallen from 25% in 2021 to less than 8%. 2022, the ratio of R&D investment to revenue was 4.77%, which is 0.4 percentage points lower than the R&D cost rate of the same period, and it represents the capitalized R&D investment.

3. Can Byton stabilize in 2023?

1. Sales volume: The market share stabilized in January and February.

Behind the rapid growth in revenue in the fourth quarter is the fact that BYD is still delivering cars at a high speed (delivering 680,000 cars in a single season, a year-on-year increase of 138%. Since the sales data has been released in advance, the Dolphin will not repeat the above, and those who need detailed sales information can check it in the Changqiao APP-Whether BYD-Depth Data).

However, sales fell sharply in January and February of this year, from 230,000 deliveries in December to 150,000 in January and recovered to 190,000 in February.

This is due to the withdrawal of new energy subsidies that has continued for more than ten years. BYD announced a price increase after the subsidies were withdrawn to attract users to pick up the car as soon as possible and release sales before the end of the year. Therefore, even a strong company like BYD still showed a decline in sales on a monthly basis in January.

But in terms of the industry, BYD's market share did not decline in January, on the contrary, it accelerated, and other car companies performed even worse.

On the whole, judging from the performance of the first two months, BYD's sales performance is relatively strong, and according to market expectations, the market expects BYD's car sales in 2023 to be between 2.6 million and 2.9 million, while the guidance given by the company is much more optimistic, at 3-4 million vehicles.

2) 2023: Price War, No One is Safe

After Tesla crazily lowered prices, the news of BYD lowering prices on the market has cast a certain shadow over its continued profitability. Let's review BYD's actions after the new year:

1. Price increase: affected by the withdrawal of national subsidies and the rise in raw material prices, BYD adjusted the official guidance prices of Wangchao.com and Ocean.com related new energy models from January 1, 2023. The adjustment range is between 2,000 yuan and 6,000 yuan.

2. Unofficial price cuts: After Tesla's large price cut after the new year formed a positive competition with BYD, BYD began to frequently cut prices. In mid-to-late February, dealers in Guangzhou, Shenzhen, and other areas, especially the old models of the Wangchao series of pure electric cars, had relatively large discounts, reaching tens of thousands of yuan. Similar news was also reported by dealers in Shanghai, Beijing, and other areas, and some new cars also had discounts of thousands of yuan. However, BYD stated that this is a dealer behavior, not an official price cut. 3) Lower starting price for new cars: On February 10th, BYD launched its new Qin PLUS DM-i 2023 Champion Edition. The base model is priced at only 99,800 yuan, making it BYD's and even China's first plug-in hybrid model priced under 100,000 yuan while still retaining equivalent power and energy efficiency with traditional combustion engine vehicles from joint ventures. Additionally, on March 16th, the Han Tang flagship Champion Edition was released, with the latest Han EV Champion Guide priced at 209,800-299,800 yuan, starting a price reduction of 10,000 yuan from the previous model. The Tang DM-i is priced at 209,800-233,800 yuan, with a slightly lower starting price than the previous generation but with enhanced configurations.

3) Official price reductions: From March 10th to March 31st, BYD's two main models conducted special limited-time marketing campaigns: Song PLUS customers who place orders were offered a discount of 6,888 yuan for only 88 yuan, while Dolphin customers who place orders can enjoy a deduction of 8,888 yuan for 88 yuan, equivalent to a discount of 8,800 yuan. There are five models in the Song Pro DM-i series, with an official guide price ranging from 140,800 yuan to 165,800 yuan. All can participate in the "88 yuan discount of 6,888 yuan" activity, equivalent to a discount of 6,800 yuan, with the starting price of the car model reduced to as low as 134,000 yuan, and a fully equipped version can be obtained for less than 160,000 yuan. This substantially implements BYD's "the same price for fuel and electric" strategy.

According to BYD's net profit per vehicle of approximately 10,000 yuan, a reduced starting price and subsidy withdrawal may affect the improvement of its current automobile gross profit margin. The only good news is that the price of lithium carbonate is currently dropping rapidly, with a unit price that has dropped to nearly 250,000 yuan/ton. If there is no futures price-locking, it can play a certain hedging role in the price reduction.

Overall, the scale economy path chosen by BYD means that BYD likely will not guarantee pricing in the case of the intensifying competition. BYD will achieve its expense dilution and upstream bargaining power improvement through further sales volume release.

As for BYD's future: internationalization? In 2022, BYD's overseas revenue reached 91.5 billion yuan, increasing by 43% year on year, which seemed insignificant compared to the 120% growth of domestic revenue. Its global auto sales of 50,000 vehicles in 2022 are still far behind those of its peers such as Geely and Changan.

However, as China's price champion, Dolphin still has high hopes for its foray into overseas markets. BYD showcased the BYD ATTO 3 (Song Plus) compact crossover, the BYD Han sedan, and the BYD Tang large SUV at the Paris Motor Show. It has already announced entry into multiple overseas markets, and the latest market is the United Kingdom, a mature market with a new energy vehicle penetration rate of nearly 40%. Based on the delivery pace, the contribution of overseas market sales might need to wait until the second half of 2023.

In addition, a key piece of information was released in the financial report this time for the overseas market stating that at the end of 2022, BYD had assets of 8.1 billion in the United States, mainly for the production and sales of vehicles to expand and develop their automobile business in the United States.

Therefore, there is no doubt that BYD will enter the US automobile market.

Dolphin's Historical Articles:

Financial Report Season

October 29, 2022 Financial Report Review - "Abandoned by Buffett? BYD's Aggressive Performance"

August 31, 2022 Conference Call - "BYD: Digesting Subsidy Reductions with Procurement Pressure, Annual Production to Reach 4 Million Next Year (Conference Call Minutes) - Translated"

August 30, 2022 Financial Report Review - "The Moment of Tearing Labels: BYD to Make a Glorious Turnaround as a "Money Making Machine"?"

April 28, 2022 Financial Report Review - "BYD: Sales Guaranteed, Smoothly Passed the Yearly Assessment"

March 30, 2022 Conference Call - "Black Technology Helps Products Upgrade, BYD's Sales in 2022 are Still Strong (Meeting Minutes)"

March 30, 2022 Financial Report Review - "The Divided BYD: Selling Cars is Easy, Making Money is Hard"

October 28, 2021 Financial Report Review - "There is Nothing Beyond Sales Volume, BYD Almost Fails"

August 28, 2021 Financial Report Review - "BYD: Performance Failed to Meet Expectations, Investment Logic Discounted" Hot Topics

On July 12, 2022, "Did Buffett Sell BYD? The Case Is Solved" was published.

In-depth

On August 10, 2021, "BYD (2): Seeking Stability After the Rampant Rise?" was published.

On July 23, 2021, "BYD: The Best EV Maker Amongst Auto Manufacturers | Longbridge Pacific" was published.

Risk disclosure and declaration for this article: Dolphin Research's Disclaimer and General Disclosure