After reading the 268-page earnings report, I had a lot of respect for BYD

On the evening of March 29, BYD [002594] officially released its 2021 financial report.

For the whole year of 2021, BYD achieved revenue of 216.142 billion yuan, an increase of 38.02% year-on-year; net profit of 3.045 billion yuan, down 28.08% year-on-year; after deducting non-recurring gains and losses, the company's net profit was 1.255 billion yuan, down 57.53% year-on-year.

After the release of the financial report, many shareholders were confused.

What's the situation?

In 2020, 394,000 vehicles were sold, and there was a net profit of 4.2 billion; in 2021, 721,300 vehicles were sold, an increase of 82.8% year-on-year.

With doubts, I also carefully flipped through the 268 pages of the financial report.

After reading it, I was surprised.

The business of BYD listed companies is mainly composed of automobiles, automobile-related products and other products, mobile phone parts, assembly and other products, secondary rechargeable batteries and photovoltaics, of which the automobile business accounts for 52.04% of the total revenue of listed companies.

Automobile manufacturing relies on scale effect to make money, and BYD's car sales will increase significantly in 2021, and it is impossible not to make money.

In 2021, the operating income of automobiles, automobile-related products and other products was 112.489 billion yuan, an increase of 33.93% year-on-year, breaking through the 100 billion mark for the first time; operating costs were 92.927 billion yuan, an increase of 47.90% year-on-year; gross profit margin was 17.39%, down 7.81% from the same period last year.

Looking at the contract liabilities, it was 14.933 billion yuan in 2021 and 8.186 billion yuan in 2020, an increase of 6.747 billion yuan, which belongs to the total amount of product contracts that have not yet completed product delivery. At the investor meeting, BYD revealed that the cumulative number of undelivered orders has reached 400,000 units, and it takes 3-5 months to pick up the car.

It can be seen that in the auto business alone, BYD has made a lot of money, and even raised the price a little to make more profits, but BYD did not do so, but took the initiative to reduce the gross profit margin, set a strategic price, and ensured that its products (mainly DM-i models) have a crushing competitive advantage. In 2021, the sales volume of new energy vehicles exceeded 600,000 units, a sharp increase of 218.3%, which also shows that BYD's price tactics are quite successful.

In addition, the revenue of mobile phone components, assembly and other products and second-charge batteries and photovoltaic businesses also increased by 43.99% and 36.27%.

So the question is, where will the money be spent in 2021?

BYD actively expanded during the industrial downturn

Buffett said: "I am afraid when others are crazy, and I am crazy when others are afraid." ”

BYD in 2021 seems to be practicing such a creed.

According to the financial report, in 2021, the total number of BYD employees increased by 63,906, and the number of employees at the end of the reporting period reached 288186!

The salary payable to employees is 1 billion yuan more than in 2020!

There are 6 important projects under construction!

In 2021, BYD's fixed assets were 61.221 billion yuan, an increase of 12.16% year-on-year; the construction in progress reached 20.277 billion yuan, a significant increase of 14.165 billion yuan over the same period in 2020.

After completion, BYD will expand from the current three production bases to nine production bases.

This is the main reason why BYD's income does not increase profits, and the money is used for expansion.

In 2021, all walks of life are not easy, there are many companies in the layoff contraction, open source and throttling, while BYD has chosen to actively expand against the trend, is this crazy?

Not long ago, BYD Chairman and President Wang Chuanfu gave a keynote speech at the China Electric Vehicle 100 Forum (2022), and there is a paragraph that explains why BYD is so impatient.

"The development of new things has never been equal, from black-and-white television to color television, from feature phones to smart phones, that is, in just a few years, the transformation has been completed, and the speed and efficiency of new things in the Chinese market are faster than in foreign countries." "The replacement of fuel vehicles by new energy vehicles will only be fast, not slow." We have all gone through the process of electrification of public transport, and the more we end up, the faster the speed of change is beyond imagination, and the same is true for private cars. "By the end of this year, it is expected that the penetration rate of new energy vehicles in the mainland will reach 35%."

BYD believes that the Chinese market is only racing against the clock, and the ban on pure fuel vehicles for new energy vehicles may be in recent years.

Just on April 3, BYD announced that it would stop the production of fuel vehicles from March according to the needs of strategic development. In the future, BYD will focus on pure electric and plug-in hybrid vehicles in the automotive segment.

Why stop selling pure fuel vehicles now, instead of a year ago? Behind this action is that BYD has completed the replacement of its own pure fuel vehicles through plug-in hybrid DM-i models.

At the recent investor meeting, BYD is more conservative in predicting sales of 1.5 million vehicles in 2022 (for comparison, Geely will sell 1.32 million vehicles in 2021 and Great Wall Motor will sell 1.28 million vehicles); if the supply chain is good, it will hit the sales target of 2 million vehicles.

All this shows that BYD is very optimistic about the future prospects of new energy vehicles.

BYD is in the early stages of a "strong product life cycle."

BYD's expansion against the trend shows that on the one hand, it should be social responsibility as an enterprise. On the other hand, for BYD, it is a once-in-a-lifetime opportunity, and if it is a good year, it is difficult to recruit so many people.

But this is a prerequisite, that is, BYD has insisted on creating its own unique system capabilities for many years, and the research and development investment over the years has transformed the results, so that BYD is currently in the early stage of the "strong product life cycle".

The development of any enterprise is cyclical, and the cyclicality of automobile companies is particularly obvious, because R & D investment takes time to produce results, and it takes time for this achievement to be transformed into a commodity sought after by the market. When blockbuster results meet the rapid growth of the market, sales will soar.

