VWAGY - BYD Is Likely To Win The $25K EV Race

2023-03-30 09:00:00 ET

Summary

• With TSLA yet to launch its $25K model, we reckon BYD may race ahead and capture meaningful market share domestically and internationally.
• Despite the uncertain macroeconomic outlook, BYD already forged multiple partnerships/ dealerships in multiple territories, which could potentially boost its 2023 delivery numbers.
• Assuming that it achieves the ambitious 4M deliveries in 2023, the stock's valuations may also be significantly boosted ahead, aided by improving profit margins.
• Therefore, BYD remains a buy at these levels, with an excellent upside potential of 30.7%.

The Low-Cost EV Investment Thesis

BYD ( BYDDY ) has become a force to be reckoned with in the global EV race, due to its well-diversified offerings across different needs and price points. The company already offers retail EVs, light-commercial electric buses/trucks, and heavy-construction trucks/forklifts, amongst others.

Furthermore, the Chinese EV company offers very attractive retail EV pricing, ranging between RMB116.8K for the Dolphin subcompact hatchback (or the equivalent of $16.97K based on the exchange rate at the time of writing) and RMB279.5K ($40.61K) for the flagship model, Han, in the domestic market. Perhaps this is why it continues to command a market-leading share of 45% (+15 points YoY) in China as of 2022 and a market share of 41% YTD .

When compared to Tesla's ( TSLA ) pricing between RMB229.9K and RMB361.9K in China , we could understand why the US-based automaker only commanded a market share of 10% (+3 points YoY) in China by 2022, and a market share of 8% YTD. While it had previously hinted at a future release of a $25K car, no further details have been offered thus far, with the recent Investor Day focusing on its long-term strategy and broad sustainability goals instead.

Incidentally, TSLA's market share in the US had also declined to 57% (-17 points YoY) at the same time, partly attributed to the intensifying EV competition from multiple automakers. For example, General Motors ( GM ) delivered 39.09K EVs (+57% YoY) and Ford Motor Company ( F ) delivered 96K EVs (+57.3% YoY) in 2022, chipping away at TSLA's market dominance.

Unfortunately, BYD's future prospects in the US may be limited, since its retail EVs (made in China) may not qualify for the Inflation Reduction Act's $7.5K tax credit. Then again, since the automaker already has an electric bus manufacturing facility in the US, it may convert some of its existing capacity to retail EVs in the intermediate term, assuming that its supply chains are trade friendly.

In the meantime, BYD already set its sights much wider internationally, with multiple dealerships/partnerships already planned in Australia/New Zealand, Latin America through Brazil, the EU, the UK , the UAE through Israel/Jordan, Asia through Japan , and South East Asia through Thailand, amongst others.

Given its value proposition, we believe the Chinese automaker may potentially achieve a similar level of dominance currently held by Toyota ( TM ). The latter sold 10.5M vehicles in 2022 (in line YoY), while delivering 1.12M ( -14.5% YoY ) units of the Toyota Corolla model ( $21.55K in the US /RMB139.8K in China), "defending its title as the world's top-selling automaker for a third straight year."

In addition, BYD made the strategic choice in vertically integrating its supply chain, by producing its own semiconductors and batteries internally, on top of securing its lithium supply from China / Africa/Chile .

By 2022, the company already commanded 13.6% of the global EV battery market , similar to LG Energy Solution at 13.6% though behind Contemporary Amperex Technology at 37%. There have also been market rumors that the automaker planned to supply TSLA with LFP Blade Batteries since 2021, though no details had been confirmed thus far.

This supply chain strategy had allowed BYD to accelerate its EV deliveries (including BEV and PHEVs) to 1.86M units by FY2022 (+209% YoY), at a tremendous CAGR of 104% from FY2019 levels of 219K units . The company had also delivered 161.96K units ( +80.8% YoY ) within the first two months of 2023, with it already recording 158.03K as of March 26, 2023 ( W1-38.92K , W2-37.13K , W3-38.49K , W4-43.49K ).

This was an impressive feat indeed, despite the COVID-19 pandemic, resultant global supply chain issues, and impact on multiple automakers, as highlighted by Taylor Ogan, CEO of Snow Bull Capital:

BYD is the most vertically integrated company that I've ever seen, not just in the auto space. BYD already does almost everything Tesla is trying, and much more. (Bloomberg)

Nonetheless, that is not to say that BYD will not encounter competition. GM already delivered 38.12K (+53.5% YoY) units of Bolt EV in the US by FY2022, priced at $27.49K, with plans to increase production to over 70K (+83.6% YoY) units in FY2023. Within China, GM also delivered 1.2M (+200% YoY) of Wuling Hongguang Mini EV in FY2022, in collaboration with SAIC and Wuling, priced at a mid-point of RMB66.35K ($9.65K).

With GM formally re-entering the EU market as of November 2022, we reckon the company may similarly introduce the Bolt for value-conscious consumers, especially given the high inflation rate of 9.9% as of February 2023.

Other legacy automakers are not resting on their laurels either, with Volkswagen AG ( VWAGY ) unveiling its entry-level model , ID.2all, in early 2023 priced at €25K ($27.11K). Production is slated to start in 2025, with delivery commencing from 2026 onwards.

In addition, BYD may also face increasing competition from its Chinese automakers, XPeng ( XPEV ) and NIO ( NIO ) domestically and within the EU, though likely in the mid-range segment at approximately RMB250K to 300K ($36.3K to $43.56K).

Nonetheless, BYD already projects an ambitious annual delivery of up to 800K EVs in the EU by 2030. We reckon the automaker may potentially capture a meaningful market share in the region, significantly aided by its affordable price tag and aggressive expansion. This is on top of a key sales projection of up to 10M by 2030 , implying an accelerated CAGR of 23.40% from FY2022 or 41.54% from FY2019.

So, Is BYD Stock A Buy , Sell, Or Hold?

BYD 2Y Stock Price

It appears BYD stock has found sufficient support at its March 2023 bottom of $25s and has recorded a decent recovery to $27.53 at the time of writing. For now, there seems to be minimal upside potential to our price target of $29.80, based on our projected FY2024 EPS of $1.20 (at a CAGR of ~20% from the FY2022 levels of $0.83) and its current P/E valuation of 24.84x.

However, given its ambitious global expansion thus far, we reckon there may be opportunities for an upward re-rating nearer to its peer, TSLA at a P/E valuation of 47.42x.

It is not overly optimistic in our view, given BYD's excellent FY2022 results thus far. The company recorded an improved gross profit margin of 20.4% and net profits of RMB16.6B ($2.41B), suggesting a tremendous expansion of +16.7% and 446% YoY. For the sake of comparison, TSLA reported gross margins of 25.6% (+0.3 points YoY) and net incomes of $12.57B (+123% YoY) in FY2022.

Furthermore, the company increased its selling prices overseas by +125.1% to €42.99K (RMB320.87K) in the EU and by +114.3% to AED162.87K (RMB305.39K) in the UAE for the Atto 3 model, or the equivalent of Yuan Plus, priced at RMB142.5K in China. Therefore, we reckon BYD may further expand its profit margins ahead, significantly aided by the aggressive delivery of up to 4M vehicles (+115% YoY) in 2023.

We believe this outperformance may justify an improved P/E valuation of 30x (if not more), resulting in a more ambitious BYD price target of $36, improving the upside potential to 30.7% from current levels. As a result, we continue to rate the stock as a buy here.

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