BYD risk-reward update: earnings forecasts cut but target price maintained at Rmb125

Overview

This report is Morgan Stanley's risk-reward update on BYD Company Limited. The report keeps sales and revenue forecasts largely unchanged, but lowers 2026/27 gross margin, net profit, and EPS forecasts due to raw material costs, upgrades in intelligent driving and ultra-fast charging configurations, and higher R&D and overseas selling expenses. Despite lower base-case and bear-case valuations, the bull case is raised on stronger medium-term overseas growth and energy storage demand, so the probability-weighted A-share target price remains at Rmb125.00.

Core views

The core view is that BYD remains a global EV leader with a vertically integrated supply chain, scale effects, cost competitiveness, and supply-chain bargaining power. The rollout of intelligent driving and ultra-fast charging technologies into the mass market could enable the company to evolve from a vehicle manufacturer into an enabler of intelligent driving technology. PHEVs are also price-competitive in emerging markets with insufficient charging infrastructure and may help avoid some EV tariff pressure in developed markets. The main pressures come from intense competition in the mass market, weak pricing power, rising costs, and uncertainty around overseas expansion.

Analysis framework

The report uses a risk-reward framework, weighting bull, base, and bear scenarios at 25%, 50%, and 25%, respectively. The base case mainly uses DCF valuation, while the bull case uses an SOTP approach, benchmarking the EV vehicle business against leading EV startups, the battery business against CATL, and referencing BYDE's recent market capitalization. The report also incorporates key earnings inputs such as 2026E P/E scenarios, sales, gross margin, revenue, EBITDA, net profit, EPS, overseas sales, and ASP trends.

Methodology notes

• Valuation methodsDCF

  Base-case valuation

  The base-case value is Rmb116, assuming a sales CAGR of above 10% in 2025-27 and an earnings CAGR of above 20%, while assuming that a higher mix of overseas and premium models can partly offset pricing pressure in the domestic mass market.

• Valuation methodsSOTP

  Bull-case valuation

  The bull-case value is Rmb219, mainly benchmarked against BYD's EV vehicle business, BYD's battery business, and BYDE's market capitalization, and reflects faster overseas expansion and stronger energy storage demand.

• Risk RewardBull/Base/Bear probability weighting

  Target price formation

  The report applies 25% bull, 50% base, and 25% bear weighting to derive an unchanged A-share target price of Rmb125.00.

• Earnings ForecastMorgan Stanley ModelWare

  Financial forecast basis

  Unless otherwise stated, the key financial metrics in the report are based on Morgan Stanley ModelWare and Morgan Stanley Research estimates.

Asset mapping & comparison

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

• BYD Company Limited A-shares (002594.SZ)

  Core covered name

  Strengths

  Vertically integrated supply chain, scale advantages, cost competitiveness, supply-chain bargaining power, progress in intelligent driving and ultra-fast charging technologies, and a rising mix of overseas and premium models.

  Weaknesses

  Intense competition in the mass market with ongoing pricing pressure; rising raw material and BOM costs; higher R&D and overseas SG&A expenses.

  Comparison

  In the bull case, the EV vehicle business is benchmarked against leading EV startups, and the battery business against CATL.

  Risks

  Weaker-than-expected demand, lower-than-expected gross margin, overseas expansion affected by protectionism, and intensifying price competition.

• BYD Company Limited H-shares (1211.HK)

  Hong Kong-listed mapping of the same company

  Strengths

  Benefits from the same fundamentals, including overseas expansion, intelligent driving adoption, and battery business value.

  Weaknesses

  H-share valuation needs to consider RMB/HKD exchange rates and H-share scenario premium assumptions.

  Comparison

  The report uses an RMB/HKD exchange rate of 1.06 and mentions premium assumptions for certain H-share scenario valuations.

  Risks

  Exchange rates, cross-market valuation discounts, and volatility in Hong Kong market liquidity and risk appetite.

• Battery business

  Important business segment

  Strengths

  Can be benchmarked against CATL for valuation and benefits from stronger energy storage demand.

  Weaknesses

  External battery sales may be lower in the bear case.

  Comparison

  In the bull case, the battery business is benchmarked against CATL.

  Risks

  Battery business sales weaker than expected, cost pressure, and intensifying competition.

• Overseas sales and PHEV business

  Growth driver

  Strengths

  PHEVs are price-competitive in emerging markets with insufficient charging infrastructure and may also help bypass some EV tariffs in developed markets.

  Weaknesses

  Overseas SG&A expenses are rising, and there is execution uncertainty in expansion.

  Comparison

  A higher mix of overseas and premium models is viewed as an important factor offsetting pricing pressure in China's domestic mass market.

  Risks

  Rising protectionism, slower-than-expected overseas expansion, and recessions in emerging markets.

Key data

• Stock ratingOverweightIndustry view is In-Line.
• Target priceRmb125.00Probability-weighted A-share target price remains unchanged.
• Current share priceRmb102.91Closing price on 2026-04-20.
• Implied upside+21.47%Relative to the current share price of Rmb102.91.
• Bull-case valueRmb219.00Raised 10% from the previous Rmb199.00, reflecting overseas growth and energy storage demand.
• Base-case valueRmb116.00Lowered 6% from the previous Rmb124.00, mainly derived from DCF.
• Bear-case valueRmb48.00Lowered 7% from the previous Rmb52.00.
• 2026/27 sales forecast5.2mn/5.7mn unitsSales forecasts are largely unchanged, and a new 2028 forecast of 6.2mn units has been added.
• 2026/27 gross margin forecast18.3%/18.7%Lowered by 0.3/0.2 percentage points, respectively.
• 2026/27 net profit forecast revisionLowered by 13%EPS forecast lowered by 12%.
• 2026E revenueRmb912,565mnFrom the key earnings inputs table.
• 2026E EPSRmb4.55Previous forecast was Rmb5.16.

Impact & implications

The report is positive in investment implication but places greater emphasis on structural divergence: near-term earnings forecasts are under pressure from higher costs and expenses, making the pricing power theme negative; in the medium term, if overseas expansion, energy storage demand, ADAS adoption, and a higher mix of premium models materialize, valuation upside still has elasticity. Maintaining Overweight indicates that the analyst believes BYD still has the potential to generate excess returns versus sector coverage over the next 12-18 months.

Risks

• NEV demand is weaker than expected.
• Gross margin is lower than expected, especially if raw material and BOM cost pressure cannot be offset by product mix improvement.
• Competition in the mass market intensifies further, leading to more aggressive price cuts.
• Overseas expansion progresses more slowly than expected, or is affected by protectionism, tariffs, and local regulation.
• The pace of new model launches is slower than expected.
• External battery sales are lower than expected.
• R&D investment and overseas SG&A expenses are higher than expected.

What to watch

• Whether 2026/27 sales remain on the 5.2mn/5.7mn unit path, and whether the 2028 forecast of 6.2mn units can be achieved.
• The adoption speed of intelligent driving and ultra-fast charging configurations in the mass market and how costs are absorbed.
• The share of overseas sales, the share of premium models, and PHEV performance in emerging markets.
• Trends in raw material prices, BOM costs, and gross margin.
• Whether energy storage demand supports the logic behind the bull-case upgrade.
• Whether BYD needs to cut prices further in a more competitive environment.
• Changes in the risk-reward profile between the Rmb125 target price, Rmb116 base case, Rmb219 bull case, and Rmb48 bear case.