Maintain BUY. We view BYD’s setback in 2Q25 as positive for its long-term expansion and product development. We believe BYD’s high earnings quality could still pave way for its solid earnings ahead.

2Q25 miss on lower GPM. BYD’s 2Q25 revenue rose 14% YoY to RMB200.9bn, in line with our prior forecast. Its gross margin fell 3.8ppts QoQ to 16.3%, lower than our forecast by 3ppts. We attribute such miss to higher rebates for old model destocking in 2Q25 and higher cost for ADAS functionalities during sales ramp-up. Its business tax, SG&A and R&D expense ratios combined fell 2ppts QoQ to 14.8% in 2Q25, better than our forecast by 1ppt. BYD’s 2Q25 net profit fell 30% YoY to RMB6.4bn (or RMB5,600 per vehicle), lower than our forecast by 36%.

2H25 earnings to recover on greater economies of scale. We cut our FY25E sales volume forecast by 5% to 4.9mn units (2.75mn units in 2H25E), as we believe BYD has become more cautious about its inventories. We expect 2H25E gross margin to rise 1.3ppts HoH to 19.3% amid greater economies of scale. With conservative forecasts for forex and government grants, we project BYD’s 2H25E net profit to rise 2% YoY and 75% HoH to RMB27.1bn, equivalent to RMB9,800 per vehicle.

High earnings quality paves way for FY26-27E. We view 2Q25’s setback as positive for the company to review its expansion strategies and investment priorities, which is crucial for its long-term premiumization and globalization. We believe it is better to encounter such problems earlier than later during the rapid expansion. The key reason why we still project a net profit of RMB9,800 per vehicle in 2H25 is BYD’s high earnings quality in R&D and fixed assets accounting treatment. About 96% of its total R&D investment was expensed in 1H25, vs. 35-70% for peers. We also believe BYD would be more aggressive on sales volume in FY26-27E, with lower priority on GPM. Therefore, we project sales volume YoY growth to be 14%/7% and GPMs to be 18.9%/18.8% in FY26-27E, respectively. We trim our FY26-27E net profit forecasts by 13-16% to RMB51.3bn/58.0bn, or RMB9,150/9,500 per vehicle, respectively.

Valuation/Key risks. We maintain our BUY rating and trim H-share target price from HK$156.67 (HK$470 prior to share dividend distribution and capital reserve conversion) to HK$140, based on 20x FY27E P/E (prior 23x FY25E P/E). Our A-share target price of RMB140 is based on its A/H premium of 10%. Key risks to our rating and target price include lower sales or margins than we expect, and a sector de-rating.