The competition between the two leading companies in the electric vehicle industry in China and the United States is becoming increasingly fierce.

On August 29, BYD (002594.SZ) disclosed its semi-annual report, with its second-quarter revenue alone reaching 176.2 billion yuan, approaching Tesla's (TSLA) $25.5 billion (calculated at the average exchange rate of 7.21 RMB to the US dollar in the second quarter, which is 181 billion yuan).

BYD achieved nearly 1 million vehicle sales in a single quarter, while Tesla only had less than 450,000.

However, BYD's current market value (725.6 billion yuan) is still only about one-seventh of Tesla's (684 billion US dollars); on the other hand, BYD and Tesla's gross profit margins are 18.69% and 18%, respectively. Looking at the net profit attributable to shareholders of the parent company in the second quarter, BYD is 9.062 billion yuan, and Tesla is $1.478 billion, further narrowing the gap between the two.

BYD accelerates its overseas expansion, while Tesla's sales decline.

Against the backdrop of a more intense price war in the automotive industry in the second quarter of 2024, BYD continues to increase sales efforts, and Tesla's leading revenue advantage is no longer significant.

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According to calculations by analyst Wu Hao from Xinda Securities, BYD achieved a revenue of 176.18 billion yuan in the second quarter, a year-on-year increase of 25.9%; it achieved a net profit attributable to the parent company of 9.062 billion yuan, a year-on-year increase of 32.8%, with a single-quarter sales volume of 987,000 vehicles, a year-on-year increase of 40.2%. However, the revenue per vehicle was 136,000 yuan, a year-on-year decrease of 13.2%; the net profit per vehicle was 8,000 yuan, a year-on-year increase of 0.83%, further reflecting the cost advantage brought by economies of scale and highly integrated supply chains.

Yang Yang, an analyst at Hualong Securities, stated that looking ahead to the second half of the year, BYD has a rich reserve of high-end models, and the dense launch is expected to achieve a significant increase in volume. In the second half of 2024, the average price per vehicle is expected to rise. Additionally, the overseas layout continues to intensify, and in terms of production capacity, the Thailand factory has started production in July 2024, with factories in Brazil, Turkey, Hungary, and other places expected to gradually come online, and local production is expected to promote an increase in market share.

On July 24, Tesla announced its financial report for the second quarter of 2024. The report shows that the second-quarter revenue was $25.5 billion, a 2% increase compared to the same period last year's $24.927 billion; the net profit was $1.494 billion, a 42.8% decrease compared to the same period last year's $2.614 billion; the total gross margin was 18%, a slight year-on-year decrease of 0.2%; the net profit attributable to common shareholders was $1.478 billion, also a significant year-on-year decrease of 45%.

Tesla's global vehicle sales were 444,000 cars, a year-on-year decrease of 22,000, down 4.8%.During the earnings call in the early morning of July 24th, Tesla CEO Elon Musk stated that the company would seek regulatory approval in Europe and China to implement supervised Full Self-Driving (FSD), with an expectation to receive approval by the end of this year. Musk anticipates delivering a more affordable vehicle in the first half of 2025 but chose not to disclose any details about future cars, as it might impact near-term sales.

Additionally, Tesla's Robotaxi initiative is scheduled for release on October 10th. Previously, Musk had posted on his personal social platform that the Tesla Robotaxi would be launched on August 8th. The delay in the vehicle's release is attributed to Musk's request for design changes. He believes that the Robotaxi vehicles can be used around the clock, serving as full-time members or part-time contributors to a fleet, with owners sharing profits directly with Tesla.

Lin Jiayi, General Manager of Xuanjia Fund, told reporters from Yicai that BYD covers almost all types of models, while Tesla has a limited range, mainly the Model 3 and Model Y. Large-scale component procurement has allowed Tesla to control supply chain costs effectively. Overall, BYD's larger scale and mostly self-supplied supply chain have gradually improved cost control. If Tesla's future new products do not sell well, the valuation logic will be disrupted, reverting to the downward logic of automotive stocks.

Net Profits Are Gradually Closing the Gap

In terms of net profit, BYD achieved a net profit attributable to the parent company of 9.06 billion yuan in the second quarter, a year-on-year increase of 32.8%. Tesla's net profit was $1.494 billion, a 42.8% decrease from the $2.614 billion in the same period last year, indicating that the gap between the two is narrowing.

