Investing in BYDDF: Build Your Dream

Many signs seem to appear to be pointing to a recession happening by 2023, for example, unabated recession, bleak economic outlook in Europe, financial market stress in the UK, escalating conflict between Russia and Ukraine/NATO.

Hence, I’m holding tightly to my war-chest while dispensing some spare cash from time to time to take advantage of price weakness and to ease myself into some opportune risk-reward balanced positions.

This is when BYD appears on the horizon for me.

BYD and its Business

BYD, which stands for Build Your Dream, is a Chinese company founded in 1995.  It first started as a factory that made rechargeable-battery.  Today, it has grown into a massive conglomerate in 4 major industries: IT, new energy, automotive, and rail transportation.  Its market cap is RMB624 billion.

About 73% of BYD’s business comes from its automobiles and batteries business segment.  Coming second is its mobile phone components, assembly services and other products segment at 27%.  BYD now has over 30 industrial parks and production bases worldwide, in places as the USA, Brazil, Japan, Hungary and India.

BYD plays a vital role in transforming car enterprises in China.  It’s contribution to the new energy vehicle industry comes from its development of Battery Electric vehicles (BEV) and Plug-in Hybrid Electric vehicles (PHEV) technology.

Who’s laughing now?

Back in 2011, Elon Musk mocked at BYD in a Bloomberg interview.

He said sneeringly, “Have you seen their [BYD] car? I don’t think they have a great product. I don’t think it’s particularly attractive, the technology is not very strong. The company was in deep trouble in China and should focus on staying in business there.”

Fast forward more than 10 years later, BYD is having the last laugh and giving Tesla a run for its money, especially in China’s EV market:

1. BYD reported revenue of RMB 117.1 billion in the third quarter, up 115.6% year-on-year and up 39.8 percent from the second quarter (RMB83.77 in Q2 and RMB66.83 in Q1). 

2. Just the first 9 months of this year alone, BYD has earned more than its annual revenue of RMB211 for the year 2021.  BYD’s revenues have mushroomed by almost 10-fold since 2008.

3. BYD’s combined sales of BEVs and PHEVs increased 250% in the first nine months to 1.2 million units.  In comparison, Tesla sold just over 318,000 electric vehicles in China during the first nine months of the year.  

4. In terms of sales figures, BYD has dethroned Tesla.

5. With overwhelming sales in China, BYD is plotting a global expansion.  End August, BYD announced a plan to debut in more than 15 new markets, including Germany, Israel, and Thailand.  Earlier this month, German car rental company SIXT just signed on to purchase around 100,000 EVs from BYD.

6. BYD’s EVs are known for their automotive technology, as well as driver and passenger comfort.  But above all, their salient selling point is the price of its EVs.  While BYD’s competitors such as Tesla, Nio and Xpeng sell their EVs priced above RMB300,000, most of BYD’s models are priced between RMB100,000 to 200,000, which appeal to millions of young, budget-conscious, environmentally-aware drivers in China who are turning their backs to petrol-guzzling vehicles. How’s Tesla taking the fight so far?  Well, Tesla has reduced the price of its EVs by 9%, selling at prices ranging from RMB265,900 yuan to RMB288,900.  Only time will tell who will win in this price war.

Value & Growth

Back in 2008, Buffett acquired 225 million BYD shares.  Buffet’s BYD cost basis was around HKD8.  BYD’s share price today (2 Nov) is about HKD285.  Buffett initial investment has grown 33 times!  

On the ShenZhen Stock Exchange, BYD is going for around RMB246. Some interesting valuation ratios to look at (in comparison to Tesla’s)

BYD’s PE is comparable to Tesla’s.  However, its PS and PB ratios appear more attractive than Tesla’s.

Since BYD is a growth company, ascertaining its growth prospects is integral to realising its investment value.

All about Growth: The automotive market is undergoing rapid change as seen in the direction of increased EV production in major car companies around the world.  Conventional petrol-combustion vehicles are not exactly going the way of the horse and cart, but higher worldwide EV adoption can only mean lower traditional vehicle production and sales in the future.  In fact, almost all major car companies have set their own goals in EV production.*  It is predicted that there will be more than 500 EV programs coming to the automobile market in the next 3 years.  

Governments, especially those in the developed world, are setting targets to phase out sales of new combustion engine vehicles.** Furthermore, freight companies such as DHL, UPS and  Amazon and UPS, as well as ride-sharing companies including Uber and Lyft have also set targets to change their vehicle fleet to the electrical ones.  For instance, Amazon, in partnership with Rivian, is planning on bringing thousands of EVs to more than 100 cities by the end of 2022.  The number of Amazon’s electric delivery vehicles will increase to 100,000 by 2030.  So, the world as a whole is committed to a zero carbon future, and this can only mean a bright future for EV production and sales.

