BYDDY - BYD: If You Don't Like Tesla Consider China's Leading EV Maker

2023-12-05 13:00:00 ET

Summary

• I follow BYD and Tesla closely as I believe both companies could shape the EV market moving forward, given their respective market leadership.
• I believe 2024 will be a year of intense competition in the EV industry, with strong companies like Tesla and BYD gaining market share.
• BYD's competitive edge in the mass market segment and its expansion into commercial vehicles could give it an advantage over Tesla in various market segments.
• Its vertical integration and established market exposure in battery and energy storage are understated advantages.
• I argue why BYDDF can be considered an anti-Tesla play for investors keen to partake in the EV transition but worried about TSLA's growth premium.

I follow BYD Company ( BYDDF ) and Tesla, Inc. ( TSLA ) very closely, as I believe their market leadership would likely shape the EV industry's direction in the medium- and long term. I used to invest in BYD but decided to take profits in 2022 to reallocate my capital to diversify my risks away from the auto industry.

I also took profits in TSLA in late 2021 but returned to grab more shares in late 2022 as it was battered. While I remain bullish about BYD's long-term opportunities, I've decided to keep just one EV maker on my portfolio, having sold out of highly speculative play NIO Inc. ( NIO ) in 2023 when it surged in June while the position was still profitable. I've learned from my experience investing in automakers that the industry is highly cyclical and challenging to maneuver (no matter what they say about the long-term opportunities in EVs). As a result, investors must pay close attention to macroeconomic conditions affecting consumer spending and interest rates.

Automakers will likely enter the next phase of more intense competition as the EV battle levels up. As a result, I believe 2024 will be a year when the strong get even stronger, and the smaller, less profitable peers could get squeezed out further. Even legacy OEMs like General Motors ( GM ) and Ford ( F ) aren't spared from these headwinds, as they experienced recently, delaying their EV roadmap.

As a result, I believe the two companies (Tesla and BYD) that have proved their ability to be consistently profitable will likely strengthen their lead and gain market share against their ICE peers.

American investors may be more familiar with Tesla. However, I believe it's important not to mess around with BYD's competitive edge in the mass market segment. Its target in scaling to a 3M NEV (all-electric and plug-in hybrids) deliveries for FY23 justifies its ambitions to dethrone Tesla as the EV champ. While Tesla is still expected to lead in all-electric sales in the near term, BYD investors are likely anticipating that its broad-based growth and well-integrated supply chain could provide it the edge across various market segments.

Observant BYD investors should know that the company did not start as an automaker. BYD is a battery maker with experience in handset assembly and semiconductors. Berkshire Hathaway's ( BRK.A ) ( BRK.B ) association with BYD as a significant shareholder since 2008 is likely well-known among Buffett's investors.

However, what might be less known is that the late Charlie Munger reportedly " urged [BYD CEO Chuanfu] Wang not to enter the challenging automobile business." However, Wang "ignored the warning, shifting BYD into electric vehicles." Given BYD's incredible success as an NEV maker, I believe investors must recognize the brilliance of the Wang-led company, justifying the endorsement by Buffett and Munger. Furthermore, BYD has expanded beyond automobiles and into commercial vehicles like buses, extending its early lead in these segments that Tesla has yet to capture. Note that these are on top of BYD's well-established battery and energy storage businesses, which are still growth options in Tesla's case.

What's also important to note is that BYD's adjusted operating margins are expected to improve as it scales. Analysts' estimates suggest BYD's margin could hit 6.2% in FY23, up significantly from last year's 5.1%. It's expected to continue improving, reaching 6.5% in 2024. Therefore, the growth factor will likely normalize after the expected surge this year, given its production breakthroughs (BYD rolled off its 6 millionth NEV from its Zhengzhou factory in late November).

As a result, I believe the long-term prospects of BYD's market leadership should help corroborate its ability to stay ahead of most of its peers in the highly competitive EV market. At a forward EBITDA multiple of 6.7x, BYD is valued well below TSLA's forward EBITDA multiple of 35.8x. As a result, BYD's implied undervaluation likely suggests a high level of geopolitical risks baked into it. In other words, although BYD is significantly exposed to the Chinese market, it's broadening its exposure to overseas markets. Accordingly, BYD's export sales grew " approximately 2.6 times that of the total volume in FY22" for the first nine months of 2023.

BYDDF is still mired in a significant consolidation zone, undergirded by the $21 support zone and resisted by the $43 resistance zone. I gleaned two bull traps at the $43 level that reacted when re-tested previously.

However, I assessed that the selling pressure from those bull traps in 2022 seemed resolved, with BYD buyers returning aggressively at the $21 level in late 2022.

The recent selloff has improved BYDDF's risk/reward profile, although I have not gleaned an optimal entry-level based on robust price action signals. As a result, investors deciding to add more exposure here must consider further downside risks. As always, be ready to average down their positions, saving some bullets to enter more aggressively at the low $20s level if re-tested successfully.

Rating: Maintain Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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