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BYD forecast a steep jump in 2023 net profit but that still missed some analyst expectations

Shares of Chinese electric-vehicle maker BYD were lower after its latest profit forecast fell short of expectations, amid an intensifying price war among China’s automakers.

Shares were 5.8% lower in afternoon trade in Hong Kong at HK$175.20, taking losses this year to over 18%.

BYD, the Warren Buffett-backed company that recently surpassed Tesla to become the world’s largest EV maker by sales volume, late Monday forecast a steep jump in 2023 net profit that nonetheless missed some analyst expectations. The Shenzhen-based company forecast full-year profit of between 29 billion yuan and 31 billion yuan, up 75%-87% on the year, on record sales of new-energy vehicles.

Nomura analysts said in a research note that the forecast was 4%-10% below their expectations, and highlighted a fourth-quarter bottom line that appeared to be down 7%-27% sequentially.

“Considering the intensifying competition in the China auto market, we have become more cautious regarding the margins and profitability of all players…exposed to China,” they wrote. With companies “sacrificing profitability for market share, it is possible that there may be no clear winners in the short run.”

Daiwa analyst Kelvin Lau said BYD’s profit per car fell from the third quarter, likely hurt by discounts offered during November and December to boost sales.

Citi analyst Jeff Chung said the full-year profit forecast was in line with the bank’s projection and the bottom line in the fourth-quarter net profit was lower than consensus, partly due to extra costs at the year’s end for dealer incentives. Sales-mix improvement on high-end products were lower than expected, Chung said, adding that the continuing price wars appear to be taking a toll.

He kept a buy rating but said the stock could be hurt in the short-term given the sector’s overall demand weakness in January along with a low-season impact in February and price-war uncertainty into March.

Shares of BYD Electronic, a maker of handset components, were also lower, slipping 4.8% in the afternoon trade to HK$27.65. The company late Monday forecast full-year profit to more than double on year to 3.9 billion yuan to 4.1 billion yuan, which Citi analysts said implied a 28%-44% sequential decline in fourth-quarter profit.

“Given expectations have been reset amid market caution on first-quarter seasonality and smartphone demand, we see this as a buying opportunity,” they said.

UK infrastructure costs are much higher than European peers, research shows

BCG report reveals price of a flat road in Britain is £8.45mn per km against European average of £5.77mn

The UK is burdened with significantly higher construction costs than European peers, according to research that lays bare the challenge of upgrading British roads, bridges and energy systems at a time of tight public finances.

Infrastructure project costs are much higher in the UK than in France, Germany and Spain, according to early findings from a Boston Consulting Group study that compared more than 1,600 projects around the world. 

The findings underline the tricky situation for politicians grappling with how to upgrade the country’s tattered infrastructure, fund the transition to a low-carbon economy and drive down public debt.

The pressure has piled on since Covid-19 as big construction projects suffer from sharp rises in material, labour and energy costs. Infrastructure construction costs in September 2023 were 25 per cent higher than in January 2020.

“The focus needs to be on how we can improve right across every stage of delivery of large infrastructure projects. Pushing more money into the pipeline alone won’t address much of the root causes,” said Raoul Ruparel, director of BCG’s Centre for Growth.

The National Infrastructure Commission has said overall public and private sector investment needs to increase from an average of about £55bn per year over the past decade to between £70bn and £80bn per year in the 2030s, to respond to global warming and bolster growth across UK regions.

This would entail one of the steepest jumps in UK infrastructure spending since the second world war, BCG estimates. 

The BCG analysis, due to be released next week, compares the unit costs and build times of road, rail and social infrastructure projects such as hospitals across six economies.

The report shows that on unit costs the UK spends more than Germany, France and Spain, as well as a wider grouping of countries across the EU. British costs are similar to those in the US, however, and below those of Australia. 

UK rail projects were found to be particularly expensive, with costs driven up in part by a handful of very large, complex projects. But even on more basic projects, such as flat roads, UK unit costs are higher, said Ruparel. 

For example, the average cost for a flat road in the UK is £8.45mn per km, compared with a European average of £5.77mn per km and £4.22mn per km in France, according to BCG.

Among the problems the UK faces are long planning times. While the UK is not the worst performer on unit costs, Ruparel said: “The picture becomes less rosy still when you consider decades of under-investment and the likely increase in demand for larger and more complex infrastructure projects.”

Infrastructure has moved up the UK political agenda after Rishi Sunak’s decision last year to cancel the northern leg of HS2 and a scandal over a potentially dangerous lightweight concrete used in schools and hospitals.

But hopes this might sow the seeds for a renewal have been overshadowed by political plans for a harsh retrenchment in public investment.

