Maintain BUY. BYD’s 3Q26 net profit missed our forecast by 12% with several transitional factors. We view 4Q26 margin realization as key for assessing its FY27E earnings trajectory. We also believe BYD’s first-mover global manufacturing footprint could help mitigate trade risks.

3Q26 earnings miss on ASP, GPM and impairment. BYD’s 3Q26 revenue expanded 13.6% YoY to RMB221.5bn, trailing our prior forecast by 3.5%. GPM in 3Q26 widened by 0.6ppts YoY but narrowed by 0.9ppts QoQ, lower than our projection by 0.4ppts. SG&A and R&D expensed combined were largely in line. Impairment losses reached RMB1.7bn in 3Q26, or about RMB750mn higher than our projection. Consequently, 3Q26 net profit rose 28.1% YoY to RMB10.0bn, falling RMB1.4bn short of our estimate. Net profit per vehicle rose by 1.8% QoQ to about RMB7,600.

4Q26 margin realization serves as a key signal for FY27E profitability. We believe that multiple transitional factors distorted 3Q26 results, including the initial rollouts of a few 2nd-generation blade battery models, forex loss and larger-than-expected impairment losses. Margin impact could be more intangible in 4Q26E when the production of new models ramps up. We view 4Q26 margin execution as a critical signal for assessing FY27E earnings.

First-mover advantage in European localization. Mass production at its Hungary plant is scheduled for 4Q26, making BYD one of the first Chinese automakers to operate a fully integrated EU manufacturing process encompassing stamping, welding, painting and final assembly. This local footprint provides structural insulation against upcoming EU import quotas and tariff burdens on Chinese hybrid vehicles. BYD’s Brazil plant, operational since 2025, demonstrates strong early execution, with the company currently seeking regulatory permits to double annual capacity to 600,000 units.

Earnings/Valuation. We cut our FY26E net profit forecast by 5.2% following 3Q26 miss, implying a net profit of RMB11.9bn in 4Q26E. We maintain our FY27E sales volume forecast of 5mn units and trim net profit by 2.2% to RMB42.2bn, assuming lower impairment and forex losses. We maintain our BUY rating but cut H-share target price from HK$125 to HK$109, based on 20x (prior 22x) our revised FY27E EPS to reflect persisting sector headwinds. We cut A-share target price from RMB125 to RMB108 based on YTD AH premium of 17%. Key risks include lower sales volume margins than we expect, as well as a sector de-rating.