In 2021, the new energy vehicle market began to explode, and the sales of new energy passenger cars reached 3.521 million units, with a penetration rate of 13.4%, an increase of 8% year-on-year. In 2021, BYD's sales of new energy vehicles also hit a new high, exceeding 600,000 units, an increase of 218.3% year-on-year; the market share reached 17.1%, an increase of nearly 8% during the year.

BYD's sales of new energy vehicles have increased significantly, on the one hand, because of the market outbreak, on the other hand, it has launched more technical content and more differentiated products, which have won market recognition.

In the field of plug-in hybrid vehicles, BYD launched the DM-i super hybrid technology, equipped with a 43.03% Snap Cloud 1.5-liter engine with a thermal efficiency and an EHS mixing system with a maximum efficiency of 97.5%, so that the DM-i model, even in the state of power loss, the driving experience is like a pure electric car, dispelling people's concerns about buying new energy vehicles. It is worth mentioning that the Qin PLUS DM-i, Song PLUS DM-i and Tang DM-i equipped with DM-i super hybrid have achieved the same purchase price as the same level of fuel vehicles.

In the field of pure electric vehicles, blade batteries have reshaped the industry's perception of lithium iron phosphate batteries with technological innovations such as super safety, super endurance, and super strength. In April 2021, BYD announced that all of its new energy passenger cars are fully equipped with blade batteries, which will upgrade the safety standards of all series and further enhance the unique competitiveness of its products.

In addition, the exclusive platform for pure electricity, e-platform 3.0, as the cradle of the next generation of high-performance intelligent electric vehicles, combines the four advantages of intelligence, efficiency, safety and aesthetics, greatly improving the intelligent driving experience. In August 2021, Dolphin, the first model equipped with the e-platform 3.0, was launched, and monthly sales climbed all the way.

According to the financial report, in 2021, BYD's R&D investment was 10.627 billion yuan (of which 2.6 billion was capitalized), an increase of 24.20% year-on-year; R&D expenses were 7.99 billion yuan, an increase of 7.05% year-on-year; the number of R&D personnel was about 40,400, an increase of 31.52% year-on-year. The cost of research and development is much higher than the cost of sales, and unlike the new forces of car manufacturing that put more money into marketing, BYD is a typical "science and engineering man".

According to IFI 250: Largest Global Patent Holders, a list of the world's top 250 patent holders released by IFI Claims, as of January 4, 2022, BYD ranked 66th with 12,246 patents, ranking first among Chinese car companies.

Blade battery, DM-i and DM-P technology, e-platform 3.0, IGBT chip, DiLink, DiPilot... These one after another research and development of dry goods, all prove that BYD's scientific research and technology level is constantly rising.

BYD is no longer a follower in the field of automotive technology research and development, in the most core and cutting-edge areas of this industry, BYD has not only achieved domestic leadership, but also ranked among the world's advanced ranks.

"Vertically integrated" supply chains are an extremely important competitive advantage for BYD

Another big reason why BYD dares to expand against the trend is that it is different from the operation mode of horizontal integration of other domestic car companies, BYD believes that the supply chain system is one of the most important supports for the operation of the entire automotive industry, so BYD has always attached great importance to the construction of the supply chain and the "vertical integration" of core components.

BYD has a layout in the key industrial chain of the middle and lower reaches of new energy vehicles, such as the upstream primary material supply chain such as lithium ore; the battery manufacturing, motor, electronic control, and IGBT in the middle reaches; and various production and sales supply chains in the downstream.

At present, BYD's vertical integration level is comparable to Toyota in the field of fuel vehicles. Moreover, through the implementation of the "vertical mode", BYD has achieved effective cost control and avoided the risk of "stuck neck" to the greatest extent.

For example, the recent serious shortage of global automotive chips has forced most car brands to reduce and be forced to suspend production. The entire automotive industry has been hit hard, but BYD has not been affected, because "I have a core and my heart is not panicked."

It can be seen that BYD has a long-term consideration at the beginning and has formulated a long-term strategy for this purpose.

According to the financial report, BYD's investment in the associated company increased to 3.5 billion yuan, and the investment in the joint venture increased to 570 million yuan. From 2020 to the end of 2021, BYD invested in high-end manufacturing companies focusing on new energy vehicles, chips, and batteries, and invested in 19 companies in two years.

After its own strength has become stronger, BYD has now begun to export technology to the entire industry.

According to reports, the Hongqi brand has used BYD's blade batteries and began official loading in the second half of 2021. Skyworth Auto uses BYD's DM-i super hybrid technology and will be officially launched at the end of August this year.

From low-end, mid-end to high-end, from research and development, supply to production, from integration, opening up to development, it is not difficult to see that BYD has the same as Huawei in the mobile phone industry, and has its own competitiveness from the top to the end. Looking at the world, BYD is the only car company with high-quality power battery research and development and manufacturing capabilities. This ability, even Tesla can not compete with.

brief summary

After reading the financial report, I have great respect for BYD as a national enterprise.

But as a competitor, I am very anxious, in another year, BYD will become the opponent that all new energy vehicle companies fear.

For BYD, the advent of the electrification era is a once-in-a-lifetime opportunity for expansion; it is also what they have been looking forward to since the launch of F3DM at the end of 2008.

Therefore, BYD's choice to actively expand against the trend in 2021 is not a big gamble, but the improvement of the system's capabilities and the prediction of the future market.

Of course, the large-scale expansion strategy will make BYD bear heavier financial burdens, and once it fails to achieve business expectations, business operations and cash flow will fall into passivity.

This "river of risk" of BYD is whether the new energy automobile industry can sustainably maintain a favorable market position.

Text | Li Jianbo

(This article is the author's personal opinion only and does not represent the position of DearAuto.) )

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Mr. Li Guoyong of Guangdong Green Law Firm