BYD's underlying Q2 earnings were stronger than the headline results suggest, with recovering domestic share and continued overseas expansion supporting growth

Overview

The report reviews BYD's Q2 2026 results, focusing on the effects of foreign exchange, R&D capitalization, sales volume, and product mix on profit. Bernstein believes headline profit understates the operational improvement, while recovering domestic share, overseas expansion, and growth in external battery supply are providing further support. It therefore maintains its Outperform rating and original target prices after slightly lowering its forecasts.

Core views

Q2 revenue was RMB194.6bn, approximately RMB195bn as shown in the chart, down 3.2% YoY and up 29.5% QoQ. Passenger vehicle sales were approximately 1.1mn units, down 3.4% YoY and up 58.2% QoQ; revenue from the EV and battery businesses fell 4.2% YoY and rose 34.4% QoQ. Sales volume grew significantly faster than revenue on a sequential basis, with estimated average selling price down 1.0% YoY and 15.1% QoQ, mainly due to a sequential decline in the overseas sales mix and foreign exchange headwinds. Overseas sales accounted for 43.3%, above 22.9% in Q2 2025 but below 46.6% in Q1 2026; the share of premium brands such as Denza, Fangchengbao, and Yangwang rose to 13.2%, above 7.9% a year earlier and 12.2% in the previous quarter. Profit performance was better than revenue. Q2 net profit was RMB8.3bn, up 26.2% YoY and 107.5% QoQ, with a net margin of 4.3%, compared with 3.3% in Q2 2025 and 2.7% in Q1 2026. Excluding BYD Electronic, net profit from the EV and battery businesses increased 44.4% YoY and 99.0% QoQ; net profit per vehicle rose to RMB7.1k, above RMB4.8k a year earlier and RMB5.7k in the previous quarter. The company's overall gross margin was 18.9%, compared with 16.3% a year earlier and 18.8% in the previous quarter. Bernstein estimates that the gross margin of the EV and battery businesses was 23.0%, slightly lower than 23.4% in the previous quarter due to material costs and foreign exchange pressure. Scale benefits and a better product mix only partially offset these effects, while the YoY improvement was driven by a higher mix of overseas sales and premium brands. Expenses and accounting treatment are key to understanding earnings quality. Q2 R&D expenses were RMB12.0bn, or 6.1% of revenue, below 7.7% a year earlier and 7.6% in the previous quarter. However, the R&D capitalization ratio rose from 4.3% in the first half of 2025 to 19.2% in the first half of 2026. The report estimates that this increased reported profit by RMB4–4.5bn, equivalent to RMB2–2.5k per vehicle. Meanwhile, the foreign exchange result shifted from a gain of RMB3.2bn in the first half of 2025 to a loss of RMB4.7bn in the first half of 2026, which is estimated to have reduced overseas profit per vehicle by RMB12k and the company's average profit per vehicle by approximately RMB4k. After removing the profit uplift from R&D capitalization and reversing the foreign exchange headwind, Bernstein estimates that normalized Q2 net profit per vehicle could reach approximately RMB8.8k and therefore believes underlying profitability was stronger than the reported figures suggest. Operating leverage was also reflected in other profit metrics. Q2 operating profit was RMB10bn, with an operating margin of 5.2%, above 3.8% a year earlier and 3.1% in the previous quarter. Selling expenses were RMB6.7bn, or 3.4% of revenue, compared with 3.1% a year earlier and 3.9% in the previous quarter; administrative expenses were RMB5.3bn, or 2.7% of revenue, unchanged from a year earlier and below 3.4% in the previous quarter. Together with the sequential recovery in sales volume and improved product mix, these figures explain the recovery in net margin. The recovery in domestic market share is the main growth indicator for the next stage. BYD's domestic NEV market share increased from 20.9% in Q1 2026 to 22% in Q2 and recovered further to 24% in July. The report states that a concentrated series of new product launches in August, gradually easing battery capacity constraints, and solid orders will drive a progressive volume ramp-up for new models equipped with the latest flash-charging technology and may keep market share stable or increase it further over the coming quarters. Overseas expansion remains strong. Q2 overseas sales increased 82.5% YoY and 46.7% QoQ, continuing to improve the overall product mix despite adverse foreign exchange movements. Bernstein estimates that BYD's Q2 2026 NEV market shares in Europe, ASEAN, Oceania, and Latin America reached 8%, 12%, 33%, and 48%, respectively. This indicates that overseas operations have become an important source of sales volume and mix contribution, although exchange-rate movements can materially affect translated profit. External battery supply provides another major growth driver. The report estimates that BYD's total battery shipments reached 134GWh in the first half of 2026, with external shipments to third-party automakers and energy storage projects accounting for more than 50% of total installed capacity. This indicates that the battery business is becoming less dependent on the group's own vehicle sales, while demand from third-party automakers and energy storage is becoming a more important business source. Bernstein slightly lowered its 2026–2027 revenue and earnings forecasts but continues to see a constructive outlook based on the company's leading position in electrification and overseas expansion. After the adjustment, the firm's revenue forecasts are 1% and 6% above market consensus for 2026 and 2027, respectively, while its net profit forecasts are 1% and 2% higher. The model forecasts revenue of RMB919.784bn, RMB1,064.473bn, and RMB1,160.141bn for 2026–2028, corresponding to growth of 14.4%, 15.7%, and 9.0%; profit attributable to company shareholders is forecast at RMB37.435bn, RMB49.928bn, and RMB57.718bn, with earnings per share of RMB4.12, RMB5.50, and RMB6.35. Gross margins over the same period are forecast at 19.1%, 20.0%, and 20.4%, while net margins are forecast at 4.1%, 4.8%, and 5.1%. The valuation uses a sum-of-the-parts approach, applying methods suited to the characteristics of the EV, battery, consumer electronics, and semiconductor businesses. The EV business is primarily valued using DCF, cross-checked against 18x 2027 P/E and 1x 2027 EV/Sales; the battery business uses DCF and P/E, BYD Electronic is included at its current market capitalization, and the semiconductor business is valued with reference to its most recent transaction value. The EV business contributes more than 70% of the total valuation. The resulting SOTP corresponds to approximately 20x 2027E P/E, supporting a target price of HK$130.00 for 1211.HK and RMB114.00 for 002594.CH, both unchanged in the report; the corresponding upside shown in the table is 44% and 27%, respectively.

