On May 27, BYD's share price experienced severe shocks in the past two trading days. Hong Kong stocks fell by more than 10%, and A shares also fell for two consecutive days.

Competitors encroach on BYD's hinterland

The direct trigger for this stock price decline was BYD's "strongest in history" promotional policy announced last week-a price cut of up to 34% for the 22 main models. After the discount, the price of the Qin PLUS DM-i smart driving version dropped to 63,800 yuan. The Seal 07 smart driving version even dropped 53,000 yuan from the original price with a "time-limited price" of 102,800 yuan.This is BYD's third large-scale price cut since the end of March, and the intensity and scope are far greater than before.

It is noteworthy that this price cut coincides with the company's year-on-year growth rate of delivery volume in April hitting a four-year low (21%). After excluding the Spring Festival factor, this growth rate is the lowest level since August 2020.The market generally believes that this shows that BYD has to sacrifice profits to maintain market share in the context of slowing sales growth.

Slowing growth and difficulty in achieving sales targets are not enough to panic BYD. The deeper contradiction stems from the qualitative change in the competitive landscape of the industry.

The rapid rise of Geely and other competitors is reshaping the market landscape-Geely Xingyuan models rely on Ningde-era lithium iron phosphate batteries and differentiated configuration to double production from 100,000 to 200,000 in just three months. The monthly delivery volume reached 36,000 units, and cumulative sales surpassed BYD Seagull to become the new king of the small pure electricity market.This close competition forced BYD to adopt aggressive pricing strategies, but at the expense of continued pressure on gross margins.

According to financial report data, BYD's gross profit margin in the first three quarters of 2024 was 21.89%. Although it increased month-on-month, it has narrowed significantly compared with 27% in 2022.Analysts at Morgan Stanley warned that the current price war may continue into the second half of the year, and the industry average price cut may further expand from the current 15%-16%.InvalidParameterValue

On the other hand, inventory pressure and concerns about overcapacity have further exacerbated market anxiety.

BYD's first-quarter financial report showed that its dealer inventory turnover days have climbed from 35 days at the end of 2023 to 52 days, and the inventory of some slow-moving models has even exceeded three months.Behind this is not only the slow sales of the old DM-i models due to the impact of Geely Raytheon's electric hybrid technology, but also the embarrassment that the market demand for the smart driving version of the model fell short of expectations-consumers are weak to pay a premium for the smart driving function of models below 200,000 yuan, and disputes over the practicality of high-speed NOA and other functions have further weakened product competitiveness.

At the same time, BYD's cost-transmission strategy of requiring suppliers to cut prices by 10%, although it eased the pressure of price wars in the short term, it also caused concerns about supply chain stability.An electronic control supplier revealed that if price cuts are implemented based on the existing order volume, its profit margin will approach zero, which may force some small and medium-sized suppliers to withdraw, which in turn affects the stability of parts quality.

The price war rekindled

The traditional off-season is approaching in June, and the automobile industry is gearing up and is about to launch a new round of price wars.

Data from the Passenger Transport Association shows that from January to August 2023, the cumulative price reduction of new energy passenger vehicles reached 127, with an average decrease of 12.7%. Among them, BYD Seal Champion Edition dropped by 40,000 yuan and Xiaopeng G9 official dropped by 60,000 yuan. Promote the overall downward trend of the price band of mid-to-high-end models.This kind of price transmission has significant asymmetric characteristics-according to Bernstein's calculations, the average annual cost reduction rate for single vehicles of top companies reaches 18%, while second-tier brands can only achieve cost optimization of 9-11%.

In terms of multinational car companies, Tesla has adjusted the starting price of the Model 3 rear-drive version in the China market to 229,900 yuan, which is 31% lower than the same model at its Berlin factory in Germany.The price of Volkswagen ID.3 dropped to 125,900 yuan after discounts on terminals in China, which is about 45% cheaper than the European market.GM's response was even more adventurous: its Cadillac LYRIQ Rayge, based on the Autonen platform, split the Super Cruise advanced assisted driving system into a subscription service with an annual fee of 12,000 yuan after an official drop of 60,000 yuan, in an attempt to replicate Tesla's FSD profit model.

The survival strategy of the new force camp is more sample significance.Huawei asked for the launch of the new M7 and cut the price by 40,000 yuan to 249,800 yuan.The zero-running car has adopted the "double fuel tank" tactic in the pricing of the extended range version of the C11-anchoring the price of the basic version at 149,800 yuan to attract attention. At the same time, the actual average transaction price has been raised to 186,000 yuan by optional high-end smart driving kits.This price strategy of "opening low and moving high" turned its gross profit margin positive to 1.8% in the second quarter. In contrast, the NIO ES6 system dropped by 30,000 yuan, but the single-quarter loss expanded to 6.2 billion yuan.What is even more disruptive is BYD's "vertical integration" strategy, which reduces the cost of electronic control systems by 30% through self-developed SiC modules, supporting the Han EV Champion Edition to maintain a gross profit margin of 25% after a price cut of 43,000 yuan.

BYD's valuation logic is slowly shifting

The capital market's valuation logic for BYD is undergoing a subtle shift.

Although the company's revenue exceeded 500 billion yuan and net profit reached 25.2 billion yuan in the first three quarters of 2024, stock price performance and fundamentals continue to deviate.This phenomenon stems in part from the market's stringent requirements for the "marginal growth rate" of growth stocks-when the penetration rate of new energy vehicles exceeded 35%, the industry shifted from a period of rapid growth to a period of saturated competition, and investors paid more attention to whether companies could increase sales while maintaining profitability.

BYD's recent operation to raise HK$43.5 billion through a discounted rights issue in Hong Kong stocks has been interpreted by institutions such as Citigroup as a positive measure to accelerate overseas expansion, but it has also caused some investors to worry about peaking valuations.After the rights issue, the proportion of H shares increased to 40.4%. The dilution effect combined with short-term capital pressure caused market confidence to be frustrated.InvalidParameterValue

The strategic choice of technical routes is also facing challenges.Although BYD's "smart driving equal rights" strategy has decentralized high-end driver assistance systems to 78,800 yuan models, its self-developed "Eye of the God" system adopts a hierarchical strategy in hardware configuration, and the low-profile version only supports high-speed NOA functions, and there is an intergenerational gap with competitors such as Huawei and Xiaopeng.

At the same time, although the company's breakthrough in the field of sodium-ion batteries has brought technical advantages such as a 30% reduction in costs and optimization of low-temperature performance, the mass production scale has not yet been formed, making it difficult to hedge the erosion of profits from price wars in the short term.This timing mismatch between technology investment and business returns makes it more difficult for investors to assess its long-term value.InvalidParameterValue

BYD's solution may lie in overseas markets and high-end two-wheel drives.

Although overseas sales currently account for less than 15%, the 200% growth rate in the European market and the 15% market share in Southeast Asia have shown potential.If we can use HK$43.5 billion in financing to accelerate the construction of localized production capacity and avoid the risks of countervailing investigations in Europe and the United States, the high profit margin of overseas business (5-8 percentage points higher than domestic) is expected to become a new growth pole.In the high-end market, looking up to U8 's sales exceeding 10,000 in August proves the possibility of brand growth, but how to balance the roles of "sales king" and "profit anchor" still requires a more refined product strategy.InvalidParameterValue