RIVN - BYD: The 100 Billion Company You Should Be Paying Attention To

2023-07-24 09:30:00 ET

Summary

• BYD has surpassed Tesla in the EV market share and is expanding its EV and battery production capacity, with new plants scheduled to be operational in China and an EV factory in Thailand commencing production in 2024.
• China's new emission standards and a substantial package worth 520 billion yuan ($72.3 billion) over four years for electric vehicles and other green cars are expected to benefit BYD, which has become China's largest automaker.
• Despite a weak economic recovery in China, BYD's financials indicate expected revenue growth and a positive trend in its financial.
• We currently rate BYD as a Buy.

Introduction

In the fast-paced realm of automotive innovation, one company has emerged as a trailblazer, revolutionizing how we perceive electric vehicles (EVs) and reshaping the landscape of sustainable transportation.

Since its inception in 1995, BYD ( BYDDF ) (Build Your Dreams, as the initials stand for) has been charting an extraordinary journey that began with small-scale ventures in battery manufacturing to evolve into a powerhouse in the EV industry steadily. BYDDF was the first company to develop a mass-produced plug-in hybrid car, the F3DM, which began the company's adventure into EV manufacturing.

While its presence in the Western automotive markets is close to non-existing, it has some presence in Scandinavia and South America. It is, however, a household name in the Chinese automotive market. Offering affordable cars to the average citizen, BYDDF has gained enormous popularity that has continued to grow. In addition, they provide a wide range of models to appeal to as many consumers as possible.

The company grabbed the attention of the world's most famous investor, Warren Buffett, 14 years ago, and he has been sitting on the majority of his investment ever since. In this article, we delve into more recent news regarding BYDDF, the macroeconomic environment, and their financials and attempt to gauge the positives Buffett also sees in the company.

Has Become Bigger Than Tesla

By now, most investors know Tesla ( TSLA ) is a massive player in the EV market. However, as seen below, BYDDF has slowly taken the lead in EV market share.

While attention has somewhat shifted focus onto emerging EV startups like NIO ( NIO ), Li Auto ( LI ), XPeng ( XPEV ), Rivian ( RIVN ), and Lucid ( LCID ), the juggernaut that is BYDDF should not be ignored.

At the beginning of 2023, TSLA encountered difficulties in capturing the Chinese market due to the high prices of their EVs, leading to several price reductions. This move prompted BYDDF to follow suit, resulting in a price war between the two companies. The strategy paid off, as TSLA and BYDDF reported record-breaking sales for the second quarter on July 2nd .

BYDDF delivered 703.56K vehicles, showing a remarkable 27.4% increase compared to the previous quarter and an impressive 98.1% increase year-on-year. Despite a slight decline in international demand, BYDDF delivered 35.55K vehicles.

Though TSLA's passenger EV deliveries in the first half of 2023 surpassed BYDDF's, the latter still achieved an impressive 1.25M deliveries in the same period, setting it on track to reach its ambitious target of up to 3.6M deliveries for the year.

Market analysts have a positive outlook on the price war strategy adopted by TSLA and BYDDF, which is expected to enhance their market shares . Additionally, BYDDF benefits from lower labor costs in China, giving them an edge over TSLA in gross margins. Despite challenges like inflation and interest rates, the momentum in EV sales remains strong globally, especially in the US, EU, and China markets. This bodes well for both BYDDF and the EV industry as a whole.

Furthermore, BYDDF is expanding its EV and battery production capacity, with new plants scheduled to be operational in China during the second half of 2023 . The company is also establishing an EV factory in Thailand, set to commence production in 2024. It plans to manufacture in countries like Vietnam, Brazil, Europe, and Indonesia. Notably, BYDDF is involved in battery storage for various applications and enjoys vertical integration, allowing for rapid expansion while many competitors grapple with supply shortages. This provides BYDDF with a significant edge over its competitors.

In the near future, BYDDF intends to introduce Level 2 driver-assistance systems in its Yangwang and Denza vehicles, setting up to rival the driving assistance TSLA operates with. The company has secured partnerships with prominent firms like Baidu and Nvidia , cementing its reputation in the EV industry. BYD Electronics, which focuses on lower-margin businesses such as smartphone components and assembly, contributes a smaller portion of the overall revenue for the company.

