In recent months, the Chinese electric vehicle giant BYD has seen a remarkable juxtaposition of opinionsOn one hand, reports flooded in about BYD’s soaring debt, with financial media raising alarms about the company's near 600 billion RMB liabilities, likening it to the infamous collapse of EvergrandeThis news sent chills through investors, especially against the backdrop of a bear market following the National Day holiday, leading to a decline in BYD's stock price.

Conversely, a dramatic turnaround began in mid-January, with BYD's stock finding its footing and surging—by February 6, it even hit a limit upOver the course of just a month, the stock price climbed from 262 RMB to an impressive peak of 359 RMB, marking a staggering 37% hike and setting a historic highBYD's market capitalization also broke the 1 trillion RMB mark for the first time, earning it the distinction of being the second manufacturing company in the A-share market—following CATL—to achieve such a valuation.

Two months prior, the internet was rife with skepticism regarding BYD's debt levels, and now, as the stock achieves new heights, it raises questions about the credibility of those who doubted this growth trajectoryThis phenomenon surrounding BYD merits a closer examination.

First, let's delve into BYD's debt situationSince 2021, the company has indeed seen its liabilities escalate dramaticallyIn 2020, BYD's debts stood at about 136.6 billion RMB, which surged by 40% to 191.5 billion in 2021. By 2022, it ballooned to 372.5 billion, reflecting a staggering 94.5% increase, and in 2023, it continued to rise, crossing the 500 billion RMB threshold to reach approximately 529.1 billionProjections suggest that by the end of 2024, debts could surpass 600 billion RMB.

Over a mere four-year span from 2020 to 2024, BYD's liabilities expanded by nearly 500 billion RMB, averaging an annual increase of around 120 billion RMB

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This acceleration, when viewed in absolute numbers, undoubtedly raises eyebrows.

However, it’s pertinent to analyze the debt ratio as wellBYD’s debt-to-asset ratio climbed from 67.9% in 2020 to 77.9% in 2023, with the third quarter of 2024 maintaining this historic highThis indicates an almost 10 percentage increase compared to 2020, which cannot be overlooked.

In recent years, the economic landscape has shifted, particularly in the real estate sectorThis adjustment has heightened awareness of the risks associated with elevated debt, especially in the wake of Evergrande's collapse that reverberated throughout the marketIn this context, BYD's high debt levels created legitimate concerns for investors and consumers alike.

It's crucial to dissect the specifics of the debt increaseNot all liabilities are created equal; indeed, many fall into the category of interest-bearing debts, which include loans from banks and financial institutionsThese require interest payments—a metric worth scrutinizingTypically, such debts are divided into short-term borrowings and long-term debtsThe former generally incorporates loans with maturity periods of less than one year, while the latter pertains to longer durations.

In terms of short-term borrowings, BYD recorded 16.4 billion RMB in 2020, which marginally increased to 18.3 billion in 2023 and reached 20.55 billion by Q3 2024. This represents a mere 4 billion increase over four years—a negligible bump when considering the overall debt load approaching 600 billion RMB.

But what about long-term borrowings? These have shown a decrease from 14.7 billion in 2020 to about 11.98 billion in 2023, further dwindling to roughly 9.8 billion by Q3 2024—almost a 50 billion RMB reduction over four yearsTherefore, the crux of the debt increase lies elsewhere.

Primarily, BYD's debt comprises current liabilities, which accounted for 85.7% of total liabilities in 2023. Within this category, three significant aspects are evident: firstly, accounts payable surged from 51.9 billion RMB in 2020 to 198.5 billion in 2023—a monumental increase of 146.6 billion

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Secondly, other payables rose from 9.28 billion to 164.97 billion in the same timeframe, marking a 155.69 billion jumpFinally, contract liabilities rose by 26.51 billion RMB, from about 8.19 billion to approximately 34.7 billion.

The nature of the other payables raises questionsAccording to BYD’s financial reports, the primary content appears to be “external debts,” which by the close of 2023, totaled an impressive 163.6 billionWhile details about these “external debts” remain sparse, speculation suggests they relate to equipment purchases.

What’s evident from our analysis is that BYD's soaring liabilities correlate closely with its remarkable increase in salesThe significant rise in accounts payable points to obligations to suppliers, while other payables—a probable nod to equipment investments—highlight the necessity of boosting production capacity to keep pace with skyrocketing demandOver the past few years, BYD has seen explosive growth in sales, with an urgent need to expand manufacturing facilities, invest in land, construct new plants, and acquire production equipment.

