BYD and Geely Automobile each reported a 28% rise in third-quarter net profit last Thursday, and in both cases the growth came from cars shipped abroad. BYD earned 10.02 billion yuan in the three months to September, up 28.1% from a year earlier, while Geely's profit climbed 28% to 4.84 billion yuan, according to their exchange filings on Oct. 29.

For investors holding the two Hong Kong-listed carmakers, the results answer one question and raise another. Overseas demand is strong enough to restore growth after a weak first half. But the domestic market, where a long price war has squeezed margins, is no longer carrying its share, and BYD's balance sheet shows the strain of building an export business at speed.

BYD misses forecasts as inventories swell

BYD's profit fell short of every estimate in a Reuters poll of three brokerages, which ranged from 11.4 billion to 12.95 billion yuan. Growth also slowed from the 30% pace of the second quarter, Reuters reported. Revenue rose 13.6% to 221.5 billion yuan, the company's first year-on-year increase after four straight quarters of decline.

The volume story was lopsided. BYD sold 1,323,065 vehicles in the quarter, up 18.7%, and exports accounted for 550,704 of them, a 137% jump from 232,806 a year earlier. Electrek, working from the filing, calculated that sales outside the export channel fell about 12% to roughly 772,000 units. Exports made up 42% of the quarter's total.

The cost of that shift shows up in working capital. Inventories reached 221.58 billion yuan at the end of September, up 60% since the start of the year, and trade receivables rose 53%. BYD attributed both mainly to growth in its overseas car business, according to its quarterly report. Cash plus securities held for trading fell 45% to 71.72 billion yuan over the same period.

Other line items moved the wrong way. For the first nine months, BYD booked 7.37 billion yuan in finance expenses, which it put down to exchange losses, against a gain of 2.94 billion yuan a year earlier. Asset impairment losses, mostly inventory write-downs, rose 68% to 2.71 billion yuan. Nine-month net profit was 22.34 billion yuan, down 4.2%, on revenue that was almost exactly flat at 566.3 billion yuan.

There were offsets. Operating cash flow for the nine months rose 33% to 54.47 billion yuan, and customer prepayments jumped 81% to 92.95 billion yuan, the filing shows. Capital spending fell 24%.

Rapid expansion is moderating as other Chinese makers push abroad, Felipe Munoz, an industry analyst, told Reuters. “Coming quarters will be tougher for BYD,” he said. Stella Li, BYD's executive vice president, told Reuters that geopolitics is the biggest obstacle to the company's international growth.

Geely leans on exports too

Geely's numbers followed the same pattern on a smaller scale. Third-quarter revenue rose 10% to 98.96 billion yuan and sales volume increased 7% to 812,523 units, according to the company's filing. Exports reached 323,442 vehicles, or 39.8% of deliveries, The Standard reported.

That leaves fewer than 490,000 units sold at home in the quarter. Over nine months, Geely's net profit rose 7% to 13.93 billion yuan (about HK$16.39 billion) on revenue up 13% at 272.56 billion yuan. Exports for the period totaled 797,670 units, about 36% of all sales.

The parallel matters for anyone comparing the two stocks. Both now depend on foreign buyers for most of their growth, while competition at home intensifies: Reuters noted that Geely has launched a faster-charging system and that Leapmotor is winning share with keenly priced models. BYD's answer in China has been cheaper cars, including the new Seagull, which Electrek said starts below US$10,000.

Plants abroad and a trade risk in Europe

Both companies are now trying to build capacity closer to their customers. BYD is seeking approval to double annual capacity at its plant in Brazil to 600,000 vehicles, Reuters reported. Electrek pointed to new output coming from BYD factories in Hungary and Thailand as well.

Local production also helps with trade barriers, which are shifting. Reuters noted that Chinese hybrid exports to the European Union could face new limits under an EU arrangement, and that hybrids account for more than half of European sales at BYD, SAIC and Chery, the largest Chinese hybrid exporters to the bloc.

October's delivery data, released on Nov. 1, suggest the export engine is still running: BYD's overseas sales more than doubled to 170,194 vehicles in the month. The open question for the fourth quarter is margin, not volume. BYD carried 221.58 billion yuan of inventory into October, and how quickly that stock turns into sales abroad will decide whether the export push pays for itself.