Revaluing BYD - Sweeping Changes Coming to the Auto Industry

Overweight: BYD (1211.HK) | Target Price: 500 RMB (57% Upside) 

Underweight: Xpeng (XPEV), Li Auto (Li), Tesla (TSLA) 

Our previous valuation of BYD (1211.HK) was based entirely on Toyota’s business model—a model that focuses solely on the hardware aspect. Under that framework, BYD leveraged its vertical integration, massive scale, and technological innovation to reduce costs and boost efficiency. However, competition is rapidly catching up. The automotive industry remains highly capital-intensive, with low net margins (approximately 5% NIM). For example, Geely Auto (00175) introduced its EM-i system to directly compete with BYD’s DM-i, thereby capping the net profit per vehicle. As a result, BYD has been forced to continuously lower prices, effectively transferring most of its efficiency gains to consumers in order to expand its market share. This business model relies purely on volume. Although overseas expansion and an enhanced product mix through premium brands are developing rapidly as core growth drivers, the majority of BYD’s revenue still comes from vehicles priced under 200,000 RMB in China. (The graph below illustrates the percentage of BYD vehicles selling above 200,000 RMB.) 

Following yesterday’s launch of its advanced driver assistance systems (ADAS) technology, I believe it is time to revalue BYD. The entire business model has undergone a transformation that most investors have yet to fully appreciate. The key change is the shift from competing solely on price to a model that integrates both software and hardware. No one expected such integration to be achieved in vehicles priced below 200,000 RMB (approximately 30,000 USD)—yet BYD has done it. We are now witnessing a company that benefits not only from economies of scale but also from a robust software ecosystem. BYD is emerging as a behemoth that fuses the DNA of both Toyota and Tesla, something unprecedented in automotive history. 

Competing purely on price is a challenging proposition: products become highly homogeneous, and consumers—who generally have limited insight into auto configurations—find it difficult to discern quality. However, when ADAS driving technology penetrates the sub-200,000 RMB segment, it

effectively ends the price war and shifts the competition to the realm of ADAS technology. This new approach enables significant differentiation that consumers can perceive and for which they are willing to pay a premium. It creates a “what we have that they don’t” advantage. Ordinary automakers will struggle to catch up because they lack the necessary data and scale; many have not even completed the first step toward electrification, making it impossible for them to follow suit. 

Only BYD can achieve profitability in the sub-200k segment by offering ADAS driving technology free of charge. Other companies will end up competing at a loss because they lack the requisite technological know-how and cannot spread fixed costs over sufficient volume. BYD asserts that, except for rubber and glass, it develops nearly all components in-house—or initially collaborates and then transitions to self-development. This strategy enables BYD to maintain costs at more than 30% lower than those of its competitors. To achieve ADAS is incredibly sophisticated, the scope spans chips, domain controllers, drive-by-wire chassis, cameras, millimeter-wave radar and LiDAR sensors, self-driving algorithms, data processing, and more—a truly massive undertaking. In my view, the challenge of integrating ADAS driving technology is even greater than that of developing batteries and electric motors. Once ADAS driving becomes a necessity for vehicles under 200k, it will create a significant competitive moat for BYD, leading to increased market share and enhanced brand value. 

I believe BYD’s ADAS driving software will evolve into a first-tier solution, potentially even surpassing that of Huawei in the coming year. With the largest running fleet collecting data for model training, a substantial budget, and the largest team of engineers dedicated to the software—and with full support from BYD’s vertically integrated supply chain—BYD is positioned to implement improvements faster than its competitors. For example, as reported in today’s WSJ: 

“BYD’s founder, Wang Chuanfu, said his company had an advantage because it has so many cars on the road to collect data for training its AI system. ‘If the data from a car is a drop of water, then BYD has an ocean of it,’ he said. BYD has said it plans to invest about $14 billion in AI and automotive intelligence technology. The company has more than 5,000 engineers working on the technology. BYD also said it has started using AI models developed by Chinese startup DeepSeek.” 

The same investment logic that applies to Tesla is now relevant for BYD. The pace at which software can be updated far exceeds that of hardware, effectively shifting the competitive intensity to an entirely new level—your car could be different from one week to the next, delivering enormous value to tens of millions of customers on its platform, while BYD achieves these updates via OTA software upgrades at minimal cost. I believe that a company’s profit is determined by the value it creates; only those companies that relentlessly create value are worthy of our investment. BYD’s value lies in its platform and its potential for generating future cash flow—this is also the core rationale behind Tesla’s valuation. With its recent launch event, an entirely new business model has unfolded before our eyes—from nothing to a potentially first-tier ADAS ecosystem—so swiftly that the capital market cannot react quickly enough. 

What does this mean for other automakers? From Xpeng, Li Auto, and Tesla to legacy manufacturers such as Toyota in China, the impact is transformational and is slowly being reflected in the capital markets. Investors are adjusting to this new reality where access to ADAS driving technology is no longer limited to high-end models, and future subscription revenue may be less relevant since BYD offers the technology for free. This shift is negative for these automakers because they burn

cash manufacturing cars, relying on the hope that one day they can recoup the loss through selling autonomous technology, and now the previously anticipated revenue from subscriptions has effectively been eliminated—at least for the next three years, ADAS is provided free of charge, making it an inherent feature rather than an add-on. In the long run, the data, R&D investment, and brainpower of these companies are not as robust as BYD’s, meaning they may not be the first to achieve full ADAS driving. Without pricing power, their valuations will inevitably change. I believe that BYD’s smart driving technology is among the top tier—perhaps even surpassing Huawei from a developmental perspective. 

Another catalyst I have consistently emphasized is that BYD’s net profit per vehicle will exceed 10,000 RMB, which should be evident by the end of this year at the latest. With the price war essentially over, competition shifting to smart driving, rapid overseas expansion, new product launches that increase the proportion of high-end models (thereby raising the average selling price per vehicle), and rising production volumes that compel dealers to reduce costs by 10% to achieve scale effects, the outlook is very positive from both pricing and cost perspectives. I expect the results to exceed our expectations. Although increased R&D spending on smart driving could impact net profit, such investment should be viewed as long-term.

I believe the capital market will revalue BYD, raise its valuation midpoint, and correctly reflect this year and future growth expectations. This year, I am projecting a net income of 60 billion RMB—based on 5.5 million cars sold with an average profit of 11,000 RMB per car—and a 25x P/E valuation. This target implies a market value of 1.5 trillion RMB, or approximately 500 RMB per share, representing a 57% upside. It is the clear leader in the EV race and trades at a low multiple. 

Some catalysts include the upcoming product launch of Han L & Tang L models, featuring the second generation of blade batteries and equipped with the newest ADAS technology. There also have been talks about the “Lightning Project” that BYD is currently undertaking with its dealers that will fully charge a vehicle within 10 minutes. This will improve the lagging EV penetration in its product mix. 

The monthly sales numbers, if they exceed expectations, reflecting the dominance of ADAS technology under 200k RMB, will also prompt analysts to increase the sales forecast for the future. Overseas sales growth and the opening of new factories in Brazil and Hungary will likely boost profit margins. If the earnings report for 2024 FY exceeds expectations, it will also lead to an upgrade.

David Z.

2025.2.11