While UK public sector net investment is relatively high as a share of GDP, at 2.6 per cent in the current year compared with 1.5 per cent 10 years earlier, the Treasury has now pencilled in a cash-terms freeze after the election expected this year.

As a result, public sector net investment will be crunched by nearly £20bn between now and 2028-29 in real terms, according to the Institute for Fiscal Studies think-tank.

Even under the Labour party’s £28bn green spending programme, public investment will end up lower in 2028-29 in real terms than its current level, said Ben Zaranko, a senior research economist at the IFS, warning of a “big squeeze” on infrastructure spending over the next five years.

Already UK private and public investment across a range of categories, including infrastructure, is about 5 percentage points lower as a share of GDP than the G7 median excluding the UK. The country would have to invest £130bn extra per year to close the gap.

“Not only has public investment in infrastructure been low by international standards but it has been highly uncertain and volatile, which impacts private sector willingness to participate,” said Jagjit Chadha, director of the National Institute of Economic and Social Research think-tank.

“We have an investment shortfall that is manifest in appalling utilities and transport services — which is a disaster for the country,” he added.

British politicians are looking to the private sector for help, hoping to encourage more insurers and pension funds to invest.

The government is also trying to accelerate infrastructure delivery via planning and grid reforms, as well as setting up a UK Infrastructure Bank.

“The government is committed to delivering high quality infrastructure to boost growth across the country,” the Treasury said.

The opposition Labour party has also pledged to improve investment if it wins the general election. Darren Jones, Labour’s shadow chief secretary to the Treasury, said the party wants to “identify thematic problems” such as on budgets, performance management and delays.

“The big question is, why is it always more expensive to build something in the public sector in the first place?” Jones said.

Under Britain’s regulated utility model for water, energy and telecommunications, large swaths of infrastructure are financed by the private sector. “You can do more to unlock more private capital to get investment higher,” said Tom Smith, director of economic policy at the Tony Blair Institute think-tank.

Pension funds are being targeted by both main UK political parties. Australian and Canadian pension funds invest three times as much of their portfolios into infrastructure than UK funds, Smith said.

However, specialists warn that overseas investors are deterred by the UK’s problems in delivering new projects.

Alison Fagan, partner and head of international infrastructure funds at DLA Piper, said: “The UK is increasingly seen as a challenging market because of the lack of a defined infrastructure policy and the wealth of alternative opportunities elsewhere.”

The Swiss start-up brand has grown rapidly with its revolutionary designs of high-performance sports footwear

Ordinarily, a shoe with holes in the soles would be primed for the dustbin. But On, the Swiss sports brand launched in 2010, has turned that irregular aesthetic into a multibillion-dollar USP — its signature crater-soled sneakers made 95 per cent of the company’s $1.5bn sales in the first nine months of 2023.

Patented as CloudTec, prototypes for On’s curious, crumpet-like rubber treads were conceived from a cut-off hosepipe some years before the company’s founding in 2010. Now, they’re made using special injectable moulds. They look a bit futuristic, are visually a tad weird and the vibe is borderline dorky. Nevertheless, both runners and pedestrians have fallen head over heels for them. 

In Dubai, they’ve replaced Yeezy as the go-to fashion sneaker, says thirtysomething physicist Abdulla Alhajri, while in Tokyo, all-black pairs of the stacked-sole Cloudmonsters (£160) are being worn by trendy, gorpcore types, according to Sam Millen-Cramer, a Portland-based strategist who works with sneaker brands. In the US, they’ve been adopted by the tech bros; in the UK, by pensioners. Peter Stephens, a 65-year-old former teacher from Surrey, switched his trusty Skechers for a pair of On’s Cloudeclipse (£170) six months ago. The Cloud technology, designed to “roll” by collapsing on impact to propel runners forward, alleviates his arthritis pain, he says.

On’s star is ascendant in the running sphere, too. In 2023, Kenyan Olympian Hellen Obiri won the Boston marathon wearing On’s carbon-plated race shoe, called the CloudTri 1. 

Martin Hoffmann, On’s co-chief executive and chief financial officer, expects the brand to double sales by 2026, to $4bn. He has good reason to be confident: the company has achieved seven record top-line quarters in a row, focused mostly on just one product category and one sport. “The lifestyle market is much bigger than the running market,” says Hoffmann. In other words, they’ve barely gotten started. 

