BYD Enters the Vaping Industry! How Long Can OEM High Margins Last?
On May 26, BYD Electronics (00285.HK), listed on the H-share market, entered the e-cigarette market, igniting excitement in the market.<\/p>
Reports indicate that BYD Electronics' e-cigarette business has completed its patent layout and is expected to achieve large-scale production in June this year. Following this news, BYD Electronics' stock price surged by 11.73%.<\/p>
In 2020, another H-share listed e-cigarette leader, Smoore International, achieved operating revenue of 10.079 billion yuan, with a net profit (excluding non-recurring gains and losses) of 3.432 billion yuan. BYD Electronics' entry into the e-cigarette field has raised high expectations in the market.<\/p>
BYD Electronics is a subsidiary of BYD (002594.SZ) and is already a leading global provider of smart product solutions, offering one-stop services including new material development, product design and development, manufacturing, supply chain management, logistics, and after-sales support.<\/p>
According to Changjiang Business Daily, in addition to e-cigarettes, last year, BYD Electronics also quickly entered the mask sector, providing anti-epidemic protective products globally, which also brought significant profits to the company.<\/p>
The push into “side businesses” may be related to BYD's own weak profitability. In the first quarter of this year, BYD reported a net profit attributable to shareholders of the listed company of 237 million yuan, only about 31% of the net profit in the first quarter of 2019.<\/p>
Large-scale production of e-cigarettes expected in June<\/strong><\/h3>
BYD's entry into the e-cigarette field has stirred the e-cigarette market significantly.<\/p>
On May 26, BYD Electronics' stock price soared, with an intraday increase of up to 22%, although it later retreated, still closing with an increase of 11.73%.<\/p>
In contrast, Smoore International's stock fell by 17.10% that day, while China Boton dropped by 17.94%.<\/p>
The direct cause of this change is BYD Electronics' entry into the e-cigarette market.<\/p>
Public information indicates that BYD Electronics' e-cigarette business has completed its patent layout, and the production line has entered trial production, with large-scale production expected in June.<\/p>
Regarding whether BYD Electronics will launch its own e-cigarette brand or have independent listing plans, BYD responded that the e-cigarette business primarily focuses on OEM for brand clients and does not have independent listing plans.<\/p>
In fact, BYD has long been laying the groundwork for its e-cigarette business.<\/p>
On January 19 of this year, BYD publicly disclosed a patent titled “An Electronic Cigarette,” with publication number CN212368321U, applied for on March 6, 2020. The patent summary indicates that this utility model provides an electronic cigarette, including the main body of the electronic cigarette and sensors, comparators, counters, and displays set on the main body. One end of the sensor is installed on the mouthpiece of the electronic cigarette, while the other end is connected to the comparator. One end of the counter is connected to the comparator, and the other end is connected to the display.<\/p>
Reports indicate that BYD's e-cigarette business is progressing smoothly, nearing mass production, with visitors having toured its e-cigarette production line, which has 40 production lines operating at or near a hundred billion level.<\/p>
On April 1 of this year, the research team led by Yan Fan from China Merchants Securities stated in a report that BYD Electronics' e-cigarettes are a growth highlight. The company's electronic vaporization products are expanding smoothly, benefiting from increased R&D in electronic vaporization pods last year. This business is expected to become an important highlight of performance exceeding expectations this year and in the future.<\/p>
In the A-share market, Yiwei Lithium Energy and Zhongjing Electronics are considered e-cigarette concept stocks. Yiwei Lithium Energy is a significant shareholder of Smoore International, and due to the sharp decline in Smoore International's stock price, Yiwei Lithium Energy's stock fell by 4.15% on May 26.<\/p>
In contrast, as a supplier for BYD's e-cigarette business, Zhongjing Electronics' stock price rose by over 3% on May 27.<\/p>
On December 2 of last year, Zhongjing Electronics stated on an interactive platform that its e-cigarette products are currently mainly supplied in bulk to overseas brand clients through BYD's OEM, with preliminary expectations of significant volume in the second quarter of 2021.<\/p>
The entry of giants into the e-cigarette field will inevitably lead to a share of the market, and the decline in stock prices of Smoore International and China Boton is not surprising.<\/p>
However, on the afternoon of May 26, the National Health Commission and the WHO Representative Office in China jointly released the "2020 Report on the Harm of Smoking in China," clearly stating that there is sufficient evidence that e-cigarettes are unsafe and can harm health.<\/p>
Wherever there is profit, there is support for high valuations<\/strong><\/h3>
Entering the e-cigarette market may be an important way for BYD to seek new profit growth points. BYD's high valuation urgently needs fundamental support.<\/p>
BYD Electronics is a subsidiary of BYD, with BYD holding approximately 65% of its shares.<\/p>
Data shows that BYD Electronics is a representative leading enterprise in independent innovation in the OEM and processing field, with its main business including smart phones, computers, new smart products, and automotive intelligent systems.<\/p>
In 2018 and 2019, BYD Electronics achieved operating revenues of 41.412 billion yuan and 53.409 billion yuan, with year-on-year growth rates of 5.77% and 28.97%, and net profits of 2.189 billion yuan and 1.598 billion yuan, with year-on-year declines of 15.33% and 27%.<\/p>
In 2020, the company achieved operating revenue and net profit of 73.491 billion yuan and 5.441 billion yuan, with year-on-year growth rates of 37.59% and 240.59%, and net profit growth of 2.4 times, far exceeding the operating revenue growth during the same period.<\/p>
The unexpected surge in performance in 2020 was due to BYD Electronics' entry into the mask sector.<\/p>
