VWAPY - BYD: World's Biggest EV Maker Has A Long Road Of Growth

Summary

• BYD recently overtook Tesla as the world's top EV maker (including PHEV) and may overtake Tesla in terms of BEVs.
• There is plenty of room for further growth both in its home market China, as well as overseas where BYD is plotting its expansion.
• BYD faces risks from increasing competition but its competitive advantages are difficult for rivals to replicate.

Tesla chief Elon Musk commented that Tesla’s ( TSLA ) nearest rival is likely to be a Chinese EV company . Warren Buffett-backed BYD ( BYDDF ) ( BYDDY ) could be the one to watch.

BYD overtakes Tesla as world's top EV seller

Chinese EV maker BYD is firing on all cylinders. The company recently overtook Tesla to become the world’s top selling EV maker (including PHEV) with 1.87 million deliveries in 2022 compared with 1.3 million for Tesla and BYD may overtake Tesla in terms of BEVs this year.

BYD has three business segments but its EV business, its biggest business segment accounting for more than half of revenues and nearly half of segment profits, is viewed as its biggest growth driver and there is plenty more room for growth.

China’s EV market has room for further growth

The vast majority of BYD’s car sales were generated in China (international sales are estimated to account for less than 2% of BYD’s car sales) but there is still plenty of runway left for growth in its home market. Last year, EV sales in China (the world’s biggest EV market accounting for about two-thirds of EV sales) rose a scorching 93.4% YoY to 6.89 million vehicles, helped by cheap electricity and government policies encouraging EV purchases in the country.

Yet, conventional vehicle sales far exceeded EV sales, with EVs accounting for just about 25% of the 28.7 million vehicles sold during the year, well ahead of the government’s 20% target by 2025 but leaving ample room for further gains as the EV industry progresses to meet the Chinese government’s aim for electric vehicles to account for 40% of all new car sales in the country by 2030. By then, ICE vehicle sales could be in permanent decline and EV’s share of China’s total car fleet could gradually increase.

The untapped market is enormous; China’s total NEV fleet was nearly 8 million in 2021 which suggests the country would have roughly around 15 million NEVs at the end of 2022. That is less than 10% of the 302 million total vehicle fleet in China. BYD has numerous competitive advantages to help them capitalize on this opportunity. As China’s leading EV player with a market share of around 30% of China’s EV sales, BYD enjoys strong brand recognition and can clearly stand against global vehicle brands such as Tesla and Volkswagen ( VWAGY ) (the latter of whom is faltering in China).

Additionally, BYD’s cost advantages (partly stemming from being the only EV player with a vertically integrated business model with the company owning its own lithium mines, semiconductor production, and notably the batteries which are the most expensive single component part of an EV) as well as its wide product offering enable it to reach lower tier cities in China where affordability issues are among barriers to EV adoption.

Roughly about half of EV sales in China are generated in China’s first tier cities, but the government wants EV makers to increase penetration in lower tier cities and rural regions as well. BYD, with its wide breadth of affordable models, is positioned to cater to EV needs from lower-tier and even rural residents (in contrast to rivals such as Li Auto ( LI ), XPeng ( XPEV ), NIO ( NIO ), and Tesla whose models tend to be priced in the premium segment and are not likely to gain much traction among budget-conscious consumers).

Setting its sights on global markets

Having dominated its home market, BYD is now setting its sights on global expansion. To support this ambition, BYD is planning to build one or two factories in Europe , is in talks to acquire Ford’s ( F ) production plant in Germany, plans to begin production in Thailand by 2024 , and is planning to construct a component factory in Vietnam .

The company launched in Europe late last year , introducing BYD's new BYD Seal (BYD’s answer to Tesla’s Model 3) at the 2022 Paris Motor Show. The top 7 countries in the world in terms of EV sales per capita are European so Europe is a logical choice with the region having relatively mature charging infrastructure and where affordable EV models could help turbocharge EV adoption.

BYD has also set its sights in Asia (ex-China). This month, BYD opened their first dealership in Japan, selling flagship models priced below Tesla and Nissan ( NSANY ).

