Automobile gross margin was lower than expected, but cost control drove net profit to pick up month-on-month. BYD's net profit for 2Q24 was +32.8%/+98.4% month-on-month to 9.06 billion yuan (RMB, same below), after deducting non-net profit of 8.56 billion yuan, or +39.7%/+128.2% month-on-month. 2Q24's revenue was 176.18 billion yuan, +25.9%/+41.0% YoY; of these, the automotive and battery business revenue was 134.08 billion yuan, +21.7%/+51.6% YoY. We estimate 2Q24 ASP to be around 0.135 million yuan, -4.0% month-on-month. In terms of gross margin, 2Q24's gross profit margin was 18.7%, lower than our and market expectations, -3.2 percentage points month-on-month, mainly due to a sharp decline in the gross margin of the automobile business. Among them, the gross margin of the automobile business declined from 28.1% in 1Q24 to 22.4% in 2Q24. We believe it was mainly affected by the blockage of the high-end product structure process and the low export ratio in 2Q24. At the same time, the DM5.0 model was limited by the rise in launch time and sales volume, which was not fully reflected in 2Q24. In terms of cost ratio, 2Q24 sales/management/ R&D expenses were +10.4%/+4.2%/-15.1%, respectively. Expenses were more restrained. The total share of the three expenses in revenue fell from 17% in 1Q24 to 11.6% in 2Q24, and cost control led to a month-on-month recovery in net profit.

Overseas revenue growth is expected to accelerate in the second half of the year and next year as new production capacity begins to be put into operation.

In 2Q24, BYD's share of export sales fell 2.2 percentage points to 19% month-on-month compared to 1Q24, and the share of exports fell to 17.9% in July. We think it is mainly affected by the EU tariff policy and is related to BYD's own overseas layout. This year, BYD has an overseas production capacity of about 0.3 million vehicles, including countries such as Thailand, Brazil, and Uzbekistan. 2H24 Overseas revenue will accelerate. BYD's overseas sales target for this year is 0.5 million vehicles. The management also recently stated that overseas markets will become an important engine for future sales growth. With the implementation of overseas localized production, it is expected that nearly half of future sales will come from overseas.

Purchases were maintained, and DM 5.0 sales and overseas revenue accelerated in the second half of the year. Although the gross margin of the 2Q24 automobile business was lower than expected, we believe it did not reflect the increase in the DM5.0 model. At the same time, 1H24 was affected by the blockage of the high-end product structure process and the low export ratio in 2Q24. Looking ahead to 2H24, it is expected to support quarterly profit improvements as the scale of the DM 5.0 model increases and the share of overseas revenue recovers. We maintain our buy rating and maintain our target price at HK$306.48.