There is no question that EV growth is strong and accelerating, and BYD will be part of this growth.  

Apart from the production of its EVs, BYD is also focused on the production of batteries.  One of its main battery products is the Blade Battery, a type of lithium a type of lithium iron phosphate (LFP) battery.  The Blade Battery is used in all BYD’s EVs.  BYD developed this battery to mitigate concerns about battery safety in electric vehicles.  Who wants to have a battery explode or the battery catch fire in addition to a car collision?  Nobody.  BYD’s Blade Battery is extremely safe and is less susceptible to burning or exploding even if punctured.  Supposedly, in an extreme test when a 46-ton truck rolled over it, the Blade Battery remained intact minus any smoke, fire, leakage, or even deformation.

With this battery, BYD’s EVs can be charged and discharged some 3000 times which translate to about 8-plus years of car life should the battery be charged every single day.

Due to its stable nature and “recharge-ability”, Tesla has decided to use BYD’s Blade Batteries.  Tesla is already equipping its Model Y with BYD’s Blade Batteries in its production plant in Grünheide, Germany.  BYD is also supplying batteries to Ford’s China factory that produces the Mustang Mach-E.  Toyota is also going to use BYD’s batteries for its EVs in the Chinese market.

Will more EV producers begin to adopt BYD’s Blade Batteries? Hopefully.

Solid Cash Flow: I read this statement from somewhere before and have it written in my “investment booklet”: Growing free cash flows are frequently a prelude to increased earnings.  

Healthy free cash flow is a testament to a company’s ability to settle debt, pay dividends, buy back stock, and facilitate the growth of the business.  BYD’s free cash flow, even at the end of 2021, looked pretty impressive.

As of 30 June 2022, BYD held RMB41,337 million (compared to RMB21,152 in 2021) of cash and cash equivalents.  Total borrowings (bank loans, bonds payable & other secured loans) as of 30 June 2022 amounted to RMB29,634 million.  Currently, BYD holds sufficient cash to meet daily liquidity management and capital expenditure requirements, and controls internal operating cash flows. 

BYD’s balance sheet looks solid too.  And keeping in mind as well the global EV growth story, BYD shares look like a good bet.

Nevertheless, BYD is still not exactly cheap based on PB but there is definitely a lot going for it in its growth story. I decided to get me some BYD stocks at RMB291.  I think I got in too early, shucks!  On hindsight, I should have waited.  Today’s price of RMB264 (2 Nov) is 26% down from its peak price of RMB358.86.

One Main Risk Factor

Although BYD has occupied a place in the Chinese auto market, it still faces competition from rivals such as Nio, Xpeng and LiAuto.  In fact, in September, Huawei revealed its first all-electric sports utility vehicle, the Aito M5, in collaboration with Chinese automaker Seres.

Non-Chinese EV producers such as Toyota, Hyundai, General Motors, and other companies also have certain research and development capabilities in new energy vehicles.  Under this situation, BYD’s technological leadership is likely to be threatened. 

BYD is currently playing the “price” card to win sales from its competitors.  There is a possibility that BYD’s competitors can reach a scale effect to eventually reduce their unit product cost and then sell their EVs at a more attractive price than BYD.  What then should that happen?

For now, BYD seems to be fending off its competitors pretty well.  And let’s not forget that BYD has a reliable battery system that other EV producers are using or might be interesting in using.

US Tech Sanction Troubles?

How is US chip sanctions going to affect BYD?  Not very much.  BYD has its own chips design and manufacturing unit.  BYD Semiconductor Co. Ltd. is part of the larger BYD enterprise.  

BYD Semiconductor’s business includes: (1) production of power semiconductors including IGBT (Insulated Gate Bipolar Transistor) modules and SiC (Silicon Carbide) modules; (2) production of intelligent control products of industrial and vehicle-level MCU chips; (3) production of intelligent sensors including CMOS (complementary metal-oxide semiconductor) image sensors, fingerprint sensors and electromagnetic sensors, (4) production of optoelectronic semiconductor chips such as LED products and precision optoelectronic devices, (5) provision of manufacturing and services related to power devices and integrated circuits.