All in all, BYDDF's strong performance, coupled with the ongoing price war, paints a positive picture for the company and the thriving EV market. For more insight into the expected growth in the EV market, readers can refer to our article on RIVN here .

China's Economic Relief and New Emission Standards

In China, the largest car market globally, there is a recent development concerning the upcoming phase of emissions requirements, known as the China 6 standard , which took effect on July 1st, 2023. This new standard will have significant implications, potentially rendering millions of petrol and diesel cars unsellable in the country. Overall, the China 6 standard combines European and US best practices with new Chinese standards to lower car emissions.

The impact of these regulations will be felt disproportionately by foreign car manufacturers, as the Chinese automotive industry has already heavily invested in full electrification. Reports suggest that companies like Toyota do not have plans for mass-produced EVs until 2027. While the accuracy of this claim regarding Volkswagen is uncertain, it aligns with Toyota's perspective that there is still sufficient time to sell hybrid vehicles. This leaves little competition to BYDDF in the Chinese markets for years.

Furthermore, to boost slower growth in auto sales and support economic development, China has introduced a substantial package of tax breaks worth 520 billion yuan ($72.3 billion) over four years for electric vehicles (EVs) and other green cars.

The new package includes exemptions from the purchase tax for new energy vehicles (NEVs) bought in 2024 and 2025, saving buyers up to 30,000 yuan ($4,170) per vehicle. This exemption will be halved and capped at 15,000 yuan for purchases made in 2026 and 2027. The Ministry of Finance has confirmed these details in a statement. Previously, China had a subsidy program for EV purchases, but it ended last year.

This extension of the NEV purchase tax exemption is part of China's ongoing efforts to promote the adoption of NEVs, which include all-battery EVs, plug-in hybrids, and hydrogen fuel-cell vehicles. Since their introduction in 2014, the cumulative NEV tax breaks have exceeded 200 billion yuan, according to Vice Minister of Finance Xu Hongcai.

The government's promotion of NEVs has benefited Chinese automakers such as BYDDF, which surpassed Volkswagen in sales to become China's largest automaker this year. With tax exemptions and other incentives in place, the market for more affordable NEV models produced by domestic manufacturers is expected to grow, putting BYDDF in a prime position to increase sales for the next two years.

Attractive Despite The Slow Chinese Economic Recovery

Given BYDDF's primary sales focus on China, it is understandable that their business is susceptible to the Chinese economic environment. Although the Chinese government has taken steps to help their economy recover, it remains to rebound appropriately.

In June of this year, China experienced the most significant drop in producer prices over seven years, raising concerns about potential deflation in consumer prices and impacting the country's economic growth. Despite a promising post-pandemic recovery in the first quarter, momentum has slowed, leading to weaker demand for industrial and consumer goods. This slowdown has cast doubts on the overall health of China's economy.

The producer price index ((PPI)) has been declining for several consecutive months , with June recording a sharp 5.4% drop compared to the previous year, the most significant decrease since December 2015. In contrast, the consumer price index ((CPI)) remained unchanged year-on-year, contradicting expectations of a 0.2% increase.

In response to the economic challenges, analysts anticipate China's central bank to implement further cuts to lending rates and reductions in the reserve requirements ratio and interest rates in the latter half of the year, which has yet to show their effects. Consequently, Beijing may need to rely on fiscal stimulus measures and other approaches to stimulate demand.

Despite the weak economic recovery in China, BYDDF's financials still indicate expected revenue growth between 2022 and TTM. Impressively, BYDDF has achieved a 5-year CAGR of 30.5%. While their gross margin experienced a downtrend from 2016 to 2021, it shows signs of improvement, stabilizing at around 18% in TTM.

In addition, it is worth noting that BYDDF achieved positive free cash flow only in 2020, but since then, it has improved its cash generation capabilities significantly. The company boasts an impressive free cash flow yield of 3.6% in the trailing twelve months ((TTM)). This improvement is attributed to their substantial investments in production, which effectively increased their car output, as evidenced by their capital expenditure.

Furthermore, BYDDF has experienced substantial growth in its operating cash flow since 2016, reaching nearly $21 billion in TTM. The figures indicate a positive trend in BYDDF's financial performance, demonstrating its ability to generate cash and efficiently manage its operations.

