VWAGY - BYD: The Fastest-Growing EV Name

2023-05-30 00:06:22 ET

Summary

• BYD Company is growing faster than Tesla and has a higher free cash flow margin.
• It is currently #1 in the fast-growing China market, eclipsing Volkswagen.
• Apart from Tesla and Volkswagen, very few BYD competitors can even touch its competitive position.
• Along with a strong competitive position, BYD also has good financials.
• In this article, I make the case that BYD is currently the strongest EV company in the world.

BYD Company ( OTCPK:BYDDF ), a long time holding of Warren Buffett's Berkshire Hathaway ( BRK.B ), is China’s largest electric car manufacturer. It makes electric, gas-powered and hybrid vehicles, but is increasingly well known for its all-electric offerings. BYD delivered 754,000 vehicles in April alone , more than Tesla (NASDAQ: TSLA ) in the same period). That figure includes EVs and gas-powered cars, but BYD’s growth rate in EV deliveries was 2.5 times faster than Tesla’s as well. In the all-important China market, the contrast is even more stark. There, BYD is sitting at a comfortable 28% market share, while Tesla is at 8% .

For now, Tesla is still ahead of BYD financially. According to Seeking Alpha Quant, TSLA had the following financials in the trailing 12 month period:

• $86 billion in revenue.

• $12.7 billion in operating income.

• $11.75 billion in net income.

Meanwhile, BYD had :

• $68 billion in revenue.

• $3.3 billion in operating income.

• $2.9 billion in net income.

So, Tesla is the ‘larger’ company going by GAAP profits and operating income. However, the situation is not as simple as it appears. BYD actually beats Tesla on free cash flow (“FCF”) and isn’t far behind on FCF per share. BYD’s revenue growth rate is nearly triple Tesla’s , so it’s not hard to picture a scenario where BYD pulls ahead of Tesla on FCF per share.

Additionally, BYD stock is much cheaper than TSLA stock is going by multiples. According to Seeking Alpha Quant, BYD is at 1.25 times sales and 5.17 times book, whereas Tesla is at 7 times sales and 11 times book. By my own calculations, BYD has a 4.5% free cash flow yield, whereas Tesla has a 0.9% free cash flow yield. So, you get more dollars' worth of free cash flow per dollar spent on BYDDF shares than you do with Tesla shares.

I don’t think that many people would dispute my claim that BYDDF is cheaper than TSLA. By most conventional metrics, it is. However, a few people might dispute my claim that, between the two of them, BYD is the stronger company. Tesla does still have a higher net margin than BYD, so it scores a win on profitability (free cash flow margins being one exception). However, there are reasons to think that BYD’s competitive position is better than Tesla’s and that, due to this advantage, it will maintain higher growth rates than Tesla and eventually eclipse its earnings.

My point here is not to advocate for investing in BYD over Tesla, but simply to highlight BYD’s strength as a company. BYDDF is profitable, is growing extremely quickly, and has built-in advantages in the Chinese market. Over time, these advantages should last, and should eventually lead to BYD becoming the most profitable EV company on earth.

Competitive Landscape

BYD has a very strong competitive position because of the wide variety of vehicles it manufactures. Unlike companies that sell only sedans and pickups, BYD manufactures a number of “niche” vehicles used only in industrial settings. Companies making these types of vehicles, like Deere & Co ( DE ), tend to enjoy high margins, because not everybody and their dog is making similar vehicles. They can’t move quite the same volumes that the biggest sedan makers do, but their margins tend to be very healthy.

Based on a quick look at BYD’s website, we can see that it manufactures :

• Busses.

• Trucks.

• Forklifts.

• Skyrail (trains that are elevated).

There is one company that competes with BYD in a good few of these categories: Volkswagen ( OTCPK:VWAGY ). That company is #2 behind BYD in China, and it’s not surprising why. VWAGY manufactures electric busses, trucks, forklifts , and other things that China’s heavy manufacturing requires. That's just one competitor, though--the others aren't close.

Now, let’s take a look at a few of those other BYD competitors:

• NIO ( NIO ) - consumer vehicles only.

• Tesla - technically has a truck but not one has been delivered yet.

