"Price Butcher" BYD: The dawn is not far away

BYD (002594.SZ) released its results for the fourth quarter of 2023 on the evening of March 26, Beijing time, after the Hong Kong stock market. The main points are as follows:

1. The embarrassment of high-end automobiles: the sales structure of ultra-high-end Yangwang and Equation Leopard sales contribution is too small, and the sales proportion of high-end Denza, Tang and Han models with relatively high prices has declined, and the revenue performance is a serious deflation of unit prices, compared with the third quarter when the price has dropped, the price has fallen by 3,000.

2. Fortunately, the gross profit margin is not stretched: although the company announced the price reduction of some models, but fortunately, there is a purchase bargaining under high sales + battery natural cost reduction, and the gross profit margin of BYD Electronics in the fourth quarter is still as high as 25.1% (including battery business), although it is 0.6 percentage points lower than the third quarter, which is definitely a brother-level existence among the many OEMs that Dolphin Jun sees, you must know that Tesla is already below 20%.

3. Profits fell back to "boots landing": the actual profit in the fourth quarter was 8.7 billion, which was basically no gap with the company's previous announcement, but in the case of selling more than 100,000 vehicles in the fourth quarter, the profit was lower than the 10 billion + profit in the third quarter;

4. The backlash of intelligent shortcomings: R&D expenses in the fourth quarter increased by 90% year-on-year, and because BYD Electronics' R&D expenses are still decreasing, the actual R&D expenses of automobile-related businesses should be more than 100% growth.

From the perspective of R&D expenditure structure, whether it is materials (may be server computing power), heads, and per capita salaries, it is likely that after a year of high-end, it is realized that intelligence may be a course that must be taken in the process of high-end, so R&D has begun to make up for shortcomings.

Dolphin's overall view:

Since the announcement on January 30 has smashed the company's stock price down, the market has known that the performance in the fourth quarter will be relatively bad, and in the fourth quarter, in terms of the three key indicators of actual performance: unit price, gross profit margin and three fees, the gross profit margin can have a 25% performance in the case of a mess in the industry, and it can only be said that a brother is a brother.

The deflation of unit prices and the expenditure of R&D expenses respectively reflect two serious shortcomings of BYD as a brother: a) high-end, especially high-end pure electric vehicles, has not made progress; b) Intelligent shortcomings are made up.

And in 2024, these two shortcomings are still the key shortcomings that BYD still needs to make up. The company also stated the goals of Denza and Formula Leopard in 2024, and in the third quarter, BYD will make high-end intelligent driving an option for 200,000+ models and a standard for 300,000+ models.

In these two directions, Dolphin Jun can only say that he can only listen to his words and watch his deeds, if there is still time to make up for the shortcomings of intelligence, then it is difficult to say whether the high-end can succeed.

In addition, in the short term, the first quarter is still behind BYD's sharp price reduction is a stage of clearing inventory and reducing channel moisture, coupled with the fact that the sales volume in the first quarter is relatively weak (the sales volume is almost halved from the previous quarter), the performance in the first quarter will inevitably collapse more powerfully.

But despite this, if you take a slightly longer view, Dolphin Jun believes that compared to BYD waiting for the release of inventory risks in 2023, then Dolphin Jun will pay more attention to BYD's reversal opportunities in 2024:

a) BYD took the initiative to digest channel inventory, and from January and February, the terminal retail sales volume continued to be higher than the wholesale sales volume, and the social inventory risk has been gradually resolved;

b) After clearing the channel inventory, BYD can use the advantages of higher gross profit margin of automobiles + DM 5.0 in July and August (known as 2.9L fuel consumption per 100 kilometers and a range of more than 2,000 kilometers), 10-200,000 price band, and price its fuel vehicles by reducing prices to accelerate the clearance of opponents;

c) Overseas expansion is a continuous increase: this year's target is 500,000 units, and last year's plan is less than 250,000 units.

At present, the company's market value corresponds to about 22 times the PE in 2023, and the valuation can only be said to be not low compared to the performance that may be further rotten in the short term, and from the perspective of dividends, the dividend of 9 billion is relative to the market value of more than 600 billion, the annual profit of 30 billion, the annual operating cash flow of 170 billion, and the monetary funds in hand of 110 billion.

But Dolphin Jun once again emphasized that if you look a little farther, it is actually easy to see that the dawn of BYD is ahead. In 2023, investors in BYD should pay attention to chasing high risks, and in 2024, we should pay more attention to reversal opportunities.