EV adoption in Asia is low (particularly in emerging Asian markets such as Southeast Asia and India), in large part due to a relatively weak charging infrastructure and affordability, but adoption is expected to grow in the coming years partly driven by supportive government policy. Indonesia, Southeast Asia's largest economy, aims to sell only electric motorcycles and vehicles by 2050. Brunei aims to have EVs make up 60% of total annual vehicle sales by 2035 while Thailand has rolled out subsidies and tax incentives as part of efforts to ensure 30% of total auto production are EVs by 2030.

How successful BYD would be in their global expansion efforts remains to be seen, however, their strategy of focusing on the value-conscious segment has merits. Although BYD does have the disadvantage of being a relatively unknown badge, BYD does have a tremendous advantage in terms of cost. Chinese EV makers reportedly have a EUR 10,000 cost advantage compared to European car makers (for various reasons including lower-cost labor as well as a highly efficient and mature EV supply chain, including being the world’s biggest lithium chemical producer accounting for roughly 60% of global supply, and having 6 of the world’s top ten EV battery suppliers led by Chinese EV battery giant CATL, the world’s biggest player).

Among those Chinese EV players, BYD probably leads the pack in terms of cost with the company’s vertically integrated business model opening tremendous cost advantages (other than the windshield and the tires, they can make pretty much everything else in the car on their own). Their in-house EV battery division is probably their biggest advantage, as not only does it give them access to industry-leading battery technology at a relatively lower cost, but it also provides a significant revenue stream and possibly further cost advantages from scale economies that come with supplying EV batteries for rival EV brands as well (after CATL, BYD is China’s biggest EV battery supplier and among the top 3 in the world).

Buyers of BYD’s proprietary blade battery for instance (recognized as one of the safest EV batteries), include Tesla , and Toyota ( TOYOF ). To further illustrate BYD’s cost advantage, despite being a relatively new and smaller player, BYD’s product development costs are reportedly as much as 20%-30% lower than veteran automaker Toyota, the world’s biggest automaker.

Contrary to views about quality and performance, BYD has received five star safety ratings from regulators in Europe as well as Australia (where Chinese automakers are gaining traction suggesting positive consumer reception for Chinese badges) for some of its models, and BYD’s affordable models are close to western rivals in terms of performance; BYD’s new Europe-bound BYD Seal model for instance, often compared to Tesla’s cheapest model i.e., Tesla Model 3, is comparable to its American rival.

Moreover, the timing of BYD’s global expansion plans seems opportune; affordability is among major barriers to EV adoption in both Asia and Europe , even more so with elevated interest rates, high inflation, and a weakening economy hitting consumer purchasing power. Consumers are expected to become more budget-conscious this year, and may seek out EV models at more affordable, budget-friendly price points, a demand BYD, among the industry’s most cost-competitive players is well placed to satisfy.

Risks

Competition is a major risk. In its home market, EV subsidy cuts is leading to increased competition among automakers, notably from Tesla who saw a surge in demand following price cuts this year. Unlike Tesla who enjoys double digit margins and could afford to absorb cost increases, BYD, already operating at barely break-even increased prices instead, narrowing the price gap between its American rival, and possibly ceding market share in the process.

The Chinese government has indicated the country has too many EV’s and is encouraging consolidation . BYD could be up against bigger and more competitive players down the road. BYD is already operating at extremely low margins, and although they are cash flow positive, stiffer competition may force them to raise additional funding to support their growth ambitions. BYD raised USD 3.9 billion in a private placement in 2021 and further fund raises could have a near term impact on BYD's stock price.

The global EV opportunity has lured competitors as well; from new startups to legacy automakers who carry their own advantages including long-standing brand recognition. Volkswagen is expanding its EV car range and, seemingly taking a leaf from BYD’s business model, is even trying to make their own batteries . Honda has invested billions into accelerating their EV sales. Toyota's EV efforts are stumbling at the moment, but the world’s biggest automaker is scrambling to jumpstart their EV division and could present a potentially formidable force. BYD’s deliveries of less than 2 million vehicles in 2022, is still far short of vehicle behemoth Toyota whose deliveries amounted to more than 9.5 million the same year.

Conclusion

BYD’s stock price has already enjoyed a strong bull run over the past few years and is up more than 22% YTD. With BYD likely to see further growth ahead as well as a solid competitive advantage, some may be of the view that the stock has more room to run. With a P/E of 65 and a P/BV of 6.5 however, others may prefer to wait for a better entry point.

Analysts are generally bullish on BYD stock.

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