BYD Stock: Surprisingly Resilient Q2 Earnings But Challenging Outlook (OTCMKTS:BYDDY)

Investment Thesis

We remain cautious on BYD despite its continued top-line and bottom-line growth in Q2 and its resilient margin. That’s because industry conditions have deteriorated further recently, with total vehicle sales down year-over-year for two straight years Monday. The industry-wide surge in EVs won’t last long, as EV penetration surpassed 50% in July. BYD’s lofty valuation of 21x 2024 PE has already priced in its industry leadership, and it could face downward pressure once EV sales start to decline.

Introduction

BYD (OTCPK:BYDDY) (OTCPK:BYDDF) is a Chinese electric vehicle manufacturer. In 2023, the company sold more than 3 million cars globally, surpassing Telsa as the world’s largest electric vehicle manufacturer by volume. The company also produces batteries, auto components, automotive electronics and power semiconductors, making it one of the cheapest car makers in the world.

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

Thanks to the launch of the highly fuel-efficient 5th generation DMI engine for plug-in hybrid vehicles (PHEVs), its PHEV sales rose 40% year-on-year in 1H24, a significant recovery compared to a 9% year-over-year decline in the previous first two months. at model launch. This new product allowed BYD to maintain its share in a highly competitive market.

Chart 1: BYD car sales in 1H24

Analysis of 2Q results

BYD reported solid results in Q2, with revenue up 26% year-over-year and net profit up 30% year-over-year.

Chart 2: Summary of BYD’s second quarter results

The results are roughly in line with sell-side forecasts, but much stronger than those from EVs such as Li Auto. Even Tesla suffered a 20% year-over-year decline in its China sales in Q2.

Chart 3: Tesla 2Q sales in China down 20% from last year

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

The outlook remained challenging in the domestic market

While BYD outperformed its like-for-like performance in 1H thanks to better cost control and superior products, it is unlikely to be immune to weak domestic demand and intense price competition forever.

Total car sales fell year-on-year for two consecutive months in June and July, despite sales of electric vehicles increasing by more than 30% year-on-year. The divergence was due to foreign brands (mostly internal combustion engine vehicles) being pushed out of the Chinese market by domestic electric vehicle manufacturers due to stiff 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 reach its goals of 500,000 overseas sales in 2024, reaching 270,000 in the first seven months. However, the relatively large overseas market margin accounted for only 14% of its total sales. Therefore, its positive impact on the margin will be limited. In addition, as the EU imposed an additional 17% tariff on BYD, while the US and Canada applied a 100% tariff, export businesses also face headwinds until the production base of over increase of BYD is in operation.

ASSESSMENT

BYD is currently trading at a P/E ratio of 21x 2024, which seems a bit of a stretch for an automaker. With the exception of Tesla, most major automakers trade at single-digit P/Es. We recognize that investors are willing to pay a premium for BYD because it is a pure play in the EV industry, which has seen higher growth compared to the overall auto market. However, with EV penetration surpassing 50% in July 2024, its faster growth than the industry may not be sustainable for too long, in my opinion.

Chart 4: BYD assessment

Chart 5: Comparison of BYD’s rating with other car manufacturers

risks

Risks to our call include the government rolling out more tax breaks and subsidies for electric vehicle buyers, which looks unlikely in the near term due to China’s ongoing negotiations with the EU on auto subsidies.

The cooperation between BYD and Huawei on self-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 Q2 result but fell short of market expectations. In particular, its margin remains stable, despite large price cuts. Net profit growth of 30% also outpaced revenue, indicating positive operating leverage and tight control over expenses. The outlook remains challenging for both the EV industry and BYD given weak consumption and sustained industry overcapacity. Therefore, we remain bearish on the stock.

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