Bernstein: BYD's third-quarter profit rebounds sequentially, but lower export tax rebates weigh on earnings outlook

Why did gross margin fall as sales and profit recovered?

In the third quarter of 2026, BYD's revenue was 221.5 billion yuan, up 13.8% quarter on quarter; total wholesale sales were approximately 1.32 million vehicles, up 19.4% sequentially. Net profit reached 10.2 billion yuan, up 22.7% quarter on quarter, and net margin rose from 4.3% in the second quarter to 4.6%. Bernstein attributed the improvement to greater scale and better operating leverage.
However, third-quarter gross margin fell from 18.9% in the second quarter to 18.0%, below Bernstein's expectations. The firm said increased overseas sales incentives, battery consumption tax and renminbi appreciation all exerted pressure: the battery consumption tax in September affected quarterly profit by approximately 500 million to 600 million yuan, while foreign exchange losses were 2 billion yuan.
Net profit per vehicle was approximately 7300 yuan, slightly above the second quarter's 7200 yuan but still below the firm's expectations. Excluding non-recurring items, net profit attributable to shareholders was 8.6 billion yuan; the firm believes the difference from net profit of 10.2 billion yuan may be primarily related to its investment in ChangXin Technology.

Premium brands including Denza, Fangchengbao and Yangwang accounted for 13.9% of third-quarter sales, up from 8.3% a year earlier and 13.2% in the second quarter, as the product mix continued to improve.
Overseas sales accounted for 42.3% of the total, up from 21.1% a year earlier but slightly below 43.3% in the second quarter. Bernstein estimates third-quarter profit per vehicle at approximately 16 thousand yuan overseas and 2000 yuan domestically; the overseas estimate has been reduced from 20 thousand yuan due to currency effects.
Domestic market share in new energy vehicles also recovered from the second quarter. Meanwhile, cash balances declined, which management said was mainly due to payments for previous capital expenditure commitments on battery capacity expansion, overseas manufacturing and charging infrastructure. The company reiterated that 2026 capital expenditure would be approximately 100 billion yuan and expects investment intensity to slow over the following two years.

Bernstein is confident that BYD's overseas sales will reach 2.5 million vehicles in 2027 and raised its own forecast from 2.25 million to 2.5 million vehicles; it lowered its domestic sales forecast for the same period from 3.1 million to 3 million vehicles.
Management guided for overseas production of 600 thousand to 700 thousand vehicles in 2027 and more than 1 million vehicles by 2028, supported by the Hungarian plant due to start production and the Brazilian plant's continued ramp-up. Bernstein believes local production can support sales growth and help mitigate regulatory effects, including lower export tax rebates and Europe's proposed quota framework for hybrid vehicles.

To reflect the reduction in the VAT rebate rate on electric vehicle exports from 13% to 9% in 2027, Bernstein cut its gross margin forecast for that year from 20% to 19% and its earnings-per-share forecast from 5.50 yuan to 4.91 yuan. Although the overseas sales forecast was raised, the rebate change still weighed on margin assumptions.
The firm maintained its outperform rating but cut its Hong Kong share price target from 130 Hong Kong dollars to 115 Hong Kong dollars, and its A-share target from 114 yuan to 98 yuan. Its sum-of-the-parts valuation implies approximately 19 times 2027 forecast earnings.
Profit quality also merits scrutiny in conjunction with expense treatment: Bernstein estimates that BYD's R&D capitalization rate rose from 4.3% in the first half of 2025 to 19.2% in the first half of 2026, boosting reported profit in the latter period by approximately 4 billion to 4.5 billion yuan.