PS: BYD is a company with a complex business structure, covering automobiles, mobile phone parts and assembly, secondary rechargeable batteries and photovoltaic businesses, but Dolphin Jun completed BYD's in-depth article "BYD: The most capable of making battery OEMs", "BYD: After the skyrocket, wealth and stability" have helped you find out the core, the business is too much and too miscellaneous but the core is still looking at the car business, you need to understand this company, you can first go back to our above two analysis.

Here's the detailed analysis

1. Automotive business

1. The gross profit margin of the automotive business decreased slightly sequentially in the quarter

BYD's gross profit margin of the automobile business reached 25.1% in the fourth quarter, down 0.6% from the previous quarter, slightly exceeding market expectations of 24.5%.

From the perspective of the bicycle economy (including the rough estimation of the battery business), the gross profit margin that declined quarter-on-quarter in the current quarter is split:

1) Bicycle price: The unit price in the fourth quarter was still under pressure, with a bicycle price of 150,500 yuan, a slight decrease of 2,600 yuan compared with the third quarter

Bicycle prices continued to decline during the quarter, mainly due to:

a) Price reduction promotion: At the end of the year, BYD will reduce the price of models such as Song, Qin, Hantang and other models by 1-15,000 yuan in November, and reduce the corvette 07, dolphin, destroyer 05 and other models by 0.5-18,000, a decrease of 5-10%.

b) The proportion of high-end sales structure has declined, and the proportion of mid-to-high-end models with more than 200,000 yuan represented by Han, Tang, Denza, Yangwang, Equation Leopard, etc. accounted for only 21.5% in the fourth quarter, down 0.5% from the previous quarter

However, BYD's overseas process accelerated, and the proportion of overseas models (higher than the domestic sales models) increased by 1.6% to 10.3% month-on-month, which to a certain extent hedged the above factors, and finally the price of a single car fell by 2,600 yuan month-on-month.

2) Bicycle cost: The cost of a bicycle in the fourth quarter was 113,000 yuan, down 1,100 yuan from the previous quarter

The decline in the cost of a single vehicle in the quarter was not significant, mainly due to the scale effect brought about by the increase in sales volume and the natural cost reduction of lithium carbonate

3) Gross profit of a single car: the price of a single car is 151,000 yuan, the cost of a single car is 113,000 yuan, and BYD gross profit of selling a car in the last four quarters is 38,000 yuan, a decrease of about 1,500 yuan from the previous quarter, and the gross profit margin of the overall car sales (including battery business) fell from 25.7% in the previous quarter to 25.1% in the fourth quarter.

2. Q4 sales hit record highs, but there are "problems"

The company's automobile sales in the fourth quarter were 945,000 units, an increase of 38% year-on-year and 14.7% quarter-on-quarter. The increase in sales in the fourth quarter was mainly due to BYD's price cuts, of which the main contribution to the increase came from the Seal, Seagull and Song models.

However, taking a closer look at the problems behind the "explosive sales", BYD is still facing a continuous decline in its overall market share in the fourth quarter, from 34% in the third quarter to 31% in the fourth quarter, mainly due to the continuous decline in the market share of hybrids, and the pure electric market share is only maintained by the low-cost car Seagull:

1) The pressure of hybrid competition is high, and the market share is declining: BYD's first-mover DM-i technology advantage is being equaled by new entrants, and the explosion of BYD's affordable hybrid models such as Leap, Geely Galaxy, and Deep Blue has further eroded BYD's hybrid share. The market share of hybrid vehicles in the fourth quarter still decreased significantly, from 51% in the third quarter to 42% in the fourth quarter.

2) Although the market share of pure electric vehicles can be maintained at 26%, it mainly relies on low-cost cars Seagull to contribute sales, but it does not bring any profit increment.

From the fourth quarter, in addition to Denza D9, BYD's 300,000 yuan high-end new energy vehicle layout is relatively weak, and the sales of new cars N7 and N8 are less than expected.

On the whole, the sales of Denza + Yangwang + Formula Leopard models in the fourth quarter only increased by 0.2% to 4.5% quarter-on-quarter, and the difficulty of high-end breakthrough is still a "problem" after the explosion.