• XPeng ( XPEV ) - its corporate website mentions only sedans and SUVs, a Google search yielded no mention of buses, trucks, forklifts or trains.

• Ford ( F ) - has some commercial EVs but not trains.

• General Motors ( GM ) - has an investment in electric buses and a few other industrial EVs, but no trains.

• Lucid Group ( LCID ) - sedans only.

• Rivian ( RIVN ) - is custom building electric delivery vehicles for Amazon ( AMZN ), but these vehicles are not part of its regular lineup, which is mostly sedans and SUVs.

As you can see, very few companies compete with BYD in the full spectrum of products and services it offers. I was able to find only a small handful of EV companies that manufacture busses, and none that manufacture skyrail trains. Now, you might counter by saying “yes, but BYD has other competitors in skyrail.” It does, but they do not have the advantage of being able to sell a wide variety of different EVs to customers in one order. China has had one of the fastest industralizations of any country in world history. To this day, its economy is still fairly manufacturing heavy. Chinese companies need a lot of cars, trucks, and forklifts to operate, and BYD is there, ready to sell to them–potentially multiple product categories in a single order. BYD’s different product categories have “synergies” with one another, making BYD as a whole worth more than the sum of its parts.

Financials and Valuation

In the trailing 12 month period, BYD had:

• $68 billion in revenue.

• $12.3 billion in gross profit.

• $3.3 billion in operating income.

• $2.9 billion in net income.

• $4.8 billion in levered FCF.

The growth rates in these categories were:

• Revenue: 97%.

• Gross profit: 155%.

• Operating income: 268%.

• Net income: 451%.

• Levered FCF: -22%.

The only category to see anything less than rapid growth was levered FCF. It declined. If we look at BYD’s cash flow statement, though, we see that operating cash flow is growing rapidly just like all the earnings metrics. It would appear that BYD has increased its capital expenditures, and in fact, the table below would seem to confirm that. So, it’s likely that BYD is simply deploying cash this year for future growth, in response to rapid increases in orders.

In light of all this growth, you might imagine that BYD is a mighty pricey stock. Indeed, it is fairly richly valued, and valuation is the stock’s weak point. However, it is much cheaper than many other EV companies, trading at:

• 30 times earnings.

• 1.25 times sales.

• 5.17 times book value.

• 4.17 times operating cash flow.

• 22 times free cash flow.

The FCF multiple is actually lower than the NASDAQ’s current P/E ratio ( 23.7 ), so arguably BYD is cheap by the standards of a large technology company.

Two Risks to Watch Out For

As we’ve seen, BYD Company has a great competitive position, is profitable, and is growing extremely quickly. It’s a good picture overall. However, there are two big risks to watch out for if you want to buy BYD stock:

1. U.S./China tensions. The U.S. and China don’t always see eye to eye, and some worry that eventually U.S./China tensions will culminate in a delisting of Chinese ADRs from U.S. stock exchanges. In BYD's case, that's not an issue--it already trades OTC--but export bans could become a problem. Just recently we saw China ban Micron Technology (NASDAQ: MU ) chips from government infrastructure, in response to similar moves by the United States. These kinds of trade wars have been going on since the Trump era and are usually accompanied by stock volatility. Then there is the ongoing matter of Taiwan. The U.S. wants Taiwan to remain independent, China wants it to reunite with itself, and the U.S. is arming Taiwan to prevent the latter scenario from unfolding. If U.S./China tensions escalate, then BYD could be banned from selling vehicles in the United States. The company currently has a contract supplying busses to Los Angeles, so this risk could have material impacts.

2. Competition. As I showed in the section on BYD’s competitive position, the company has an admirable edge on its competitors. That doesn’t change the fact that EV is an increasingly competitive industry. Between large companies like Volkswagen, GM and Ford, and small companies like NIO, Lucid and Rivian, there is plenty of competition in the space. With plenty of competition comes plenty of potential for margins to get squeezed. So, investors will want to watch out for increasing competition in BYD’s industry.

The risks and challenges above are worth keeping in mind. Nevertheless, if you look at the overall package of factors BYD has in its favor–profitability, growth and arguably even valuation–it looks like the most attractive play in the EV space today.

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