BYDDY - BYD: Forget Tesla The Real King Of Chinese EVs

Summary

• BYD is the largest EV manufacturer in China and a leader in "blade battery" technology.
• In the fourth quarter of 2022, BYD reported record NEV deliveries of 683,440, which rose by an outstanding 157% year over year.
• BYD has announced a series of vehicles which rival Tesla and even beat some of the company's models on certain specifications.
• BYD has announced plans to launch a new premium off-road vehicle in 2023, under the name YangWang.

BYD ( BYDDY ) is an iconic Chinese Electric vehicle and electronics company. Its name stands for "Build Your Dreams", but they are a nightmare for Tesla. The company is the largest EV manufacturer in China and is poised to benefit from the huge growth in the country's middle-class population . The company was backed by Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) in 2008, which acted as a seal of approval on the company's credentials. Buffett's business partner billionaire Charlie Munger, even dubbed BYD's founder Wang Chuanfu, a cross between "Bill Gates and Thomas Edison", a great compliment by any measure. Since the investment in 2008, BYD's share price has increased by over 1,400% and its sales have exploded. In the fourth quarter of 2022, the company reported another record for its deliveries, and its growth is accelerating. In this post, I'm going to outline BYD's business model (and compare it to Tesla (TSLA)). In addition, I will break down its financials and valuation, let's dive in.

Business Model (BYD Vs Tesla)

BYD is a Chinese EV and technology company that operates across a variety of sectors. Its first most notable segment is its "automobiles", which includes electric vehicles and plugin hybrids. It should be noted that between January and July 2022, BYD sold 800,765 plugin EVs versus Tesla at "just" 617,309. This actually meant BYD surpassed Tesla as the world's largest EV maker at the start of the year. I believe Tesla took back the top spot for a brief period after, but now BYD is back as the leader. There is one caveat to this metric, BYD's "plugin" vehicles, also consist of the "hybrid" type which includes an internal combustion engine.

A positive for BYD is the majority of its sales are in China, and thus the company is the standout leader in the world's largest electric vehicle market. The business also exports to places such as Europe, Africa , South America , and the Middle East. Exporting to foreign countries does require some "localization" and thus is not completely straightforward, but offers huge potential.

BYD's vehicles differ from Tesla greatly, in that the company has historically focused on mass production of a range of low-cost models. Admittedly, the majority of its cars aren't as "sexy" as Tesla, but they do get the job done for its millions of customers. Notable models include the compact e2 and the e3 hatchback, with 186-mile and 249-mile ranges, respectively. In addition, the company sells a "full-size" electric taxi with a 249-mile range and a variety of EV buses for public transport applications. I believe the public transport application could be a major business driver. Tesla doesn't produce an electric bus, and if it did, I believe they would likely miss out versus local competitors, as I do believe it is a biased market. BYD has also already scored a small number of EV Bus sales in Europe to Germany's largest bus operator, Deutsche Bahn. Thus, the potential for further expansion into other public transport providers in Europe is likely.

BYD's latest vehicle models are surprisingly "sexy" and really do compete with Tesla, head to head. First, we have the BYD Tang SUV, which has 400km (248 miles) of range and competes with the Tesla Model X which has up to 348 miles of range. In addition, we have the "beautiful" BYD Han, which is a mid-sized sedan that competes with the Tesla Model 3. I personally think the BYD Han is better looking than the model 3, but of course, that is subjective. The BYD Han does outpace the Tesla Model 3 slightly on range with 610km (379 miles) versus the Tesla at 374 miles of range.

BYD has plans to launch a new "luxury" off-road vehicle in 2023, under the name YangWang. This is expected to compete with premium brands such as those by Chinese EV maker NIO , which I discussed in a prior post, and the Tesla Cybertruck. BYD also has a partnership with Daimler AG (Mercedes) to develop luxury cars under the "Denza" brand.

BYD is a pioneer in battery design with its " blade battery ". This battery reportedly has higher energy density than a traditional "cylinder" shaped lithium ion-phosphate battery. In addition, it uses less space by close to 50%. The battery helps to power BYD's EVs and its Energy Storage business.