At the same time, the inventory backlog of dealers is also another problem after the explosion, BYD's retail sales in the fourth quarter and the actual wholesale sales (after excluding exports) The difference reached 120,000 units, which implies that BYD's inventory backlog in dealers is serious.

3. Destocking in the first quarter, travel lightly to welcome the new product cycle

From January to February, due to the Spring Festival holiday and the off-season of sales, the company took the initiative to reduce inventory in January and February to accelerate the clearing of terminal inventory.

Although cumulative sales from January to February were 324,000 units, a decrease of 6% y/y, cumulative sales were 264,000 units excluding exports, while retail sales totaled 290,000 units from January to February, and about 27,000 units were destocked from January to February.

Since mid-February, BYD has rapidly launched the 2024 model, and a number of new Honor Edition models have been launched, and the price has further dropped compared with the guide price of the champion model. BYD has achieved the ultimate cost control with the ultimate scale effect + vertical integration layout, and has become a "price butcher" in the price band of 5-200,000 yuan, and the guide price of the glory version is generally 1-30,000 yuan compared with the 23 champion editions, of which the starting price of BYD Qin DM-i has dropped to 79,800 yuan, truly realizing the "low electricity than oil" and accelerating the seizure of the fuel vehicle market.

BYD with the Glory version of the ultimate cost performance to further strengthen the competitiveness of the model terminal, with the gradual adjustment of inventory in place, the follow-up BYD sales continue to pick up, BYD new product cycle opened, 3.11-3.17 weekly sales have quickly recovered to 56,000 units, is expected to recover to 20-250,000 units in March.

Although the sales volume in the first quarter of 24 is expected to be 50-550,000 units, compared with the fourth quarter of last year, the previous quarter decline of 45-500,000 units, the capacity utilization rate is expected to reach less than 50%, which will cause the depreciation and amortization of the single car to rise further, and the discount on the old car will also drag down its gross profit margin, and the performance is expected to be under pressure in the first quarter of this year, but in the second quarter, with the opening of the new product cycle, the performance will come out of the bottom, and it is necessary to skip the short-term impact of the first quarter to see the performance after that.

The market is also worried that the launch of the Glory version of another price reduction will affect the gross profit margin, but with reference to last year, under the cost reduction advantage of BYD's vertical integration + extreme scale effect, the gross profit margin in the second and third quarters of last year's same champion model price reduction actually continued to increase month-on-month. In addition, this price reduction is actually a recovery of the dealer's discount, and the actual reduction is lower, so there is no need to worry too much about the impact on the gross profit side.

4. The process of going overseas has been accelerated, and it is expected to contribute 40-500,000 sales increments in 24 years

BYD has two directions to improve its profitability: high-end and going overseas, and the high-end breakthrough in the fourth quarter is still facing problems, but the process of going overseas has accelerated.

BYD's overseas sales in the fourth quarter were 97,000 units, up 37% from 71,000 units in the third quarter, and the proportion of overseas sales continued to increase from 8.6% in the third quarter to 10.3% in the fourth quarter.

Although BYD's main market for going overseas, the European market will face the trouble of EU countervailing investigation, and there is greater resistance to expanding market share.

However, the company's overseas production capacity can play a vital role, BYD in the rest of Thailand/Brazil/Uzbekistan/Hungary new production capacity is expected to start production in 24 years (including Brazil/Thailand each 150,000 production capacity), 24 years as more models accelerate overseas and new production capacity to start production, is expected to achieve exports of 40-500,000 units in 24 years.

5. Revenue was lower than expected due to lower unit prices

After excluding BYD Electronics, BYD achieved revenue of 142.2 billion yuan in the fourth quarter of 2023, a year-on-year increase of 18.2%, lower than market expectations of 158 billion yuan.

Specifically, the company's car sales increased by 38%/15% year-on-year/month-on-month in this quarter, but the revenue of a single car decreased by 14.5%/1.7% year-on-year/month-on-month, and the revenue of a single car also fell from a high of 176,000 yuan in the fourth quarter of last year to 150,000 yuan in this quarter.

6. R&D and selling expenses increased significantly during the quarter

1) R&D expenses: intelligent high-end to make up for shortcomings

R&D expenses in the fourth quarter were 14.6 billion, an increase of 3.5 billion from the previous quarter, significantly exceeding market expectations of 11.4 billion, and the R&D expense rate was 8.1%.

