On June 10, $BYD COMPANY(01211.HK)$ the stock price staged a thrilling scene: the closing price on June 9 was HKD 396.6, but the opening price on June 10 was only HKD 132.4. Many mooers holding BYD shares panicked: their accounts visibly lost a lot of money. What on earth happened? Don't panic, below is a detailed explanation of the underlying logic.

What caused the drastic drop in stock price?

Let’s get to the conclusion first: the main reason is$BYD COMPANY(01211.HK)$ the rights issue took place before the distribution of entitlements today, which includes cash dividends, bonus shares, and the conversion of capital reserves into shares.

The specific plan for the related entitlements is as follows:

● Cash dividend: a cash dividend of RMB 3.974 per share (including tax), equivalent to HKD 4.33596, will be distributed on July 29, 2025.

● Bonus shares and capital increase shares: for every 10 shares, 8 bonus shares will be distributed, and capital reserves will be converted to give 12 shares for every 10 shares. In other words, shareholders who originally held 10 shares will receive a total of 30 shares, increasing the total shares to three times the original amount. Bonus shares and capital increase shares will also be credited on July 29.

The above statements actually cover a lot of technical terminology, and I will further explain below to help everyone understand. (Many mooers in the comment section mention Stock Dividends, but in fact, BYD is not doing Stock Dividends this time, so the following table will also compare and explain it.)

Why are rights and dividends removed? It can be said that removing rights and dividends ensures fair trading in the market. The above actions are equivalent to transferring Assets from one bag to another, merely changing the form of Shareholder wealth without altering the total wealth of the Shareholder. Hence, when the other bag's Assets increase (in terms of Stocks or cash Assets), the first bag's Assets must decrease (in Stock price), thus new Shareholders will not have to pay extra for what has already been distributed.

With prices dropping so much, how is it calculated? How will the prices change?

The theoretical formula is as follows: Rights and dividends price = (Closing price before rights removal - Cash dividend per share) / (1 + Stock Dividend ratio + Capitalization ratio). Calculating this gives (396.6 - 4.33596) / (1 + 0.8 + 1.2) ≈ 130.75 HKD, which is quite close to the opening price of 132.4 HKD on June 10.

Next, we will also calculate the change in Shareholder equity based on the price of 130.75.

In other words, assuming that Shareholders have no other actions during this period, then after the dividend and Stock Dividends are credited on July 29, if the stock price at that time is 130.75 HKD, the total Assets held by Shareholders will be the same as that at the closing price on June 9.

Of course, this is just a theoretical value; in reality, these corporate actions may have an indirect impact on stock prices. For example, the significant drop in stock price after rights removal lowers the entry threshold, which may attract more investors to participate, potentially increasing liquidity. According to Capital Trend data, on June 10, BYD's net Inflow was nearly 1.3 billion HKD, indicating strong Bids.

What other impacts could there be? Since the EPS is diluted after the Stock Dividends, if investors expect future Business growth to offset this dilution, it might drive the stock price to correct upwards.

Additionally, the rights to dividends and stock transfers will only be credited on July 29, which means that currently, 2/3 of the shares have not yet circulated. There is a time lag between capital expansion and capital delivery, which may lead to a short-term imbalance in supply and demand. If the rising share prices are digested in advance, there could instead be a pullback by that time.

The reason for the company's actions can be simply summarized. On one hand, it may be lowering the investment threshold to increase market attractiveness. On the other hand, it is using capital expansion to match earnings growth and market cap management, while also creating a good image of returning value to shareholders.

More tips for investors.

In the short term, after a significant adjustment in stock prices, market sentiment may need some time to stabilize. However, in the medium to long term, it still needs to be viewed based on fundamentals.

In terms of finances,$BYD COMPANY(01211.HK)$ the revenue and net profit have maintained relatively impressive performances, with a significant increase in R&D investment and overseas market revenue proportion projected in 2024. However, the gross margin has recently declined, mainly due to fluctuations in prices and raw material costs, coupled with the impact of recent price wars, which could continue to squeeze profits.

From a business perspective, BYD's current leading position in the New energy Fund sector, its technical research and development capabilities, and the continuous expansion of its market share remain unchanged.

Its technological leadership in blade batteries, DM-i hybrid, and Solid State Battery actually constructs a moat for the entire Industry Chain, along with its high investment in R&D, which is also supporting its intelligence (Heavenly Eye intelligent driving) and fast charging technology.

The globalization strategy is also a major driving factor for BYD's stock price. Overseas sales achieved a high growth rate of up to 111% in Q1 2025, and the localization production in factories in Thailand and Brazil, as well as the upcoming establishment of a factory in Europe, may hedge against some tariff risks.

However, in addition to the decline in gross margin, there are other risk factors worth paying attention to, such as: Tesla's price cuts, new forces like Huawei seizing the mid and low-end market, and competitors advancing their commercialization in Solid State Battery and intelligent driving technologies, which could bring competitive risks. There are also risks associated with policies, geopolitics, and globalization uncertainties.

Recently, there has been a hot topic, Long Wall Motor's chairman Wei Jianjun implied that BYD is the Evergrande of the auto industry, questioning BYD's huge debt scale as hiding similar financial risks to Evergrande.

Indeed, BYD's debt ratio is quite high, reaching about 70%, but the new energy vehicle sector itself is in a period of rapid growth, requiring capital investment and industry research and development, so high debt is basically a necessary condition for expansion. BYD's debt is fundamentally different from Evergrande's debt; the former is more technology-driven, using debt to build a moat, with relatively controllable risks; the latter is financial arbitrage-driven, using debt to fill in bubbles, ultimately leading to collapse.

Lastly, a reminder: If you are a short-term trader, there may be a certain participation window in the current market, but care needs to be taken regarding the risk of reverse price changes caused by supply and demand imbalance. If you are a long-term investor, you can ignore short-term fluctuations and focus more on the company's performance growth and the industry's long-term outlook. Regardless of whether you are a short-term or long-term investor, do not forget to set a reasonable profit-taking and stop-loss plan.

If you have any other questions, you can click on the image below, and let Futubull AI tell you more about BYD information. >>