Furthermore, contract liabilities reflect customer deposits—monies received from consumers for vehicles that BYD is yet to deliverHence, the high debt levels at BYD essentially embody the result of an unprecedented sales boom, which is a common phenomenon for manufacturing companies experiencing rapid growth.

Historically, between 2014 and 2020, BYD’s sales figures hovered around the four to five hundred thousand mark, which seemed modestHowever, 2021 heralded a turning point, initiating an explosive sales trajectory that saw numbers surge to over 730,000, doubling the following year to 1.87 million unitsIn 2023, BYD breached both the 2 million and 3 million thresholds, ultimately reaching 3.02 million sales—a staggering nearly tenfold growth in four years, with projections for 4.27 million in 2024 at a remarkable 40% growth rate.

Accompanying this sales explosion has been extensive investment in infrastructure

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From 2020 to 2023, fixed assets soared from 54.6 billion RMB to a towering 230.9 billion, an increase of 176.3 billionConcurrently, construction in progress expanded from 6.1 billion to 34.7 billion, marking a 28.6 billion increaseThe numbers indicate a surge of over 200 billion RMB in non-current assets alone.

Moreover, BYD's liquidity assets have also seen significant increases, with cash reserves escalating from 14.4 billion to 118.7 billion RMB, reflecting an increase of 10.43 billionInventory levels climbed from 31.4 billion to 87.7 billion, a jump of 56.3 billion, all corresponding to the sales increase, while accounts receivable rose from 41.2 billion to 61.9 billion, up by 20.7 billionTogether, these three categories contributed to a liquidity asset increase of over 181.3 billion RMB, complemented by substantial fixed asset and construction project increases; this totalled upwards of 400 billion RMB in asset growth.

BYD finds itself at a pivotal juncture, where the root cause of its burgeoning liabilities is intricately tied to an explosion in salesIt stands as a burgeoning industry leader, wielding considerable leverage within the supply chain, as evidenced by both accounts payable and other payablesHowever, sustaining such high debt ratios is unsustainable—most mainstream automakers maintain debt ratios exceeding just over sixty percentTo offer perspective, Toyota operates with a debt ratio of around 61% and Tesla maintains a lean 40%.

The last few years have been uniquely transformative for BYD, characterized by explosive growthFrom 2021 to 2024, BYD has broadened the accessibility of electric vehicles to unprecedented levelsThe company has reached a remarkable benchmark of sales exceeding 4 million—all electric vehicles—allowing ordinary consumers to experience the seamless pleasure of this technology.

Looking ahead, the next transformative phase for electric vehicles appears to be in the realm of intelligence—specifically, intelligent driving

Previously seen only in mid- to high-end electric vehicles, BYD’s integral mission now focuses on democratizing intelligent drivingAchieving this will be essential for further cementing its position as a sales leader, as mere reliance on their current electric vehicles will not sufficeHowever, by incorporating intelligent driving features, achieving the ambitious milestone of millions of vehicles sold within the next five years may become a reality.

While the development of intelligent driving entails considerable research and development costs, it follows a model that allows for near-zero marginal costs—much like internet enterprisesWith an annual sales volume surpassing 4 million units, BYD's marginal costs can be trimmed significantly; an addition of 10,000 RMB per vehicle could yield substantial funds—enough to cover the costs associated with enhancing intelligent driving capabilities, delighting consumers without excessive expense.

As of February 10, 2025, BYD has announced the advent of an era of smart driving accessible to all, promoting features like the “Eye of the Gods” C, which will encompass essential usage scenarios such as long-distance travel, commuting, and parkingThe first phase will see 21 models ranging from the 70,000 to 200,000 RMB bracket equipped with advanced smart driving capabilitiesThis initiative could potentially propel BYD towards a sales target nearing 5 million or even 6 million by 2025.

In January of this year, BYD's momentum continues unabated, achieving remarkable sales figures with 300,000 vehicles sold—an increase of 49% year-on-yearEven with such a high base, their growth remains impressiveTogether with the introduction of superior intelligent driving features across the entire range, one can only speculate at how sales numbers may further elevateThis could very well be the crux behind the recent surge in stock price, especially given that the current P/E ratio of around 30 remains significantly lower compared to Tesla’s 160 P/E ratio.

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