BYD Company Limited Report Interpretation

Overview

This report reviews BYD's 2Q26 results, focusing on sales recovery, per-vehicle profitability, product and geographic mix, expense control, and cash flow. Morgan Stanley believes the results were broadly in line with expectations and that the decline in the operating expense ratio was the biggest highlight, sufficient to offset approximately RMB 3.0 billion in FX losses. Its investment view remains essentially unchanged, and it maintains its Overweight rating.

Core views

BYD's 2Q26 net profit was RMB 8.2 billion, up 30% year over year and 102% quarter over quarter, broadly in line with the market expectation of RMB 8.0 billion to RMB 9.0 billion. Lower operating expenses offset approximately RMB 3.0 billion in FX losses, so the report believes these results have little impact on the existing investment thesis. The financial results were in line with consensus, and the direction of consensus EPS expectations for the next 12 months also remains broadly unchanged. The operating expense ratio was the most notable area of improvement: it fell to 13.5% in 2Q26, down 2.5 percentage points quarter over quarter and 1.3 percentage points year over year. Sales recovery was another pillar of the earnings improvement. 2Q26 sales volume increased 58% quarter over quarter. Excluding BYDE's RMB 400 million profit contribution, automotive profit per vehicle reached RMB 7,200, increasing by RMB 1,500 quarter over quarter and RMB 2,400 year over year. Revenue increased 30% quarter over quarter to RMB 195.0 billion, significantly slower than sales-volume growth, implying a high-teens percentage decline in average selling price quarter over quarter. The report attributes the lower selling price mainly to a higher share of domestic sales in the sales mix and relatively stable energy-storage-system revenue quarter over quarter, meaning that more of the incremental volume came from the lower-priced domestic automotive business. Gross margin improved only slightly, reaching 18.9% in 2Q26, up 0.1 percentage points quarter over quarter. Scale benefits from higher sales volume were offset by rising material costs and a lower overseas sales mix quarter over quarter, indicating that the quarter's earnings improvement came more from expense control and scale-driven cost absorption than from significant gross-margin expansion. The report also notes that the lower operating expense ratio was primarily driven by a lower R&D expense ratio. Its simulated R&D capitalization rate for 1H26 was 19.2%, significantly higher than 4% in 1H25 and 13% in 2H25. Capitalizing a larger proportion of R&D expenditure reduces the R&D expense recognized in current-period profit and loss. The selling and administrative expense ratio declined 1.1 percentage points quarter over quarter but remained up slightly by 0.3 percentage points year over year, overall reflecting strict cost control. Regarding cash flow, the increase in scale generated RMB 34.5 billion in operating cash inflow. This was achieved even as accounts-payable turnover days declined from approximately 156 days to 126 days. Based on this, the report emphasizes that the sales recovery not only supported profit but also generated a strong operating cash-flow contribution. Morgan Stanley's model presents EPS of RMB 3.61, 4.21, 5.42, and 6.52 for 2025 through 2028, respectively; net revenue of RMB 803,965 million, RMB 851,597 million, RMB 933,966 million, and RMB 1,011,101 million, respectively; and EBITDA of RMB 120,061 million, RMB 135,318 million, RMB 164,303 million, and RMB 193,721 million, respectively. Over the same period, P/E declines from 23.7x to 12.1x, P/BV declines from 3.1x to 2.2x, EV/EBITDA declines from 7.2x to 4.2x, while ROE changes from 17.6% to 15.4%, 18.3%, and 20.0%. The report maintains its H-share price target of HKS121.00, implying 32% upside from the HKS91.95 closing price stated in the report. The target valuation uses weighted bull, base, and bear scenarios with weights of 25%, 50%, and 25%, respectively. The base case uses DCF, assuming a WACC of 14.3% and a long-term growth rate of 3.0%. The bull case uses SOTP, implying a 2026 bull-case P/E of 40x and reflecting the rerating of comparable companies such as CATL and EV startups. The bear case uses a 2026 P/E of 12x, assuming weaker domestic and overseas vehicle sales and more severe price reductions. The valuation uses an exchange rate of 1.06 RMB/HKD. Regarding the H-share scenario premium, the original text states both that a 5% premium is applied to the bull- and bear-case values and that no premium is applied to the bear case. This condition is therefore retained as stated in the original text without additional inference. The key scenario variable is whether incremental sales volume can offset intense competition in the mass market. The report believes that broader ADAS adoption and the continuation of trade-in stimulus policies could generate incremental sales and partially offset competitive pressure. Upside factors include new-model launches, faster overseas expansion, and stronger-than-expected global new-energy-vehicle demand. Downside factors include stalled overseas expansion due to rising protectionism, weaker-than-expected global new-energy-vehicle demand, and lower-than-expected gross margins.