Analysis framework

The report first breaks down Q2 growth by revenue, sales volume, and average selling price, then uses the overseas and premium-brand mix to explain changes in product mix. It subsequently compares gross margin, expense ratios, net margin, and profit per vehicle, while separately quantifying the effects of R&D capitalization and foreign exchange gains and losses on reported profit to estimate normalized earnings. The report then tracks domestic market share, new models, overseas regional market shares, and external battery supply to form its medium-term operating assessment. Finally, it updates its financial forecasts and derives A-share and H-share target prices through segment valuations of the EV, battery, consumer electronics, and semiconductor businesses.

Methodology notes

• Industry/Sector Analysis FrameworkPrice-Volume Decomposition

  Revenue, sales volume, and average selling price decomposition

  The report separately compares YoY and QoQ changes in revenue, sales volume, and estimated average selling price to show that Q2 sales volume recovered rapidly while revenue growth was weaker, mainly due to sales mix and foreign exchange effects.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Normalized profit per vehicle adjusted for R&D capitalization and foreign exchange gains and losses

  The report quantifies the uplift to reported profit from capitalized R&D expenditure and the reduction in overseas and overall profit per vehicle from foreign exchange losses, based on which it estimates normalized net profit per vehicle of approximately RMB8.8k.

• Valuation MethodSOTP Valuation

  Aggregate valuation of the EV, battery, consumer electronics, and semiconductor segments

  Different businesses are valued using different bases and then aggregated. The EV business contributes more than 70% of the total valuation, ultimately deriving target prices for the two listed share classes.

• Valuation MethodDCF

  DCF valuation of the EV and battery businesses

  The report discounts future cash flows for the EV and battery businesses. EV valuation assumptions include a 20% long-term market share in China, an 8% EBIT margin, an 11% WACC, and a 2% terminal growth rate.

• Valuation MethodPE/PEG valuation

  2027E P/E cross-check

  The EV business is cross-checked using 18x 2027E P/E, while the overall SOTP corresponds to approximately 20x 2027E P/E.

• Valuation MethodPS valuation

  EV/Sales cross-check for the EV business

  The report uses 1x 2027E EV/Sales as another valuation reference for the EV business, cross-checking the DCF and P/E results.

Asset mapping & comparison

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

• BYD Company (1211.HK, 002594.CH)

  The report's core coverage target; recovering domestic NEV market share, overseas expansion, and growth in external battery supply jointly support the Outperform view.

  Strengths

  Leading position in electrification, recovering domestic market share, rapid overseas sales growth, a rising premium-brand mix, and expanding external battery supply.

  Weaknesses

  Average selling price is affected by mix and foreign exchange, the gross margin of the EV and battery businesses declined slightly QoQ, and R&D capitalization provides a significant uplift to reported profit.

  Comparison

  The A-shares and H-shares represent the same operating entity; the target prices are RMB114.00 and HK$130.00, respectively, and the report notes that A-shares may generally be more volatile than H-shares.

  Risks

  Sales below expectations, product quality issues or recalls, worsening competition, technological disruption, adverse government policies, and differences between A-share and H-share market rules.

• BYD Electronic (285.HK)

  BYD holds a 65.8% stake, and the report includes the value of the consumer electronics business in its SOTP at the current market capitalization.

  Strengths

  Has an observable listed market value that can serve as the basis for segment valuation.

  Weaknesses

  The stock is not covered in this report.