On September 1st, at the 2024 World Power Battery Conference, BYD CTO Sun Huajun discussed two aspects of cost reduction. One aspect involves learning from the Toyota model, with extreme manufacturing and continuous improvement, stating that "every minor improvement is an opportunity for us to reduce costs." On the other hand, he shared BYD's philosophy of "technology as king, innovation as the foundation." What does innovation as the foundation mean? He believes that innovation serves to reduce costs, and the essence of technological innovation is to lower costs.

Regarding future operational risks, BYD stated in its semi-annual report that its main business is in highly competitive industries, facing fierce market competition both domestically and internationally. As the best solution to air pollution and energy scarcity, new energy vehicles have seen a series of industry support policies introduced by national and local governments to support the continuous development of the new energy vehicle industry. Any changes or adjustments to these policies in the future may affect the level of policy support the group enjoys, potentially impacting the operation of the main business in the short term. Additionally, the main raw materials required for the company's production include steel, plastics, and other metal raw materials such as lithium and copper. Fluctuations in raw material prices will directly affect the production costs of the group's main business, thereby having a certain impact on the group's operating performance.

Tesla mentioned in its financial report that despite fierce competition and continuous technological investment, the company still achieved a record total revenue. However, the decline in profits was mainly due to increased operating expenses from AI projects, a decrease in vehicle deliveries, a drop in average selling prices, and costs associated with restructuring.

CITIC Construction Investment Securities stated that Tesla's operating profit per vehicle in the second quarter of 2024 was $0.33 thousand per vehicle, a 43% year-on-year decrease, and a 14% sequential increase. This was mainly due to a 11% sequential decrease in fixed costs per vehicle and a 1% sequential increase in variable costs per vehicle to $3.39 thousand. Additionally, Tesla's sales and R&D expense ratios in the second quarter were 5.0% and 4.2%, respectively, decreasing by 1.4 percentage points and 1.2 percentage points sequentially.

On July 30th, according to a report from the U.S. National Highway Traffic Safety Administration (NHTSA), Tesla initiated a large-scale recall. This recall involved Model 3, Model S, Model X from 2021 to 2024, and Model Y from 2020 to 2024, totaling 1.85 million vehicles. The reason for this large-scale recall was that the software might not detect if the hood was not locked, and an unlocked hood could fully open, obstructing the driver's view and increasing the risk of collision. This recall will be completed through over-the-air (OTA) upgrades.Valuation Gap is Significant

BYD's latest price-to-earnings ratio (TTM) stands at 22 times, while Tesla's has reached 60 times, and well-known investors have uncertain views on the two companies.

Cathie Wood, head of ARK Investment Management, which has a significant stake in Tesla, said in a recent interview that Tesla will achieve a substantial increase in its stock price by launching its Robotaxi business, with an estimated increase of about 10 times. She believes that Tesla will transition from being an "electric vehicle manufacturer" to a supplier of autonomous driving taxi services, and will reap substantial profits at that time.

On the evening of July 22, information disclosed by the Hong Kong Stock Exchange showed that Berkshire Hathaway, under Warren Buffett, sold 1.3955 million shares of BYD on July 16, 2024. After the sale, it still holds 4.94% of H shares, with a share count of 54.2 million. If Buffett further reduces his holdings in BYD, he will no longer need to disclose it. Some industry insiders believe that this represents Buffett's profit-taking from his investment in BYD over the past decade or so. Buffett may have concerns about future global electric vehicle support policies, or he may consider that compared to other holdings, BYD's valuation is not low.

Regarding the significant valuation difference between the two giants, Fuwen Hao, a researcher at Cheese Fund, believes that on the one hand, the valuation difference between the two companies is due to the relatively lower risk preference in the domestic market compared to the risk preference in the U.S. stock market. On the other hand, it is also due to Tesla's more obvious advantages in globalization and the accumulation of research and development in intelligent driving. Lin Jiayi believes that at present, the U.S. market is still in a stage of capital chasing gains, while the domestic market is in a relatively pessimistic phase, and the cross-market spread still exists. In addition, the valuations of electric vehicle companies are generally too high, and after the penetration rate increases, the future growth rate will gradually slow down. As price wars intensify, the expected return is indeed decreasing.