In the first half of the new energy vehicle race, BYD has been very mature in electrification, building core technology advantages in electrification such as batteries, motors, and electronic controls, as well as having an electric e3.0 platform and a hybrid DM4.0 dual platform to quickly launch new models to the market.

At the same time, BYD has a strong vertical integration capability, and more than 75% of the parts are self-made by BYD, so that BYD has a gross profit margin that is unrivaled (BYD can earn gross profit from raw materials to vehicle assembly and sales)

But in the second half of the arms race around intelligence, BYD is significantly behind other competitors. The reason for the backwardness is mainly that the price segment of most of BYD's models is below 200,000 yuan, and intelligence at this price end is not just needed, BYD's strategic focus is more on cost control, and the market's valuation of BYD's intelligent part of the bonus is therefore conservative.

However, with the launch of high-end models Denza, looking up and Formula Leopard, intelligence is also the focus of competition among mid-to-high-end models, and intelligence is the homework that BYD must make up. In the third quarter of this year, BYD is expected to achieve 200,000+ models of high-end intelligent driving options, and 30W+ models of high-end intelligent driving standards, which is also conducive to BYD's high-end breakthrough.

2) Marketing expenses: the direct sales model adopted by high-end brands + sales volume at the end of the year has further increased sales expenses

The sales expenses in the fourth quarter were 7.98 billion, an increase of 1.6 billion from the previous quarter, slightly exceeding the market expectation of 6.2 billion.

At present, BYD's Dynasty and Ocean Network models mainly adopt the dealer model, of which dealers account for nearly 90%, but BYD mainly adopts the direct sales model for its high-end models Denza, Yangwang and Equation Leopard, and it is expected that the sales expenses will further increase due to the construction and expansion of high-end brand stores.

At the same time, in the fourth quarter, the company also invested a higher amount of marketing expenses in order to rush sales, and issued red envelopes to all stores that completed the sales task according to the amount of pick-up * 666 yuan.

3) Management costs: reasonable control and efficient management

The management expenses in the fourth quarter were 3.18 billion, down 280 million from the previous quarter, lower than the market expectation of 3.61 billion.

7. Bicycle net profit declined

Core operating margin of 5.3% in the fourth quarter decreased 2% sequentially compared to the previous quarter, mainly due to the sequential decline in gross margin and the surge in R&D in the quarter, which resulted in an increase of 1.4% in operating expense ratio.

BYD's net profit declined in the fourth quarter, in addition to the decline in operating profit margin, asset impairment losses and credit impairment losses increased, and finally BYD bicycle (including energy business) made a net profit of 8,000 yuan, and the profit margin has fallen from 7.5% in the previous quarter to 5.6% in this quarter.

Second, the high growth of the energy business mainly depends on the volume of energy storage, and the growth of power batteries has slowed down

BYD's installed capacity of power batteries and energy storage (including self-supply and external supply) has reached 50GWh in the fourth quarter, a year-on-year increase of 54%, and the energy business still maintains a high growth rate.

In the fourth quarter, energy storage battery shipments were 18.5GWH, an increase of 194%/52% year-on-year/month-on-month, but the growth rate of the power battery business slowed down, and the power battery shipments in this quarter were 31.5GWH, only achieving a year-on-year/month-on-month increase of 21%/10%, which was lower than the growth rate of new energy vehicle sales in the same period, and the market share of power batteries was also declining.

3. BYD's electronics business continued to perform strongly

In the fourth quarter, the mobile phone parts and assembly business with BYD Electronics as the main operating body achieved revenue of 37.8 billion yuan, a year-on-year increase of 5%, higher than the market expectation of 35.3 billion.

In the fourth quarter, BYD Electronics' gross profit margin was 9%, a decline from the previous quarter, but it was still higher than the market expectation of 8.1%, but it has come out of the trough period at the beginning of this year.

The growth on the revenue side was mainly due to:

1) In terms of consumer electronics, according to IDC, global smartphone shipments increased by 8% year-on-year in 4Q23, and the company's Android assembly and parts business is expected to increase year-on-year under the recovery of market demand, as well as the increase in the share of overseas major customer business, which will promote the growth of consumer electronics business

2) Growth of automotive business: Thanks to the growth of new energy vehicle sales of parent company BYD, as well as the expansion of auto parts categories driven by a large number of R&D to promote technological innovation, the increase in shipments of accessories related to intelligent driving, and the increase in the value of parts business.