BYDDY - BYD: All Eyes On Sales Data And NEV Subsidy Policy

Summary

• BYD's December 2022 and full-year sales volume met the market's expectations.
• The company has both pricing and cost levers to counter the negative effects of the removal of NEV subsidies on consumer demand.
• I upgrade my rating for BYD to a Buy, given that its 2022 sales performance was good and I see the company delivering above-expectations results for 2023.

Elevator Pitch

My investment rating for BYD Company Limited's ( BYDDF ) ( BYDDY ) [1211:HK] stock is a Buy.

I wrote about BYD's 2022 business outlook in my prior article for the company published on January 4, 2022. With my latest write-up, I review BYD's most recent sales numbers, and evaluate how the company can deal with the negative change to China's NEV (New Energy Vehicle) subsidy policy. These are the key issues that investors with an interest in BYD are watching closely.

I have decided to raise my rating for BYD from a Hold previously to a Buy now. BYD's shares dropped by more than -20% in the last one year due to concerns regarding the withdrawal of NEV subsidies in 2023, and I believe such worries are overblown. As such, I think that the market's view of BYD is overly bearish, and BYD should be able to achieve positive surprises in the form of better-than-expected growth in 2023.

BYD's Sales Were In Line With Expectations

BYD's NEV sales numbers for the month of December 2022 and the full year were reasonably good.

NEV sales (including commercial vehicles) for the company grew by +150% YoY from 93,945 units in December 2021 to 235,197 units for the last month of the previous year. Based on the monthly sales data of Chinese NEV makers which I compiled, BYD was the third fastest growing company in a list of Chinese NEV makers which registered at least 10,000 unit sales in December. Only AITO and Zeekr achieved stronger YoY sales growth rates of +604% and +199%, respectively in the final month of 2022. In fact, BYD's December 2022 sales growth was way better than other notable US-listed peers; both NIO ( NIO ) and Li Auto ( LI ) recorded a relatively lower +51% YoY sales volume increase in the same month.

The company's full-year 2022 sales growth was even more impressive. BYD's NEV sales volume expanded by +209% from 603,783 units for 2021 to 1,863,494 units in 2022. None of BYD's peers and competitors achieved sales volume growth in excess of +200% in the prior year. Specifically, LI and NIO achieved more modest yearly unit sales growth of +47% and +34%, respectively for 2022. AITO and Zeekr aren't included in this comparison with BYD, as both of these NEV brands were introduced to the market in mid-to-late 2021, so a full-year comparison isn't possible.

In absolute terms, BYD remained the outright leader in China's NEV market. The second largest player in the Chinese NEV industry in terms of sales volume is AION, which only achieved a unit sales of 271,156 (or 15% of the sales that BYD recorded) in 2022. More importantly, BYD's actual 2022 NEV sales volume in excess of 1.8 million units surpassed the company's earlier goal of 1.5 million units (set in early 2022) by a very wide margin.

BYD Has The Ability To Counter NEV Subsidy Policy Change

China's state media Global Times published a news article on January 3, 2023 confirming that the Chinese "government's subsidies on new-energy vehicles" will be "phased out as scheduled" this year.

BYDDF's share price has dropped by a substantial -22.5% in the past one year. It is reasonable to assume that investors' fears of lower top line growth and slower bottom line expansion for Chinese NEV makers in 2023 have contributed to the company's stock price weakness.

In my opinion, the market's concerns regarding the negative impact of NEV policy change on BYD are overdone, as I think that BYD is in a position to pull different levers to support the company's earnings growth this year.

BYD has various means of raising the average selling prices of its vehicles in 2023.

Firstly, BYD has implemented a price hike across the board. A January 1, 2023 Reuters article noted that the company is increasing the price of its existing vehicle models by "between 2,000 yuan ($290) and 6,000 yuan." In other words, slower volume growth can be offset by higher selling prices to some extent.

Secondly, Chinese NEV makers in general have been ramping up exports , as NEVs sold in foreign markets outside China should carry higher selling prices. It is also noteworthy that Asian technology media publication KrAsia has referred to BYD as one of the "major homegrown (Chinese NEV) exporters" in its articles . It is reasonable to assume that BYD will also work hard at growing exports to increase its mix of higher ASP (Average Selling Price) vehicles i.e. exports.

Thirdly, BYD is introducing a new premium brand this year known as "Yangwang" as part of its plans "appealing to upscale auto buyers" as highlighted in this December 15, 2022 Seeking Alpha News article . The company should be able to charge higher selling prices for new vehicle models launched under this premium brand "Yangwang", and this should boost BYD's overall selling prices.

In the area of cost optimization and margin improvement, Chinese automotive companies are bargaining harder with their respective suppliers, and positive operating leverage has typically been a tailwind for the biggest NEV maker in China.

Technology media publication DigiTimes published a news article in October 2022 mentioning that auto companies in China have been discussing with their suppliers regarding a reduction in the prices of semiconductor chips. As the largest player in the Chinese NEV space, BYD should have relatively better bargaining power with its suppliers as compared to some of its smaller NEV peers. This puts BYD in the position to achieve greater cost efficiencies and expense savings this year vis-a-vis other Chinese NEV players.

Also, as highlighted in a September 2, 2022 commentary posted on Chinese NEV information website CnEVPost , BYD's chairman had emphasized that the company has a track record of lowering its annual "raw material procurement costs" by 3%-5% historically, due to economies of scale.

Based on financial projections drawn from S&P Capital IQ , the sell-side analysts expect BYD's revenue growth (in local currency terms) to moderate from +85.5% in FY 2022 to 40.1% for FY 2023. Over the same period, the market consensus sees BYD's bottom line (normalized earnings per share in RMB terms) expansion slowing from +363.2% for FY 2022 to +24.9% in FY 2023. These are still pretty decent growth numbers, and I am of the view that BYD's actual 2023 results can beat expectations due to the factors highlighted in this section of the article.

Bottom Line

My opinion is that BYD deserves to be rated as a Buy. Its 2022 sales growth metrics were pretty good, and I see BYD's financial performance for the current year exceeding the analysts' expectations.

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