BYD: To digest subsidy decline with purchase pressure, production to reach 4 million vehicles next year (minutes of phone conference)

Below is the summary of BYD's 2022 financial report. For the financial report interpretation of this issue by the Dolphin Analyst, please visit "Tearing Labels Moment: Is BYD going to enjoy a magnificent transformation into a profitable machine?".

I. Key information from management:

1. Continued research and development is essential, and strategic planning is the direction.

2. In July 2022, the market share of new energy vehicles (NEVs) is expected to reach nearly 29%. The Dolphin, Tengshi D9, and Tang DM-p have already been launched in the second half of this year. The Dolphin, ATTO3, and M3 are expected to be available for sale in bulk next year.

3. Some models are expected to feature NVIDIA chips by 2023. Regarding the overseas market, BYD has already penetrated into the Netherlands, Sweden, Germany, Thailand, Costa Rica, and will further enter the Japanese market in August.

II. Q&A with Analyst:

Q: The market's understanding of demand seems to be significantly divided, and the BETA of the entire stock market is declining. Could you give us some guidance as to what our current market demand is like?

A: The rate at which NEVs in China are replacing petroleum-fueled vehicles has exceeded many people's expectations. This is a result of multiple factors, including rising oil prices, the spreading of NEV's first wave of user reputation, and the outstanding performance of NEVs in various aspects exceeding that of petroleum-fueled vehicles.

All of these factors add up to a rising market platform for NEVs in China, which is also noticeable at car exhibitions. For example, at the recent Chengdu Auto Show, the exhibition booth of NEVs was crowded with people while traditional car brands' booths were deserted. This is a relatively closed space with tens of thousands of people attending the car show every day, and all of them are potential car buyers for the next 18 months. Through these data, we can infer that the fundamental attitudes and purchasing habits of ordinary people have undergone a drastic change towards NEVs, especially for the younger consumer group.

In this era of transition between old and new models, new energy car manufacturers represented by BYD have gained ample growth opportunities, particularly with the introduction of new technologies such as the DMI super hybrid, blade battery, e-platform 3.0 + CTB, and more.

BYD has indeed been faced with a supply and demand imbalance this year, with many orders in our hands and numerous additional orders every month. Most of these orders are from owners of joint venture brands who have switched to BYD; for example, we now have around 700,000 orders at hand.

Many of our stores are working hard to deliver the orders. The power rationing in Sichuan and Chongqing has led to the operational shutdown of our electronic factory in Chongqing for about a week. The suppliers in Sichuan and Chongqing have also been severely affected, and the unexpected outbreak of COVID-19 in Jiangsu also added to these problems. As a management team, we are determined to focus on completing deliveries, improving the entire production chain efficiency, and fulfilling the needs of our customer base by working overtime.

Currently, the production volume at the Hefei facility is increasing every month, and the Jinan facility is expected to start mass production around November, which will further expand the company's production capacity. We expect the deliveries in August to exceed that of July. The demand at our Plus stores is around 50,000 to 60,000 units per month, but our supply can only meet up to 30,000 to 40,000 units at the moment. Therefore, we are now increasing production capacity and planning to achieve a monthly production of 280,000 units by the end of this year. Of course, whether production capacity can reach expectations still involves issues such as the epidemic and supply, and management will try their best to meet this need.

Q: If we achieve 280,000 in a single month at the end of the year, the annual scale will be over 3 million. How big is the entire market for new energy passenger vehicles next year? What is our sales target approximately? Is the ratio of pure electric and PHEV still 50:50? Second, regarding orders, does it mean that our undelivered orders from last month were 800,000 units and now it's approximately 700,000 units, meaning a decrease of 100,000 units in the interim? Or is it the case that it was also 700,000 units last month and it still is now, and how should we understand this?

A: The national delivery volume this year should be around 6 million units, which actually accounts for 30% of the total number of vehicles in China, which is around 20 million units. Of course, there are still many undelivered orders, whether it's BYD or Tesla, many manufacturers have a large number of undelivered orders on hand. Therefore, the actual penetration rate is even higher. If we complete the production of 6 million units of new energy vehicles this year, I believe the scale next year should be around 9-10 million units. Of course, this still depends on supply. Now it seems that demand is growing stronger, because the experience of new energy vehicles is very good. The gap between electric cars and fuel cars is quite big, whether it's in terms of intelligence, screen size, the number of screens, cost reduction, green plates, etc.

As for BYD, our new orders are increasing every month, probably at around 700,000 undelivered orders. Some may be delivered in June, but some may be cancelled. This number may still increase a lot in November and December, because of the subsidy cut, many people may accelerate their purchases. Therefore, we need to increase production capacity.

Q: From the guidance, we can see that you are quite confident about the overall industry and shipments next year. However, after the subsidy cut in the next year, consumers' purchasing enthusiasm may decrease, and the single-vehicle profit raised this year will also be reduced by the subsidy cut. After the subsidy cut, do we need to return part of the subsidy cut from profits to consumers?