Analysis framework

The report first compares 2Q26 net profit with market expectations and then decomposes the earnings changes into factors including sales volume, average selling price, gross margin, per-vehicle profit, operating expenses, and FX gains or losses. It then explains the expense-side improvement through the R&D capitalization rate and the selling and administrative expense ratio, while using operating cash flow and accounts-payable turnover days to assess the cash-flow effects of scale growth. The valuation section combines Morgan Stanley ModelWare forecasts, weighted bull/base/bear scenarios, DCF, SOTP, and P/E methodologies to derive the H-share price target and identify key upside and downside variables.

Methodology notes

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of sales volume, revenue, and implied average selling price

  The report compares the 58% quarter-over-quarter growth in sales volume with the 30% quarter-over-quarter growth in revenue, deriving a high-teens percentage decline in average selling price quarter over quarter. It then explains the change in pricing mix through the higher domestic sales share and relatively stable energy-storage revenue.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Analysis of the R&D capitalization rate and expense ratios

  The report simulates a 1H26 R&D capitalization rate of 19.2% and compares it with 4% in 1H25 and 13% in 2H25 to assess how much of the decline in the operating expense ratio resulted from the accounting treatment of R&D expenditure rather than purely from improved operating efficiency.

• Company Fundamentals and Financial Framework

  Morgan Stanley ModelWare Framework

  Unless otherwise specified, the report's financial metrics and forecasts are based on Morgan Stanley's ModelWare framework, which is used to consistently produce forecasts for revenue, EPS, EBITDA, ROE, and valuation multiples.

• Valuation MethodDCF Discounted Cash Flow

  Base-case DCF valuation

  The base case values future cash flows on a discounted basis, using a WACC of 14.3% and a long-term growth rate of 3.0%.

• Valuation MethodSOTP Sum-of-the-Parts Valuation

  Bull-case SOTP valuation

  The bull case separately assesses and aggregates the value of each business, resulting in an implied 2026 bull-case P/E of 40x and incorporating the impact of comparable-company rerating.

• Valuation MethodPE/PEG valuation

  Bear-case P/E valuation

  The bear case uses a 2026 P/E of 12x, reflecting assumptions of weaker domestic and overseas sales and more severe price reductions.

• Valuation Method

  Weighted bull, base, and bear scenarios

  The report assigns weights of 25%, 50%, and 25% to the bull, base, and bear scenarios, respectively, to derive a target value that incorporates different sales, competition, and valuation assumptions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• BYD Company Limited (1211.HK)

  The principal H-share covered by the report; the Overweight rating is maintained with a price target of HKS121.00, implying 32% upside from the HKS91.95 closing price stated in the report.

  Strengths

  Sales volume increased 58% quarter over quarter, per-vehicle profit improved, the operating expense ratio fell to 13.5%, and operating cash inflow reached RMB 34.5 billion.

  Weaknesses

  Average selling price declined by a high-teens percentage quarter over quarter, gross margin increased by only 0.1 percentage points quarter over quarter, and the overseas sales mix declined.

  Comparison

  The bull-case SOTP valuation reflects the rerating of comparable companies such as CATL and EV startups, implying a 2026 bull-case P/E of 40x.

  Risks

  Overseas expansion impeded by protectionism, weaker-than-expected new-energy-vehicle demand, lower-than-expected gross margins, and intensifying price competition in the mass market.

• BYD Company Limited (002594.SZ)

  The A-share-listed security of the same company, identified by the report as a covered stock and assigned an Overweight rating.

  Strengths

  It shares the company's overall fundamentals of sales recovery, improved per-vehicle profitability, expense control, and operating cash-flow growth.

  Weaknesses

  It is likewise affected by lower selling prices, rising material costs, changes in the overseas sales mix, and intense market competition.

  Comparison

  The report does not provide a separate A-share peer-comparison conclusion.