  Comparison

  Unlike the EV and battery businesses, which use DCF and valuation multiples, this segment is valued directly at its current market capitalization.

• BYD Semiconductor

  BYD holds a 72.3% stake, and the report treats it as the semiconductor business segment in the SOTP valuation.

  Comparison

  The report references the most recent transaction value rather than a listed market price.

Key data

• Q2 2026 revenueRMB194.6bnDown 3.2% YoY and up 29.5% QoQ; rounded to RMB195bn in the chart.
• Q2 2026 passenger vehicle sales1.1mn unitsDown 3.4% YoY and up 58.2% QoQ.
• Estimated change in average selling price-1.0% YoY, -15.1% QoQThe report attributes this to a lower overseas sales mix and foreign exchange headwinds.
• Q2 2026 net profitRMB8.3bnUp 26.2% YoY and 107.5% QoQ, with a net margin of 4.3%.
• EV and battery net profit excluding BYD Electronic+44.4% YoY, +99.0% QoQIndicates that profit from the core automotive and battery businesses improved faster than the group's headline profit.
• Net profit per vehicleRMB7.1kCompared with RMB4.8k in Q2 2025 and RMB5.7k in Q1 2026; normalized estimate of approximately RMB8.8k.
• Company-wide gross margin18.9%Compared with 16.3% in Q2 2025 and 18.8% in Q1 2026.
• Estimated gross margin of the EV and battery businesses23.0%Below 23.4% in Q1 2026 but above 18.7% in Q2 2025.
• R&D expenses and capitalization ratioRMB12.0bn; 19.2%R&D expenses represented 6.1% of Q2 revenue; the capitalization ratio rose from 4.3% a year earlier to 19.2% in the first half of 2026, estimated to have increased profit by RMB4–4.5bn.
• Foreign exchange change in the first half of 2026Shifted from a gain of RMB3.2bn to a loss of RMB4.7bnEstimated to have reduced overseas profit per vehicle by RMB12k and overall average profit per vehicle by approximately RMB4k.
• Domestic NEV market share24% in July 2026Above 20.9% in Q1 and 22% in Q2.
• Q2 overseas sales growth+82.5% YoY, +46.7% QoQOverseas sales accounted for 43.3% of total sales, compared with 22.9% a year earlier and 46.6% in the previous quarter.
• Estimated Q2 overseas regional market sharesEurope 8%, ASEAN 12%, Oceania 33%, Latin America 48%Reflects BYD's NEV penetration in major overseas markets.
• Battery shipments in the first half of 2026134GWhExternal shipments to third-party automakers and energy storage projects accounted for more than 50% of total installed capacity.
• 2026–2028 revenue forecastsRMB919.784bn, RMB1,064.473bn, RMB1,160.141bnCorresponding to YoY growth of 14.4%, 15.7%, and 9.0%.
• 2026–2028 earnings per share forecastsRMB4.12, RMB5.50, RMB6.35Forecasts for 2026–2028.
• Forecasts relative to consensusRevenue 1%/6% higher; net profit 1%/2% higherCorresponding to 2026 and 2027, respectively.
• Expected P/E2025A 22.0x, 2026E 19.1x, 2027E 14.3xValuation metrics presented in the report.
• SOTP-implied valuationApproximately 20x 2027E P/EThe EV business contributes more than 70% of the total valuation.

Impact & implications

The report believes that the recovery in sales volume and improvements in the overseas and premium-brand mix have begun to translate into higher profit per vehicle and operating margins, while recovering domestic market share provides further support for the coming quarters. Overseas operations and external battery supply have broadened the sources of growth, but exchange rates may prevent operational improvements from being fully reflected in reported profit. The higher R&D capitalization ratio also means that operating improvements must be distinguished from accounting contributions when interpreting earnings. Although the 2026–2027 forecasts were slightly lowered, the firm's estimates remain above consensus, so its SOTP valuation and target prices remain unchanged.

Risks

• Vehicle sales may fall below the report's expectations.
• Product quality issues and potential recalls may affect operations and target prices.
• A worsening competitive landscape may pressure sales volume, pricing, or margins.
• Technological disruption may weaken existing product and technology advantages.
• Adverse government policies may affect industry growth, capital markets, or company valuation.
• A-shares may be more volatile than H-shares, and Chinese market rules may affect A-shares and H-shares differently.

What to watch

• Monitor new product launches in August, order performance, and progress in easing battery capacity constraints.
• Track the delivery ramp-up of new models equipped with the latest flash-charging technology and whether domestic NEV market share can stabilize at its current level or increase further.
• Track overseas sales, regional market shares, and the overseas sales mix, while monitoring the impact of exchange rates on overseas profit per vehicle.
• Monitor whether battery shipments to third-party automakers and energy storage projects, and their share of total shipments, can continue to grow.
• Monitor the R&D capitalization ratio and its impact on reported profit and normalized earnings per vehicle.