TSLA - BYD A Global Force In Battery EVs Aimed Toward Greater Dominance

2023-11-02 13:21:47 ET

Summary

• BYD displayed its battery electric vehicle models at the 2023 Japan Mobility Show, marking the first time a Chinese automaker showcased vehicles in Japan.
• BYD reported strong Q3 earnings, with sales topping $22.1 billion, a 38.5% increase, and EPS beating analyst expectations.
• Warren Buffett's Berkshire Hathaway has been selling its stake in BYD, potentially due to changing conditions and worsening US-China relations.

In October, for the first time, BYD Company Limited (BYDDF) (BYDDY) displayed its battery electric vehicle ((BEV)) models at the 2023 Japan Mobility Show - what had once been the Tokyo Motor Show. The event was remarkable because it was the first time any Chinese automaker had displayed vehicles in Japan.

A month earlier, BYD was one of the most talked-about attractions at the mobility show in Munich, another exhibition that has been rebranded from its former identity as the Frankfurt Auto Show.

The two events are the latest pieces of evidence, along with BYD's increasingly impressive financial performance, of the company's rising global prominence in the BEV business. BYD is nothing if not ambitious, poised to gain share of EV markets in Asia as well as in Europe.

Growth by numbers

On Monday, Shenzhen-based BYD reported earnings for Q3 2023 after the market close in Hong Kong that beat analyst expectations by a wide margin. Q3 sales topped $22.1 billion, a 38.5% increase, while EPS was $0.48 a share, compared with the consensus analyst forecast of $0.40.

Like Tesla , BYD scores high on profitability metrics, as measured by Seeking Alpha. Like Tesla, BYD scores low on valuation metrics, having already been discovered and identified by investors around the world as a growing, viable entity in an EV business that's not likely to sag or vanish anytime soon.

The automaker's shares trade on the Shanghai and Hong Kong exchanges in two different currencies, which accounts for the two classes of American Depositary Receipts (ADRs) that trade over the counter. The shares have fallen about 4% over the past month due to investor worries over price-cutting for BEVs, which has been a consequence of gathering macroeconomic worries and weaker-than-expected consumer demand.

One reason BYD is becoming known in the West is the sizable ownership stake in the company by Berkshire Hathaway Inc. (BRK.A), (BRK.B). Warren Buffett, Berkshire's CEO, began watching BYD in the early 2000s; the company bought a 10% stake in 2008. He has praised BYD's founder, Wang Chuanfu, and the company's groundbreaking strides in developing battery technology.

Lately, however, Buffett & Co. have been selling BYD shares - although there's no clear indication that Berkshire Hathaway has become disenchanted with the automaker. Berkshire, which generally follows a buy-and-hold strategy with regard to its investments, originally purchased its BYD stake in 2008 for just $232 million. In late 2021, Berkshire owned about 21% of BYD, according to Hong Kong regulatory filings, which was worth more than $7 billion at its peak last year. No doubt the investment has been a home run for Buffett, who is not opposed to taking profits when conditions are right.

Berkshire exit?

Buffett may have decided that BYD is overvalued at the moment - or he may see that conditions have changed from when he made the original investment. I think the latter is a distinct possibility given the worsening of relations between the U.S. and China in the 15 years since the company bought its stake in BYD, then a relatively unknown company. Trade disputes, COVID and tension over Taiwan and navigation of the South China Sea may have influenced Berkshire and its leaders - including Charlie Munger - to reduce its stake.

While Tesla still holds a slight global lead over BYD in terms of EVs delivered, the gap has been narrowing quickly. (BYD numbers include plug-in gas-electric hybrids, a category in which Tesla doesn't compete.) In the current quarter, BYD - which builds its own batteries and sells them as well to competitors - appears to have a good chance to pass Tesla on a quarterly basis for the first time.

Another little-noted advantage enjoyed by BYD is that it manufactures its own semiconductor chips. Along with the in-house batteries and other vertical integrations, not having to rely on outside chip vendors has boosted BYD's production rapidly over the past two years as rival automakers struggled with supply shortages.

A big strategic move lies ahead, namely BYD's eventual arrival in the U.S. - a virtual certainty. BYD, which is short for "Build Your Dreams," began as an affordable EV brand in China and now has landed in Europe, is spreading through Asia and has established partnerships for electric buses and energy storage throughout Latin America.

Global friction

Geopolitical tensions between the two countries may be one reason that BYD is steering clear of the U.S. for the moment. Another is the administration's so-called "Inflation Reduction Act," which provides incentives for local battery and EV production and sourcing.

As reported by TechCrunch:

In an interview with Bloomberg, Stella Li, a senior vice president at BYD, said , "The U.S. market isn't under our current consideration." The executive, who oversees the company's international expansion, also believes President Joe Biden's Inflation Reduction Act (IRA), may "slow down EV adoption in the U.S." because it will make affordable EVs inaccessible to American consumers.

But BYD already has a foothold in the U.S. as a manufacturer of electric buses, which the company builds at a plant in Lancaster, Calif. Los Angeles, Denver, Washington DC, Albuquerque, and other U.S. cities have purchased BYD buses.

The arrival of BYD in the U.S. is only a matter of time and will make a difference in the lower-price segment of the battery electric market, adding pressure on the government and incumbent automakers to take steps to broaden incentives and lower costs.

Since my investing orientation is longer-term - a hold for five years or more - I rate BYDDY or BYDDF as reasonable buys at current valuations. BYD's earlier years have been spectacular - but much of its growth lies ahead, once the brand establishes itself in the profitable U.S. market, which also will strengthen its brand globally.

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