After the outbreak of the pandemic last year, there was a shortage of essential protective materials, and BYD announced its entry into mask production. In early May last year, BYD publicly announced that it had built 300 mask production lines, with a daily output of 20 million masks, producing 231 masks every second. At that time, the market predicted that BYD's mask business would profit approximately 269 million yuan in the first quarter.<\/p>
BYD's mask business was also handled by BYD Electronics, which was a significant reason for the substantial increase in net profit throughout the year.<\/p>
In 2020, with the improvement of the new energy vehicle market in the second half of the year, coupled with increased government subsidies and other factors, BYD achieved operating revenue of 156.598 billion yuan, a year-on-year growth of 22.59%, setting a new historical high. The company achieved a net profit of 4.234 billion yuan, a year-on-year increase of 162.27%, also achieving a doubling effect.<\/p>
However, in the first quarter of this year, BYD achieved operating revenue and net profit of 40.992 billion yuan, with year-on-year growth of 108.31%, net profit of 237 million yuan, and a non-recurring net profit loss of 82 million yuan, with year-on-year growth of 110.73% and 82.69%.<\/p>
Changjiang Business Daily found that compared to the same period last year, BYD achieved significant growth in net profit and non-recurring net profit, but in the first quarter of 2019, its net profit and non-recurring net profit were 750 million yuan and 412 million yuan, respectively, making this year's first quarter net profit approximately 31.60% of the same period in 2019, with a nearly 500 million yuan difference in non-recurring net profit.<\/p>
With operating performance under pressure, BYD seems to have chosen a temporary business strategy of "doing whatever is profitable."<\/p>
In the secondary market, BYD has experienced a significant rise since last year. At the beginning of last year, its stock price was 47.61 yuan/share, reaching a peak of 273.37 yuan/share on February 3 this year, with a maximum increase of 474.19%. However, the stock price has since continued to decline, closing at 177.45 yuan/share on May 27. On that day, its price-to-earnings ratio was 119.91 times, with a dynamic price-to-earnings ratio exceeding 500 times, and a market capitalization of 507.71 billion yuan.<\/p>
Clearly, the net profit of 237 million yuan in the first quarter cannot support a market value exceeding 500 billion yuan, and the strategy of entering "side businesses" to earn "quick money" may be one of BYD's choices to maintain its high valuation.<\/p>
Entering the e-cigarette market may be an important way for BYD to seek new profit growth points. BYD's high valuation urgently needs fundamental support.<\/p>
BYD Electronics is a subsidiary of BYD, with BYD holding approximately 65% of its shares.<\/p>
Data shows that BYD Electronics is a representative leading enterprise in independent innovation in the OEM and processing field, with its main business including smart phones, computers, new smart products, and automotive intelligent systems.<\/p>
In 2018 and 2019, BYD Electronics achieved operating revenues of 41.412 billion yuan and 53.409 billion yuan, with year-on-year growth rates of 5.77% and 28.97%, and net profits of 2.189 billion yuan and 1.598 billion yuan, with year-on-year declines of 15.33% and 27%.<\/p>
In 2020, the company achieved operating revenue and net profit of 73.491 billion yuan and 5.441 billion yuan, with year-on-year growth rates of 37.59% and 240.59%, and net profit growth of 2.4 times, far exceeding the operating revenue growth during the same period.<\/p>
The unexpected surge in performance in 2020 was due to BYD Electronics' entry into the mask sector.<\/p>
After the outbreak of the pandemic last year, there was a shortage of essential protective materials, and BYD announced its entry into mask production. In early May last year, BYD publicly announced that it had built 300 mask production lines, with a daily output of 20 million masks, producing 231 masks every second. At that time, the market predicted that BYD's mask business would profit approximately 269 million yuan in the first quarter.<\/p>
BYD's mask business was also handled by BYD Electronics, which was a significant reason for the substantial increase in net profit throughout the year.<\/p>
In 2020, with the improvement of the new energy vehicle market in the second half of the year, coupled with increased government subsidies and other factors, BYD achieved operating revenue of 156.598 billion yuan, a year-on-year growth of 22.59%, setting a new historical high. The company achieved a net profit of 4.234 billion yuan, a year-on-year increase of 162.27%, also achieving a doubling effect.<\/p>
However, in the first quarter of this year, BYD achieved operating revenue and net profit of 40.992 billion yuan, with year-on-year growth of 108.31%, net profit of 237 million yuan, and a non-recurring net profit loss of 82 million yuan, with year-on-year growth of 110.73% and 82.69%.<\/p>
Changjiang Business Daily found that compared to the same period last year, BYD achieved significant growth in net profit and non-recurring net profit, but in the first quarter of 2019, its net profit and non-recurring net profit were 750 million yuan and 412 million yuan, respectively, making this year's first quarter net profit approximately 31.60% of the same period in 2019, with a nearly 500 million yuan difference in non-recurring net profit.<\/p>
With operating performance under pressure, BYD seems to have chosen a temporary business strategy of "doing whatever is profitable."<\/p>
In the secondary market, BYD has experienced a significant rise since last year. At the beginning of last year, its stock price was 47.61 yuan/share, reaching a peak of 273.37 yuan/share on February 3 this year, with a maximum increase of 474.19%. However, the stock price has since continued to decline, closing at 177.45 yuan/share on May 27. On that day, its price-to-earnings ratio was 119.91 times, with a dynamic price-to-earnings ratio exceeding 500 times, and a market capitalization of 507.71 billion yuan.<\/p>
Clearly, the net profit of 237 million yuan in the first quarter cannot support a market value exceeding 500 billion yuan, and the strategy of entering "side businesses" to earn "quick money" may be one of BYD's choices to maintain its high valuation.<\/p>
