In 2Q24, BYD's total revenue rose by 25.9% YoY, lower than sales volume growth of 40.2%, primarily because the rollouts of cheaper Rongyao editions and weakening product mix pulled back blended ASP. Despite weaker gross margin that dipped by over 3ppts QoQ, net income surged 32.8%YoY and roughly doubled QoQ to RMB9.1bn in 2Q24, helped by stronger OPEX control and an increase in other income. Heading into 2H24, we anticipate the further launch of new models and capacity bottleneck release for DM5.0 may drive September sales volume to break 400k units. Meanwhile, thanks to higher MSRP/margin of DM 5.0 products than corresponding Rongyao versions, we expect earnings per vehicle set to further improve from 2Q24 at RMB8.5k. We maintain BUY with higher TP at HK$265.00, equivalent to 20x 2024E P/E.

Key Factors for Rating

2Q24 revenue growth well below sales volume growth dragged by ASP decline due to pricing campaign and weakening product mix. In 2Q24, total revenue rose by 25.9% YoY to RMB176.2bn, with the revenue of BYDE (285 HK, BUY) largely in line at RMB42.1bn. If excluding BYDE, the remainder increased 21.7% YoY to RMB134.1bn, much below sales volume growth of 40.2% YoY for the period, dragged by lower revenue per vehicle that dipped 13.2% YoY to RMB 136k amid the company's new round of pricing campaign. Since late February, the company successively launched Rongyao versions for major models with MSRP mostly slashed by RMB 20-30k, while new-generation DM-i products that have been launched since late May still contributed limited proportions in 2Q24.

2Q24 gross margin missed on deteriorated product mix and aggressive price reduction despite larger sales scale. The overall gross margin dipped by over 3ppts QoQ to 18.7%, below expectations. If excluding BYDE whose gross margin flattened QoQ, gross margin of automobiles and other businesses declined 5.7ppts QoQ to 22.4% in 2Q24, which could be explained by (i) deteriorated product mix with larger sales proportion of low-margin entry-level models, (ii) extra start-up costs relevant to PHEV models featured fifth-gen DM-i technology during the early production ramp up stage (i.e. Qin L DM-i, Seal 06 DM-i).

Net income largely in line with mixed picture on weaker GPM but stricter OPEX outlay control. Despite lower GPM, the OPEX outlay was under stringent control in 2Q24 with OPEX ratio narrowed to 11.6%, against 17.0% in 1Q24 and 12.3% in 2Q23. In addition, other income (mainly government subsidy) surged to RMB 3bn (vs. RMB 1.8bn in 1Q24 and RMB1.2bn in 2Q23). All these combined led to net profit up 32.8% YoY and doubling QoQ to RMB 9.1bn in 2Q24.

Cash flow stayed negative with the net operating cash flow sinking to three-year low on inventory hike. In 2Q24, the company's net cash flow from operating activities sunk to RMB4.0bn as three-year low, mostly due to an increase of finished goods and trade receivables resulting from mismatch of deliveries and production. Coupled with escalated cash outflow from financing/investing activities, the company extended a negative free cash flow of RMB-17.2bn in 2Q24, vs. RMB-15.9bn in 1Q24. Even so, we expect the overall inventory level to normalise in upcoming quarters helped by increasing delivery scale and continued sales ramp up of new launches, which aids to a positive cash flow accordingly.

Earnings Forecast and Valuation

Propelled by the intensive launches of cheaper Rongyao editions for flagship models and upgraded hybrid models with DM5.0 technologies, the company set a fresh quarter delivery new high in 2Q24 with earnings per vehicle recovering to RMB8.5k from RMB 6.6k in 1Q24. Going forward, we expect to see sequential improvements in both revenue per vehicle and gross profit margin by virtue of continued sales ramp up of upgraded PHEV offerings with DM5.0 technology, which is tagged with price increase of c.RMB6k than current DM4.0 products and featured with healthier gross margin.

Fuelled by aggressive pricing campaign and sturdy product cycle with the release of Rongyao variants and DM5.0 PHEV models, BYD's YTD domestic sales performs much better than our initial forecast and it has successfully defended its market leadership with the July NEV market share rallies to 35% and PV market share hikes to 17.5% as new high, both in terms of retail numbers. Yet, we noticed that its trio premium brands have been struggled to capture market share from counterparts with slower pace of new launches and weaker audience feedback. We regard it still takes some time to observe its breakthrough in upmarket push. In terms of overseas expansion, the YTD exports growth and global capacity construction progress came in line with our estimates, which set to be the primary growth driver for BYD in mid-to-long term.

To reflect stronger demand domestically, we lift our sales volume forecast for 2024E-2025E to 3.91m/4.57m units, but trim our vehicle ASP assumption due to weakening product mix and aggressive pricing strategy for both Rongyao and DM5.0. Thus, we nudge up our revenue forecasts by 1-3% to RMB714bn/794bn. Meanwhile, given potential upside for OPEX optimisation and higher government subsidies, we raise our net profit forecasts for 2024-25E by 10-11% to RMB34.8bn/35.9bn, respectively.

Currently, its H-shares trade at 17x 2024E P/E, higher than that of most other HK-listed OEM, either NEV start-ups or traditional own-brand makers. We reckon BYD's valuation premium is well supported by its deepening vertical integration in NEV supply chain and robust new model cycle led by upgraded DM5.0 offerings ahead, both of which aids to cementing its market leadership and continued earnings improvements. Thus, we maintain BUY rating with higher TP at HK$265.00, equivalent to 20x 2024E P/E.