[BEIJING] The fallout is becoming impossible to ignore in the fierce battle among Chinese carmakers.
With BYD reporting a staggering 30 per cent plunge in quarterly profit last Friday (Aug 29), its first decline in over three years, it’s become clear that not even dominant players are safe in the cutthroat battle for market share.
Despite robust overseas sales, BYD’s net income of 6.4 billion yuan (S$1.2 billion) for the three months to Jun 30 fell short of analysts’ estimates for a modest increase. Heavy discounting saw BYD’s gross margin contract to 18 per cent from 18.8 per cent in the first half of 2024, although that figure is still among the top in the industry, exceeding rivals such as Zhejiang Geely Holding Group and Chery Automobile.
The Shenzhen-based giant blamed “industry malpractices” and “excessive marketing” for pressuring its bottom line, an ironic twist considering BYD has been a major driver of the price war, leading multiple rounds of cuts since 2023, including its latest in May. Its most recent discounting campaign prompted the government to warn automakers off “rat-race competition”, saying that price wars can affect supply-chain security and seriously damage the international reputation of “Made-in-China”.
BYD’s stumble comes as a shock given global expansion has gained pace this year, with the brand making major inroads in markets such as Brazil, which accounts for about one-third of its international sales, Australia, Singapore and parts of Europe. Overseas revenue, excluding Hong Kong, Macau and Taiwan, was up 50 per cent in the first six months versus the same period a year ago to 135.4 billion yuan.
Calling the margin shrinkage “scars of competition”, a note published by research firm Sanford C Bernstein over the weekend observed that margin pressure persisted despite the higher overseas sales mix. “Increased promotional efforts didn’t achieve anticipated volume growth,” analysts, including Eunice Lee wrote, adding that higher capital expenditure further weighed on margins. Bernstein maintained its outperform rating but lowered its target price from HK$133 to HK$130. Shares in BYD closed in Hong Kong on Friday at HK$114.40, ahead of the earnings release.
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Outside of gross margins weakening, the company’s net profit attributable to shareholders increased at a slower rate, another sign that profitability is under pressure, while borrowings jumped to 39.1 billion yuan from 28.6 billion yuan as at the end of last year.
Research and development expenses are also rising quickly, up more than 50 per cent year on year, showing the company is leaning heavily into innovation even though margins are tightening. BYD is likely deliberately ramping up spending on core technologies – batteries, electrification and intelligence – as part of its long-term strategy to secure its lead in new-energy vehicles. Arguably, there are fatter margins to be had from premium models such as the Yangwang or Fangchengbao.
The company’s latest financial statements indicate BYD is paying suppliers more quickly than before. “The turnover days of the trade payables and bills payables of the group were at a low level in the automotive industry and further declined during the reporting period as compared to the same period in 2024,” the Aug 29 filing said, without revealing the exact number of days.
Back in 2023, BYD was taking an average of 275 days to pay suppliers, a period far exceeding global industry norms, data compiled by Bloomberg showed.
The company said in June that it would comply with new government rules to pay suppliers within 60 days, a big adjustment that would likely hit its working capital outflows, reducing any flexibility in a downturn.
It may also cause adjustments to other parts of its balance sheet down the line – a report by accounting consultancy GMT Research said that without supply chain financing, BYD’s true net debt would be closer to 323 billion yuan, compared to the 27.7 billion yuan officially on its books as at the end of June 2024.
Nevertheless, the automaking powerhouse is not yet under any serious financial strain and a slower pace of growth may well be more sustainable as the company transitions from industry-disrupting upstart to global giant.
BYD seems to be increasingly turning its attention outside of China, noting that higher profitability there has made its overseas business a key driver for continued growth. “The group has been proactively advancing the planning and construction of additional overseas production capacity to fully prepare for a surge in international demand,” its interim report said.
BYD is “well on track to hit one million units in overseas volumes, ahead of guidance at 800,000”, Bernstein’s Lee said, adding that annual sales, including both domestic and international shipments, are now forecast to come in at around 5.1 million vehicles for 2025. “BYD is our top outperform pick for the sector.” BLOOMBERG
