Focus: BYD shifts away from in-house payment system that strained suppliers, sources say

China's BYD is reportedly transitioning away from its proprietary Dilian platform for supplier payments, which issued unregulated IOUs, to commercial paper or bank notes. This move is significant as Dilian allowed BYD to manage costs and cash flow by extending payment terms, averaging 127 days, and imposing higher early-cashing discounts on suppliers, a practice that drew criticism and contributed to a higher estimated net debt. The shift is prompted by a fierce auto price war, supplier grievances, and new Chinese regulations mandating faster payments and prohibiting forced non-cash methods. This change could increase BYD's working capital costs, posing a challenge amid its recent slowdown in sales and declining profits.

Analysis

BYD is reportedly transitioning from its proprietary Dilian platform, which issued unregulated electronic IOUs, to commercial paper or bank notes for supplier payments. This shift is a direct response to a brutal price war in the Chinese auto industry, increasing supplier complaints about extended payment terms (averaging 127 days for BYD versus an industry average of 108 days), and new regulatory mandates requiring payments within 60 days. The previous Dilian system allowed BYD to maintain a large cash pile and reduce working capital costs, enabling rapid model rollouts.

The move away from Dilian is expected to increase BYD's working capital costs, as the company will lose the financial flexibility of its previous system, which allowed for payment delays up to a year and high early-cashing discounts (e.g., 6% vs. <2% for bank notes). This change comes at a challenging time for BYD, with October sales volume down 12% year-over-year, domestic market share declining to 13.2% from 19.1%, and recent quarterly revenue and profit declines of 3% and one-third, respectively. GMT Research previously estimated BYD's true net debt to be significantly higher at 323 billion yuan ($45 billion) due to its supply chain financing practices, compared to its reported 27.7 billion yuan.

Chinese regulators have tightened oversight of supply chain financing, with new rules effective June requiring automakers to pay suppliers within 60 days and prohibiting forced non-cash payments. While BYD claims its Dilian system is within guidelines and payments have sped up, the perceived higher default risk of Dilian IOUs and the regulatory push for transparency indicate a systemic shift in industry payment practices. This regulatory environment, coupled with BYD's current financial headwinds and plans for heavy overseas investment, suggests a period of increased operational and financial scrutiny.

Key Decisions for Investors

• Monitor BYD's working capital management and cash flow statements closely for increased costs and potential liquidity impacts following the transition from Dilian.
• Evaluate the implications of new regulatory compliance on BYD's profitability and competitive positioning, especially concerning its ability to manage supplier relationships and costs.
• Consider the potential for a re-evaluation of BYD's true debt levels by the market, as suggested by GMT Research, and its impact on the company's financial health and credit risk profile.
• Assess BYD's ability to navigate current market challenges, including declining sales and profits, while simultaneously absorbing higher operational costs from the payment system change and executing its overseas expansion strategy.