It’s a tricky time for performance brands. Sales of athletic footwear in the US increased just 2 per cent in the year to November 2023, according to research firm Circana, with revenues driven by price hikes rather than a growth in the number of shoes sold. Amer Sports, owner of Arc’teryx and Salomon, is currently looking to raise up to $1.8bn in an IPO to reduce debt. Allbirds revenue was down 21 per cent in the third quarter of 2023. Nike’s overall sales (encompassing all its sports categories, not just running) rose 10 per cent, to $51bn — but, in December, the company lowered its outlook of sales growth for 2024 to 1 per cent, and its stock slid 10 per cent. 

On, which raised $746mn when it went public in 2021, has seen its shares rise 57 per cent in 2023. “We have confidence in On’s forward pipeline,” says Jonathan Komp, a senior research analyst at RW Baird, a US-based financial advisory firm, pointing at emerging opportunities within apparel, hiking and gym training for the brand. “The market is currently challenging . . . but we see On as one of the winners going forward.” 

On’s growth aligns with a consumer shift towards speciality brands that blend the boundaries between lifestyle and performance. It is also one of the few new contenders to penetrate the sports shoe category and become a challenger to heritage sports brands — quite the feat for three founders with no prior experience of footwear design or manufacturing. (David Allemann worked in marketing; Olivier Bernhard was a pro triathlete; Caspar Coppetti was a strategy consultant at McKinsey & Co.) “Athletics is a competitive space, and it’s difficult to break into,” says Komp.

Hoka, founded in 2009 and now owned by Deckers, is one other rarity in a saturated industry where established performance brands, including Under Armour, have struggled to become known within the footwear sector. Shoes have many technical components and are expensive to execute — and many shoppers by default go to big-name brands for reliable performance and broad product offerings. (Nike currently has about 115 different styles of running shoes on nike.com.) On, which has 23 dedicated running styles, is currently clawing 10-15 per cent of footwear’s sales in speciality running stores, according to RW Baird’s Komp. 

Still, it’s hard work going up against the big dogs. Adidas and Nike each spend 10-12 per cent of revenue on marketing. How to make noise, and stand out? “On’s distinctive product and technology, wrapped up in Swiss design and colour, [give it] intrigue,” says Komp. Its branding is also a point of difference. Neat and minimalist, in its early days On was cited as the go-to brand for design types.

Allemann, who formerly worked in marketing for Vitra, the trendy Swiss furniture firm, admits there were brands on the moodboard when the trio started On. But none were sports labels. “Apple changed the way we look at computers, not just the aesthetic of the hardware but the feel of the software,” he says. “Dyson made his technology very visible — you can peek into that turbine engine.” On’s holey soles follow the same view. “The customer sees the technology just by looking at it.” 

Innovation is another of On’s strengths. Its shiny Zurich HQ has an incubator hub, an on-site lab for prototyping and a recycling facility: in the latter, it breaks down its bio-based Cloudneo sneakers and turns them into brand new shoes. In a pioneering subscription model, runners rent a pair of Cloudneos for £25 a month and return them once they’re worn out, to be swapped for a new pair. On is so far the only sportswear brand to take ownership of end of life, thus addressing running’s waste problem. (Performance shoes generally wear out after 300 miles; most brands have focused sustainability efforts on using recycled materials.) 

“We’re ambitious to create a new kind of sports brand; we spend 50 days a year in the lab with our teams,” says Allemann. On now makes shoes and apparel from captured carbon emissions, using a process called CleanCloud — it created its own supply chain that turns emissions into pellets, then into yarns and soles, in partnership with three external firms.

The company is also pushing into different categories. Roger Federer’s 2019 investment saw On’s segue into tennis. Apparel is the next big focus. Belgian designer Tim Coppens, whose eponymous label is sold in Dover Street Market, was hired in 2022 to head up the apparel line. The kit is slick, with no big bold logos in sight, and it works well in the gym or down the pub.

“You go from being a shoe brand to a full sportswear brand,” says Allemann. Pick-up for apparel is strongest in China, where On has 22 stores. In the past year, the company opened two stores in London, a second in New York and 10 more in China, as well as in Paris and Miami. Portland and Austin are next. On is also sold in speciality stores (Runners Need, Achilles Heel), mainstream shops (Foot Locker, Bloomingdale’s) and fashion-forward retailers (Net-a-Porter, END).

But there’s work to do to turn on Gen Z shoppers; its demographic is predominantly 35-55. Introducing baggier apparel fits, athleisure pieces and partnerships with young athletes such as 21-year-old tennis star Ben Shelton form part of this strategy, as do ongoing collaborations with LVMH-owned Loewe that have increased its fashion plate. 

“It’s a marathon, not a sprint,” says Allemann. Shareholders might be keeping an eye on the podiums and the pavements, but the founders’ ambitions are looking skyward, towards the clouds.