LI - BYD: A Strong Bet On The Chinese EV Market

2023-09-07 13:53:23 ET

Summary

• BYD Company Limited is already profitable and delivering a significant amount of EV products globally. BYD's Q2 2023 profits soared and the firm achieved record sales.
• BYD sold 274,386 electric vehicles in August, showing a significant increase in delivery volume. The company benefits from strong demand for electric vehicles in China and abroad.
• BYD's international expansion is impressive, with the company experiencing significant growth in export delivery volume.
• Shares of BYD are unreasonably cheap given that BYD is already profitable.

Shenzhen-based electric vehicle ("EV") car brand BYD Company Limited ( BYDDF ) is ramping up its deliveries fast and making progress in its effort to expand its operations internationally. The company is seeing significant momentum in deliveries, both in China and in export markets, which I believe supports a long-term investment in the EV manufacturer.

While I have previously focused more on less-mature Chinese startup companies in the electric vehicle market such as NIO ( NIO ), Li Auto ( LI ), and XPeng ( XPEV ), BYD is offering EV investors, in my opinion, significantly lower risks due to the fact that the company is already profitable, sees strong earnings growth, and has already achieved a very high delivery volume. Given that BYD also appears undervalued based off of revenues, I continue to see the EV maker's shares as attractive for investors!

Previous rating

I rated BYD a strong buy more than two years ago -- "This Chinese EV Star Is Still Very Cheap" -- and the EV company suffered like the broader EV market from COVID-19 lockdowns and slowing demand for EV products. Recently, however, BYD is seeing very strong delivery growth and the EV company benefits from an unleashing of demand for electric vehicles post-COVID.

BYD’s delivery accomplishments

The two single biggest advantages that BYD holds over other electric vehicles start-ups in China is that the company is already profitable and delivering a massive amount of product to customers, not only in China, but around the world. Electric vehicle startups like NIO have taken investors on a rollercoaster ride in the last few years as deliveries surged during the pandemic, before slowly tapering off, resulting in unpredictable delivery patterns and massive valuation losses for investors that bought at the height of the EV boom.

Large EV companies like BYD that achieve significant delivery volumes and are already profitable, however, seem to be less risky bets on the EV market for investors than the start-up competition... which is still generating huge losses.

BYD sold a massive 274,386 electric vehicles last month, showing a 4.7% month-over-month and a 57.7% year-over-year increase. BYD also hit an all-time delivery record in August as the EV company benefitted from strong demand for electric vehicles. The EV market in China shows broad signs of recovery in FY 2023 after the industry suffered from supply chain problems and COVID-19 restrictions last year. The unleashing of EV demand post-COVID was a major reason for me to recommend other Chinese electric vehicle companies earlier this year as well.

Soaring earnings growth on the back of record deliveries

BYD is already profitable and the company’s profits have soared in-line with its growing scale and increasing domestic delivery/export volume. In the second-quarter, BYD generated 6.82B Chinese Yuan in profits ($936M) on total revenues of 140.0B Chinese Yuan ($19.2B), while Chinese EV start-ups are mostly still generating losses. BYD’s Q2'23 earnings soared 65% year over year and the company is solidly profitable (and also pays a small dividend to shareholders). Li Auto is expected to generate positive earnings on a full-year basis this year (based off of consensus estimates ), but NIO and XPeng are still expected to remain loss-making for a couple of more years. Li Auto is the only Chinese EV start-up that I currently recommend as a strong buy for more aggressive EV investors due to the company's strong delivery growth and expected near-term earnings breakeven: A Buy-The-Dip Situation .

International expansion

While China remains one of the most attractive markets for EV investors due to strong adoption of electric vehicle technology, Chinese firms are increasingly looking abroad in order to sell their EV products and gain market share. Even Chinese electric vehicle start-ups like NIO or XPeng are entering the European market, as an example, in order to boost their delivery growth rates.

BYD, however, is in a league of its own: in August 2023 alone the company exported more than 25 thousand vehicles to other countries, which is more than NIO’s entire monthly delivery volume of 19,329 EVs for the month of August. BYD's export delivery growth is also quite impressive: the export volume increased by 138% in just the last two months due to robust demand for the company's EV products in markets such as Germany, France and Australia.

BYD’s valuation compared to rivals

BYD is expected to generate total revenues of $85.0B in FY 2023 and $106.2B in FY 2024, implying a year-over-year growth rate of 25%. The P/S ratio is less than 1.0X which makes BYD a comparatively attractive investment in the EV space: NIO, Li Auto and XPeng have P/S ratios of 1.4X, 1.6X and 2.2X. Tesla ( TSLA ), which is likely BYD's most formidable competitor in terms of delivery volume, is valued at 6.2X FY 2024 revenues. I believe BYD could easily trade at a P/S ratio of 1.5X considering that the company is already profitable, which would put a fair value of $54 on BYD. At a current price of $31, I see the EV maker as fundamentally undervalued.

Risks with BYD

BYD Company Limited is a Chinese company and some investors have reservations investing in foreign EV companies, especially with Tesla being the number one electric vehicle company in the world and operating in the U.S. (which U.S. investors tend to be more comfortable with). The biggest risk that I see with BYD, in the long term, is growing competition from startup companies which should increase their delivery volumes exponentially, resulting in increasing pricing pressure in the EV market.

Final thoughts

BYD has two major advantages compared to the EV competition, including NIO, Li Auto and XPeng: BYD is already a mature EV player with a significant delivery volume and BYD is exporting more EVs than companies like NIO or XPeng produce in total in a given month. BYD is also already profitable, due to its large scale, which makes the Chinese EV company one of the lowest risk EV investments in China, in my opinion.

While an investment in BYD certainly has risks, they appear to be much lower than with the start-up competition, most of which still struggles with profitability. Therefore, I would recommend BYD to those investors that want exposure to the Chinese EV market and that prefer to choose an established, mature and profitable EV company over the more volatile and unpredictable investments in the start-up segment!

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