BYD - New Dawn
2Q Results: Negative Surprise
BYD’s second-quarter earnings were a clear negative surprise to the market. We attribute the miss to three factors:
Added cost from the God’s Eye ADAS system (≈RMB4,000 per car).
Heavy R&D expense outpacing operating income.
Aggressive price discounts before the government intervened in the industry-wide price war.
Current Position: A Transitional Phase
BYD is in a painful but strategic transition. Its once clear domestic technology lead has narrowed as EV supply chains mature and rivals access similar capabilities. Geely has emerged as the main challenger with copycat, low-price strategies.
At the same time, tech company crossovers such as Xiaomi with their customer-centric products and social-media-savvy marketing are reshaping the market landscape. Traditional OEMs, including BYD, are learning to adapt.
Early Signs of a Comeback
Despite near-term headwinds, we see credible signs of a comeback as early as this year. BYD has begun clearing inventory and incentivising dealers months ago, signalling a major model refresh and lighter balance sheet ahead of newer model launches that could come as early as September.
We would like to call its new strategy “double-sword” that combines:
Price discounts on renewed non ADAS models and older models –BYD lost share in the price sensitive market because of the added cost that comes with ADAS. BYD is launching non ADAS models to compete with low price competitors like Geely. Also, the older 2025 models will go on discounts to clear the way for newer 2026 models, attracting price sensitive customers.
Upgraded configurations at the same price – BYD is upgrading its models to be more competitive while price remains the same. Some added features will be exclusive to BYD and inaccessible to competitors. This includes enhanced air suspension (Yun Nian C), second-generation blade battery, megawatt charging and OTA updates across infotainment, smart driving and hybrid fuel saving. On the designing front, BYD will drop the widely critiqued piano-lacquer trim for modern styling, new paint colours will be added like the two-tone, and a broadened ecosystem (iPad mounts, drones, baby seats, “queen” seats) will be added. This is to make BYD more appealing to younger buyers who care about hardware features but also the “emotional value” design could offer.
Early trials are encouraging. Seal 06 EV sold ~30k units in its launch month with growing wait lists; Yuan UP non ADAS is outcompeting comparable Geely models on price/performance. The Fangchengbao Ti-7 SUV launches on 9 September and could further validate the new approach if it’s positively received, accelerating similar rollouts.
Thinking the Long-Term: Manufacturing Giant + Technology Platform
The market still values BYD as a traditional auto maker. In the short term, price wars and margin pressure weigh on valuation. Yet we see a “turnaround” opportunity: competitive products revamps, technology leadership and continued overseas expansion support investment value from the auto manufacturing perspective.
Longer term, we are waiting for the “story change” moment when BYD is valued more like a technology company, incubating multiple cutting-edge technologies on top of a massive manufacturing base and commercialising them quickly. It is positioned at the forefront of many revolutionary technology trends such as:
Solid-state batteries / Energy storage – End-to-end coverage from inverters to system integration; Europe shipment leader; expected to release solid-state batteries ahead of peers in 2027-2028. Ideally BYD will out compete on specs giving it a technical edge, base case BYD would be on par with CATL, and the two will take more market & value share.
Robotics – In-house precision machining, materials, motors, batteries, gears plus a large smart-driving/software team enable rapid cost reduction and testing; BYD is well positioned for mass-market robots. There is an internal team working on this.
Power semiconductors / Chips – China’s largest automotive-grade IGBT/SIC chip manufacturer, self-developed smart cockpit chips, first to achieve kV MW flash charging. Long term we believe fast charging is more efficient than having larger batteries once the charging infrastructure is complete. Having SIC chips is crucial for high voltage charging.
AI & Autonomous driving – BYD Electronics is the world’s No.2 EMS and actively taking server-cabinet orders and making ADAS hardware in-house saves costs; BYD has the largest fleet collecting data on the road for training and mapping. We believe the added costs from God’s Eye is a strategic investment to accelerate autonomous model development. The future of cars will increasingly shift to the software side, those with the most data trains the best models, which are then OTA to the entire fleet, creating a flywheel effect.
While the market assigns high multiples to second- and third-tier battery and chip firms, BYD’s heavy R&D spend in the same areas has earned little “tech premium” if not getting penalized for the high spending. Some investors are questioning BYD’s R&D efficiency. With most hardware level innovations beyond solid-state batteries now incremental, we suspect BYD’s research extends well beyond cars toward more revolutionary technologies like humanoid robots and autonomous driving. Wang Chuanfu may be positioning BYD much like Elon Musk positions Tesla: a technology-centric company with a hardware base. Although this has yet to play out, learning from the history of the company, we think it is very likely and would emerge in two to three years as BYD started to commercialize its technology.
Commentary on Peers
We are cautious on China’s domestic auto market. NEV penetration already exceeds 55% this year, leaving little headroom for growth. The future is not a bigger pie but intensifying price and model competition. For companies not yet sustainably profitable, survival odds are slim.
By year-end more than a dozen large five- and seven-seat SUVs will launch (BYD Titanium 7, possibly Tang, Xiaomi, Leapmotor+, Geely M9, NIO, Huawei-ecosystem models, etc.). “Big-fridge/big-TV/big-sofa” SUVs are easy to copy; competition reverts to price. Brands are broadly strong and mostly cheaper than Li Auto. NIO’s new L90 SUV is well received, but its sales will be split in a crowded market, and battery-pack leasing clouds true pricing.
For the same reasons we are unconvinced by Geely and Leapmotor. Both have only just turned profitable on EV and are reluctant to risk losses again. If BYD can stabilize and even regain share, these peers will be under significant pressure.
We think SLS is a clear leader in the high end car market. Its M7 model got 100k pre-orders the first day it launched. Huawei has a large following in China and its brand power, not to mention the first tier ADAS capabilities cannot be matched by others. But it also disabled international expansion due to political tensions, and its international brand recognition might be more negative due to bad press.
Xiaomi has proven its success, but it’s constrained by delivery capacity. By the time it ramped the market dynamic might be different, as other automakers caught up to Xiaomi’s marketing and customer centric strategy. This too, like the hardware, can be replicated. The competition is about to get much more intense in the upcoming years. It’s a game of survival.
Main takeaway
Choosing BYD, unfortunately, is choosing the hard path because the business is undergoing major transitions and now might be the darkest time before dawn.
Short-term earnings weakness masks a strategic repositioning. BYD is refreshing its product line, cutting costs, embracing a “double-sword” domestic strategy and investing heavily in a technology platform whose value the market has yet to recognise. Combined with credible overseas expansion, we believe BYD offers asymmetric upside if execution stays on track.
