Latest financial results show that BYD Company Limited's first-half revenue exceeded Tesla's for the first time, but gross margin declined from 18.78% in the same period last year to 18.01%. The second quarter gross margin also dropped 3.8 percentage points sequentially to 16.3%.

According to trading desk sources, Morgan Stanley stated in its latest research report that BYD's second quarter gross margin hit its lowest level since Q2 2022. The margin compression directly impacted per-vehicle profitability, with Q2 per-vehicle profit falling from 8,800 yuan in Q1 to 4,800 yuan, nearly halving.

However, the report noted that the most puzzling aspect of these results is that strong overseas sales growth, favorable exchange rate factors (particularly in European markets), and continued production scale expansion - factors that should have boosted profits - do not appear to be reflected in the financial statements.

This disconnect surprised Morgan Stanley analysts, who began investigating whether Q2 results might contain certain "one-time" or "concentrated provision" negative factors.

**Profit Margins Under Unexpected Pressure from Three Key Factors**

BYD's second quarter core financial metrics contrasted sharply with high market expectations. Financial data showed quarterly net profit of 6.4 billion yuan, declining 31% sequentially and 30% year-over-year, significantly below Morgan Stanley's previous forecast of 10 billion yuan.

Sharp gross margin compression became the key factor eroding profits. The quarterly gross margin of 16.3% represented the lowest level since Q2 2022, notably when BYD's sales volume was only about one-third of current levels.

The decline in profitability was more directly reflected in per-vehicle profits. The report indicated that excluding BYD ELECTRONIC's profit contribution, BYD's automotive business generated only 4,800 yuan per vehicle in Q2, well below Q1's 8,800 yuan, returning to the lowest point since Q1 2022.

According to Morgan Stanley's analysis, margin pressure stemmed from three main sources. First, dealer rebates. To stimulate sales, BYD provided rebates for most vehicles sold in the Chinese market during the first half, directly eroding per-vehicle profits.

Second, rising costs. The company's promoted "God's Eye" advanced intelligent driving system enhanced product competitiveness but significantly increased per-vehicle manufacturing costs, while the resulting sales volume increase was insufficient to fully cover these additional expenses.

Third, price competition. Intense price wars in China's domestic market continued, with BYD's further price reduction measures since late April putting direct pressure on profit margins.

**The Profit "Mystery" Behind Strong Overseas Growth**

What truly puzzled analysts was the disconnect between strong overseas business performance and overall profit weakness.

Morgan Stanley specifically emphasized in its report that BYD's global expansion narrative remained unchanged despite these quarterly results. For example, new vehicle registrations in Europe tripled year-over-year over the past month, consistently outpacing Tesla.

However, the higher average selling prices, favorable exchange rate benefits, and greater scale effects that this overseas growth should have delivered failed to materialize in Q2 profit statements, creating a profit "mystery."

The report described this phenomenon as "surprising" and led analysts to suspect undisclosed one-time factors, or whether the company chose to concentrate negative cost absorption in Q2 to prepare for more significant cost reductions beginning in Q3 (i.e., "financial bath").

Until the company provides more details, this uncertainty may provide ammunition for market bears. The report suggested that potential catalysts to reassure investor sentiment might include seasonal sales recovery, new vehicle models launched around the Chengdu Auto Show, and whether overseas business can achieve genuine profit-level recovery.

Currently, BYD's Hong Kong stock price has retreated 27% from its year-to-date high but remains up 29% since the beginning of the year. Morgan Stanley expects the "tug-of-war between shorts and longs" around BYD's stock price to continue in the near term.