  Risks

  Weaker-than-expected global new-energy-vehicle demand, weaker domestic and overseas sales, intensifying price reductions, and lower-than-expected gross margins.

Key data

• 2Q26 Net ProfitRMB 8.2 billionUp 30% year over year and 102% quarter over quarter, broadly in line with the market expectation of RMB 8.0 billion to RMB 9.0 billion.
• 2Q26 FX LossRMB 3.0 billionLower operating expenses offset the larger FX loss.
• 2Q26 Operating Expense Ratio13.5%Down 2.5 percentage points quarter over quarter and 1.3 percentage points year over year.
• 2Q26 Sales-Volume GrowthUp 58% quarter over quarterSales recovery drove scale benefits and improved cash flow.
• 2Q26 Automotive Profit per VehicleRMB 7,200Calculated after excluding BYDE's RMB 400 million profit contribution; up RMB 1,500 quarter over quarter and RMB 2,400 year over year.
• 2Q26 RevenueRMB 195.0 billionUp 30% quarter over quarter, implying a high-teens percentage decline in average selling price quarter over quarter.
• 2Q26 Gross Margin18.9%Up 0.1 percentage points quarter over quarter; scale benefits were offset by rising material costs and a lower overseas sales mix.
• Simulated 1H26 R&D Capitalization Rate19.2%4% in 1H25 and 13% in 2H25.
• Change in Selling and Administrative Expense RatioDown 1.1 percentage points quarter over quarter and up 0.3 percentage points year over yearThe report believes overall expense control was strict.
• Operating Cash InflowRMB 34.5 billionAchieved while accounts-payable turnover days declined from approximately 156 days to 126 days.
• 2025A to 2028E EPSRMB 3.61, 4.21, 5.42, and 6.52Corresponding to 2025, 2026E, 2027E, and 2028E, respectively.
• 2025A to 2028E Net RevenueRMB 803,965 million, 851,597 million, 933,966 million, and 1,011,101 millionCorresponding to 2025, 2026E, 2027E, and 2028E, respectively.
• 2025A to 2028E EBITDARMB 120,061 million, 135,318 million, 164,303 million, and 193,721 millionCorresponding to 2025, 2026E, 2027E, and 2028E, respectively.
• H-Share Price TargetHKS121.0032% above the HKS91.95 closing price on August 28, 2026.
• Base-Case DCF ParametersWACC 14.3%, long-term growth rate 3.0%Used for the base-case valuation.
• Scenario WeightsBull 25%, base 50%, bear 25%The three scenarios are weighted to derive the target value.
• Valuation Exchange Rate1.06 RMB/HKDUsed to convert values between RMB and HKD.

Impact & implications

The report believes the 2Q26 results do not materially change the existing investment thesis or the direction of consensus EPS expectations for the next 12 months. Sales recovery, higher per-vehicle profit, a lower expense ratio, and improved operating cash flow support earnings resilience. However, revenue growth lagging sales-volume growth, lower average selling prices, rising material costs, and a reduced overseas sales mix indicate that mass-market competition and the sales mix continue to constrain gross margin. Broader ADAS adoption, continued trade-in policies, new models, and overseas expansion are important variables for achieving the target valuation.

Risks

• Upside risks include a stronger product cycle driven by the pace of new-model launches.
• Faster-than-expected overseas expansion represents an upside risk.
• Stronger-than-expected global new-energy-vehicle demand represents an upside risk.
• Rising protectionism that results in a lack of progress in overseas expansion is a downside risk identified in the report.
• Weaker-than-expected global new-energy-vehicle demand is a downside risk identified in the report.
• Weaker-than-expected gross margin is a downside risk identified in the report.
• Intense mass-market competition, weaker domestic and overseas sales, and more severe price reductions would reduce the bear-case value.

What to watch

• Track new-model launch schedules and their contribution to incremental sales volume.
• Track whether broader ADAS adoption can generate the incremental sales volume assumed in the report.
• Track whether trade-in stimulus policies are extended and their effect on sales volume.
• Track the pace of overseas expansion, the overseas sales mix, and the impact of protectionism.
• Track global new-energy-vehicle demand and domestic and overseas vehicle sales.
• Track material costs, average selling prices, product and geographic mix, and changes in gross margin.
• Track the R&D capitalization rate and the sustainability of the decline in the operating expense ratio.