BYD's other business segments include a range of products such as; PV solar cells, LED lighting, electronic components , and even cell phones. The beauty of BYD's business model is it is vertically integrated and will likely not fall into supply chain issues from component shortages like we have seen for NIO in the past.

Financial Review and Deliveries

Financial data on BYD is pretty hard to unpack, given it is a Chinese company with different reporting standards. I have used a combination of its latest financial reports on its website and the Seeking Alpha financial statements for an overview. In the third quarter of 2022, BYD reported $16.456 billion in revenue, which increased by a rapid 95% year over year. This growth rate was also faster than the prior 5 quarters' growth rates of between 23% and 68%. This is a positive sign as it shows its sales are accelerating on the back of strong EV momentum. The Chinese government has recently extended its purchase tax exemption, which should help to further boost sales of EVs.

BYD has reported its preliminarily fourth quarter delivery numbers, which were outstanding. For December 2022, BYD announced monthly deliveries of 235,197, which increased by 150% year over year and was a new record for the company. This consisted of 111,939 pure electric vehicles and 122,659 plug-in hybrid models. Its total fourth quarter "New EV" deliveries were 683,440 NEVs, which increased by a solid 157% year over year. For the full year 2022, its NEV sales increased by 1.86 million, up a staggering 209% year over year.

Back to the financials for the third quarter of 2022. The company reported operating income of $1.051 billion, which increased by a fantastic 279.83% year over year. In the trailing 12 months, operating income was $1.547.7 billion, which increased by a fantastic 95% year over year. BYD is accelerating its profitability, as it scales, which is a great sign to see and shows economies of scale. BYD has a lower operating margin than Tesla with 4.34% reported, versus Tesla at 16.71%. However, as the business moves "upmarket" with more premium models at higher price points, I imagine its margins will also increase over time.

BYD has a robust balance sheet, with $6.658 billion in cash and short-term investments. In addition, the company has total debt of $3.661.7 billion, with ~$1 billion in long-term debt, which is manageable.

Advanced Valuation

To value BYD I have plugged its latest financials into my discounted cash flow valuation model. I have forecasted 70% revenue growth rate for next year, which is less than the prior growth rate of above 90%. This is fairly conservative given the macroeconomic environment, and recent cuts in China's GDP forecast. In years 2 to 5, I have forecasted 60% revenue growth per year, which is based on a higher base level of revenue.

To increase the accuracy of the valuation, I have capitalized R&D expenses, which has lifted net income. In addition, I have forecast a pre-tax operating margin of 6% over the next 6 years. I forecast this increase to come from greater economies of scale and higher margin premium EV models.

Given these factors I get a fair value of $42.57 per share, the stock is trading at $26.86 per share at the time of writing and thus is ~37% undervalued.

BYD also trades at a price-to-sales ratio = 1.58, which is ~79.88% cheaper than its 5-year average. Relative to other EV makers including Tesla and NIO, BYD is trading the cheapest as you can see from the chart below.

Risk

China Risk/Buffett Selling

Investing in China always involves at least three parties, you (the investor), the company, and the Chinese government. The Chinese Communist Party ((CCP)) has previously slapped technology companies like Alibaba ( BABA ) with billion-dollar fines. In addition, geopolitics has increasingly played a role in market dynamics, due to delisting fears from U.S exchanges. Warren Buffett of Berkshire Hathaway has also been reported to have trimmed his position in BYD. Given the fundamentals and valuation are both strong with the company. I believe this is so Buffett can invest in other opportunities, while also de-risking his portfolio from the unpredictability of the Chinese government.

Final Thoughts

BYD is the largest EV manufacturer in China and arguably one of the largest in the world. Its "full EV" strategy which covers a range of vehicles from compact cars to buses is a solid strategy as it allows the company to fulfill niches in the market. China has the world's largest population and offers a major opportunity for BYD to continue to grow sales locally, while also exporting its vehicles. Its stock is undervalued intrinsically and relative to historic multiples, thus it could be a great long-term investment.

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