A: We can respond to policy subsidy cuts through economies of scale, price increases, or competitive procurement. Through competitive procurement, the price of our raw materials decreases by 3-5% each year, usually 5%. Especially with the increasing scale of BYD, the cost savings of 5% can roughly offset 7,000 yuan. Of course, as BYD's scale becomes larger and larger, depreciation, sales, and R&D sharing can lead to a monthly increase in gross profit margin.

In addition, the sales structure of BYD Tang and Han is becoming larger and more optimized. In the context of strong demand, after the price increase, the orders are not decreasing but still increasing, because there is a synergistic effect in the industry, and everyone should be raising prices. From the data perspective, I believe that BYD can completely absorb the subsidy cut and gain an increase in profit. Q: With the current high demand for power batteries and energy storage batteries, how much contribution can Fudi exports make to the revenue and profit in the second quarter? What is Fudi's capacity planning for the next two years and what percentage of power and energy storage batteries can be exported?

A: BYD's growth is driving Fudi's rapid development. We were not well prepared last year, which has caused a lot of embarrassment this year. In summary and according to the market needs and the auto show situation, we estimate that there will be a large demand for power and energy storage batteries in China next year. Frankly speaking, BYD's passenger car sales volume is very large, but the future growth cannot be as fast as before, so some resources will be freed up for exports. Fudi's main production capacity will still be internal next year, but external supply may increase a little in the following years. This is our current overall plan.

Q: In the past one or two years, BYD has been relatively cautious in terms of intelligence, leading with safety. At this point in time, what plans do we have for intelligence?

A: We have been developing hardware and software all along, and solutions will be slowly introduced by the end of this year or next year. BYD will launch some high-end vehicle models next year that will have advanced assistance features. Due to current regulations, we can only focus on driving assistance to reduce accidents and fatigue, which is our current priority.

Q: How do you view the competition pattern of hybrid vehicles in the second half of this year and next year? What will be the proportion of pure electric and hybrid vehicles?

A: BYD has conducted ample research on the Chinese market and we believe that nearly 50% of vehicles belong to new purchases, and the other half consists of replacement or additional purchases. As the first car for many families, long-distance driving must be considered; thus, pure electric vehicles are not popular, plug-in hybrids are what this group is most satisfied with. Therefore, after years of effort, BYD has developed the DMI product, which has been successful.

Plug-in hybrid cars face three obstacles:

(1) The first is technology. Many experiments need to be conducted in all seasons. For example, at least two rounds of experiments are required in winter to solve all of the problems.

(2) The second is cost. I believe our peers face a hurdle in terms of cost.

(3) The third is production capacity. We have made significant efforts to solve the DMI's production capacity, but ramping up production capacity is still difficult.

Whether plug-in hybrids can be converted into pure electric depends on China's development of charging infrastructure and the public's range anxiety. When range anxiety is resolved, plug-in hybrids may gradually become pure electric.

However, I believe that China will take at least three to five years to transition from plug-in hybrids to pure electric.

Q: BYD has entered the overseas markets in South America, Southeast Asia, and Europe but has not yet entered the US market. Recently, the US has proposed an anti-inflation bill. How do you view the US market? How will the anti-inflation bill affect the entire electric vehicle industry chain?

A: The US anti-inflation bill states that 7500 US dollars in subsidy for new electric car owners will only be given to vehicles produced in the US and batteries made in the US with US materials. Under such regulations, it is difficult for Chinese companies to continue doing business in the US, so BYD has temporarily given up on the US market. Q: China's consumer preferences are constantly changing. How can BYD maintain its competitive position and market share in the country in the future?

A: Product technology should be the most important factor, especially for the younger generation who are increasingly focused on it. BYD has always been a leader in product technology and innovation, especially with our DMI hybrid technology, e-platform 3.0, and CTB technology. The Han and Song PLUS models, among others, have received excellent reviews. I believe that only a leading product or technology can maintain a long-term advantage.

Q: What is the planned production capacity for vehicles and batteries at the end of this year and next year? The Dolphin has gained a lot of attention, but there have been relatively few exhibitions. Could you share the progress related to it?

A: Underestimating the market last year has made us very passive this year, with long delivery times leading to frequent complaints. This year, we have made good preparations, and I believe that next year's battery, power semiconductor, and vehicle production capacity will grow in sync. We plan to produce 4 million vehicles and up to 300 GWh of batteries next year, or even more. In addition, we are synchronizing our vehicle regulation, semiconductors, electric motors, and controllers to meet next year's total demand.

The Dolphin has gained a lot of attention recently, and we are under a lot of pressure to deliver. We delivered more than 1,000 units this month alone. Recent power outages and the pandemic have put pressure on the Dolphin's industry chain, and we are intentionally slowing down the production of this new product to prioritize the delivery of existing products.

Q: BYD has been very successful in its DMI strategy. In which area do you think the next breakthrough in the field of electric vehicles will occur?

A: In 2024, we will launch the fifth generation of DMI, which will consume even less fuel than the fourth generation and will have more localized design. It will be better in terms of performance, cost, and skill level than our current DMI.

Of course, there are many new technologies to come. We will launch BYD's most high-end brand next year, which will have a million-dollar price tag and match that with high-end technology.

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