We talked a lot about how BYDDF compares to Tesla, so let us dive into how the two companies and others compare, focusing on both valuation and growth metrics. Initially, we observe that when examining valuation metrics, the three most established companies, Ford ( F ), Mercedes ( MBGAF ), and BMW ( BMWYY ), currently differ significantly from TSLA and BYDDF. Overall, MBGAF, BMWYY, and F generally trade at lower prices than BYDDF. However, based on the price/cash flow metrics, BYDDF trades similarly to MBGAF and is cheaper than F.

It should be noted that both TSLA and BYDDF have experienced substantial growth in the past year, and they also project significantly higher growth in the future. This growth trajectory is unsurprising, considering that both companies are actively expanding their operations and market presence in their respective growth phases.

In summary, while the more established companies like Ford, Mercedes, and BMW have varying valuation metrics compared to TSLA and BYDDF, the latter demonstrate impressive growth potential due to their recent growth performance and ambitious growth plans for the future.

When comparing BYDDF and TSLA individually, it becomes evident that BYD offers a more affordable valuation than TSLA while showcasing higher future growth potential. Thus, BYDDF may be perceived as undervalued compared to TSLA by these metrics.

However, it is essential to remember a crucial caveat - TSLA is often seen as more than just a car manufacturer; it is regarded as a tech company. As a result, examining the price-to-sales ratio may provide the most insightful signal in understanding how the two companies compare. Based on this metric, BYDDF is more than seven times cheaper than TSLA.

Technical Analysis

As depicted in the graph below, BYDDF has steadily trended upwards since December 2022, consistently achieving higher highs and lows. The stock is attempting to establish a base around the $33.94 level, having recently broken through it. Should the stock successfully solidify its position at this level, it wouldn't be surprising to witness a potential increase toward $38, representing the next level of resistance.

A positive aspect is that the stock trades above all the included Exponential Moving Averages (EMAs), providing solid support to propel the stock even higher. Notably, the 20 EMA has proven to be a robust support level over the past week, which could continue to bolster the stock.

However, in the event of rejection at $33.94, and if the 20 EMA fails to offer the same support as before, the 50 EMA would be the next level to be tested. Notably, the stock is situated at the top of the golden zone area, lying between the 0.5 and 0.618 Fibonacci numbers. In case of rejection at this level, further decline is possible below the 20- and 50 EMAs. Nonetheless, if the stock breaks through this level, the likelihood of reaching $38 becomes more apparent.

On the longer timeframe, BYDDF has recently broken out of a pennant pattern to the upside, indicating potential further upward momentum as it establishes a new pattern. The factors to monitor in the longer timeframe are similar to those previously mentioned.

While there is a reasonable chance that the stock may experience a downward move toward the 20 EMA in the coming days or weeks, this level could support and facilitate the stock's upward movement. We recommend exercising patience and waiting for the stock to approach the 20 EMA at the $31.5 level as a prudent approach. Observing how the subsequent candle closes at that point could present an opportune entry point.

Considering the recent breakout from the pennant pattern and the potential support at the 20 EMA, investors should carefully observe the stock's movements and utilize the $31.5 level as a possible entry point when deciding on the longer timeframe.

Conclusion

In summary, BYDDF has made remarkable strides in the EV market space, significantly impacting the industry and garnering substantial popularity in the Chinese market.

Its impressive growth trajectory and groundbreaking achievements, including being the first to develop a mass-produced plug-in hybrid car, have garnered attention from notable investors like Warren Buffett. With promising growth potential, BYDDF's expansion plans, strategic partnerships, and focus on electrification give the company a competitive edge in the evolving automotive landscape.

China's adoption of the China 6 standard further solidifies BYDDF's advantage, while substantial tax breaks and incentives bolster its position as the largest automaker in China.

The recent breakout from the pennant pattern signals upward momentum in the stock market, prompting traders to exercise patience and observe its behavior around the 20 EMA at the $31.5 level before considering an entry point. Overall, BYDDF's consistent growth and successful market positioning make it a formidable player in the EV industry, warranting careful monitoring by investors.

We rate this stock a buy for the long term.

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