Key points of investment:
At the beginning of the year, BYD launched the Honor model, and orders increased dramatically, but some market opinions believe that BYD's continued price cuts will affect overall profits, and there will be insufficient long-term room growth in the future. From the perspective of the 2023 annual report, this report answers three questions: 1) why bicycle revenue declined in 2023; 2) why profitability is still improving in the context of declining bicycle revenue; 3) looking at the quality of BYD's statements in terms of depreciation and expenses.
Due to falling raw material prices, price wars, and model cycle effects, bicycle revenue in 2023 fell year on year. BYD achieved revenue of 602.32 billion yuan in 2023, an increase of 42.0% year on year; passenger car sales volume was 3.013 million units, up 67.7% year on year. Passenger bike revenue fell from 152,000 yuan in 2022 to 135,000 yuan, mainly due to: 1) declining raw material costs, driving down the company's pricing strategy; 2) the launch of the Champion Edition, which led to a decline in overall prices. 3) Strong sales of new models drive growth in mid-range and low-end sales.
Due to the scale effect, there was a high increase in high-end and export models, achieving a double increase in gross profit margin and net profit margin. In 2023, BYD achieved net profit of 30.4 billion yuan to mother, an increase of 80.72% over the previous year. Net profit margin to mother was 5.0%, up 1.1 pct year over year. Among them, the gross margin of the automobile division was 23.0%, an increase of 2.6 pct over the previous year, and profitability continued to increase. The main benefits are: 1) the capacity utilization rate remains at a high level, and the scale effect brought about a marginal cost improvement; 2) the rapid increase in high-end + export sales in 2023. Currently, the pace of BYD's capital expenditure is slowing down, new projects are being added, capital expenditure has declined, and large production capacity is being invested or nearing completion. The pressure on depreciation and amortization is expected to ease in the future, which is conducive to the release of the company's subsequent performance.
Large depreciation and high R&D expenses affect short-term profits. We are optimistic that the medium- to long-term profit level will increase, and BYD will change accounting estimates in 2023 to accelerate depreciation of fixed assets such as machinery and equipment. After the change, the depreciation rate in 2023 was 14.5%, an increase of 5.0 pct over the previous year. In terms of R&D, R&D invested a total of 39.92 billion yuan in 2023, an increase of 97.4% over the previous year. Of these, R&D expenditure that met the capitalization conditions was 340 million yuan, and the capitalization rate was only 0.9%. There is no subsequent amortization burden, which is conducive to improving medium- to long-term profit levels.
Profit Forecasts, Valuations, and Ratings
We expect the company's revenue for 2024-2026 to be 8130.6/9529.8/1162.64 billion yuan, respectively, with year-on-year growth rates of 35.0%/17.2%/22.0%, net profit to mother of 410.8/520.3/68.56 billion yuan, year-on-year growth rates of 36.7%/26.7%/31.8%, EPS of 14.1/17.9/23.6 yuan/share respectively, and a 3-year CAGR of 31.7%. Given that the company is a global leader in new energy, with excellent technical strength and continuous iteration, the domestic sales market share is leading and is expected to be maintained. Export and high-end sales open up space, and depreciation and amortization pressure are expected to be reduced. Referring to comparable company valuations, we gave the company 20 times PE in 2024, with a target price of 282.22 yuan to maintain a “buy” rating.
Risk warning: 1. Industry competition intensifies; 2. Prices of upstream raw materials have increased; 3. Overseas freight prices have risen.