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Investing.com -- In a note Tuesday, JPMorgan analysts assessed the recent 9% drop in BYD (SZ:002594) shares, pointing to concerns about a deepening price war in China’s auto market.
“BYD’s share price pulled back by near 9% today... which triggers investor concern of worsening pricing environment,” JPMorgan wrote, referencing unanticipated price cuts across BYD’s key “Ocean” and “Dynasty” model series.
The company announced discounts of 15–30% versus MSRP for 21 models, though JPMorgan notes the effective new incentives are closer to 5–15%, given prior discounts.
The bank explains that the cuts appear aimed at defending market share amid foreign competition and helping BYD hit its second-quarter delivery target of 1.2 million units.
While aggressive pricing may raise concerns about profitability, JPMorgan remains optimistic.
“As long as BYD doesn’t exceed its annual [sales and marketing] budget, the company should be able to deliver its full year profitability guidance of a sustained per unit profit of Rmb10k,” the firm said.
Their current model already assumes a record 4.3% of revenue allocated to marketing, up from 3.6% in Q1.
Looking ahead, JPMorgan believes BYD’s strategy to mitigate domestic price pressure, via premium model launches and overseas expansion, should preserve earnings.
“Specially, exports or overseas market is expected to account for ~15% of BYD’s total sales volume this year while premium brands (i.e. Yangwang, Denza and Fanchengbao) 8-10%. These two businesses would account for ~23-25% of total sales volume but 40-50% of earnings in our estimate,” they wrote.
With strong in-store traffic and resilient demand observed on a May 24 store visit, JPMorgan sees no immediate need to revise earnings forecasts.