If you read and understand Chinese, here’s a little trivia on BYD’s initial venture into chips making:

没错,比亚迪“造芯”20年了。

比亚迪是在2002年成立的IC(集成电路)设计部,与造车和电池计划几乎同时起步。

20年前,不知道是怎样的压力,促使王传福进入资金、技术、人才都如此密集、但利润率却很低的芯片领域。

20年后,面对汽车产业的“缺芯”难题,比亚迪应对得最为从容,在各个公司面临“缺芯”停产、减产的时候,比亚迪不止是不缺芯片,还在对外销售芯片。

20年前的战略性决定,王传福栽下的种子,今日开花。凭借对产业链的垂直整合能力,比亚迪月销量突破10万辆,并一举超越合资品牌,成为中国市场上销量最大的车企. ***

Basically, the seed of chips making was planted by the founder of BYD enterprise some 20 years ago.  It wasn’t a lucrative business to get into at that time but now the initial investment is bearing fruit for BYD.  BYD does not fear chips shortages or supply chain disruptions, and is able to meet its own needs and even sell the chips to other companies. 

BYD Semiconductors has launched a new IGBT (insulated-gate bipolar transistor) 6.0 chip, the so-called CPU of an EV.  These chips allow for switching with low power losses, making them ideal for use as a reliable switch in high power circuits.  This “CPU of an EV” is the second-most expensive part of an EV after batteries, accounting for around 7-10% of the total cost.

So for now, BYD is not experiencing any repercussions from US tech sanctions on China and there is nothing much to worry about here.

Conclusion

With strict Covid-19 measures still in force, an essentially closed border, and Xi’s tightening grip on the country’s government, China’s stock market appear to be sinking deeper and deeper into the abyss.  In view of current situation, is the Chinese market still investable?

I am optimistic about the Chinese market.  At present, the Chinese market might not be synonymous with rapid growth.  If any thing, growth in the Chinese stock market seems to have tanked.  Foreign monies have fled the Chinese market.  But, so what?  Chinese markets are primarily owned by Chinese investors, and international investors own only just over 5% of Chinese shares.**** Chinese monies will come back to the Chinese market once all the dust have settled.

Since I am investing for the long term, I believe the bleak situation in the current Chinese market will turn around one day.

It is way too early to underestimate (or demonise) Xi’s governance of China.  China has a rich 5000 years of history.  It has gone through revolutions, upheavals and whatnots, and it is still here! China might in the near future falter but it is not going to fail and sink into oblivion.  Being of SG-Chinese descent, I do firmly believe in the ingenuity, industriousness and fortitude of the Chinese people.

And this US chip sanction on China?  It is going to come to nought.  All China needs is time and in time China will, as the Chinese like to say, 彎道超車 (overtake on a bend). If that is not possible, then China will 換道超車 (overtake on a different lane).

What about a war with the USA (because of Taiwan) coming to pass?  Then, China’s millions will respond as they sing in their national anthem: … 冒著敵人的砲火,前進!前進!前進!進!(Braving the enemies’ fire, March on! March on! March on! Charge!).

* https://www.caranddriver.com/news/g35562831/ev-plans-automakers-timeline/

** https://theicct.org/growing-momentum-global-overview-of-government-targets-for-phasing-out-sales-of-new-internal-combustion-engine-vehicles/

*** https://nev.ofweek.com/2022-04/ART-77013-8460-30558539.html

**** https://www.investopedia.com/articles/investing/092415/chinas-stock-markets-vs-us-stock-markets.asp

___________________

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

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Not Sitting out of the Market

Uncertain.  Gloomy.  Bleak. 

These are some words that one notices when one reads the news concerning world economy.

So is the world approaching a recession or is the recession already here?

Singapore, for now, seems to have averted a technical recession.  In fact, our new prime minister, also the current financial minister, Mr Wong has said quite clearly in July that “Singapore’s economy is not at risk of recession or stagflation at this stage.”  In fact, the government seems pretty optimistic that the Singapore economy will not slip into a recession or stagflation next year although one must take note of the caveat “significant headwinds remain globally.”

What about the world’s most significant economy in the USA?  Discussions on the state of the economy of the land of the brave and free, on whether it has entered recession or not, can be pretty robust and or even heated.  

The US economy shrank by 0.9% in the second quarter of this year.  In the previous quarter, the economy contracted by 1.6%.  Put loosely, a recession is defined to be a period of 2 quarters of negative GDP growth.  Hence by definition, the US is in a recession.  

And if you watch Fox News which is pro-Republican (or pro-Trump), then you get the message that under the Biden administration, the US has entered a recession.  Here’s what Tucker Carlson said on his show on July 29th:

“We’re in a recession. The economy has been shrinking all year. Real wages are at record lows and at the same time, inflation is the highest it’s been in the lifetime of most Americans. So, call it whatever you want, but it’s a recession and it’s scary …”

But is it? Has the US entered a recession and is it then going to drag the world economy down soon?

Well, according to the president who shakes hands with thin air, the US economy is just fine and dandy.  He cited record job growth and foreign business investment as signs of a healthy US economy, the 2 quarters of economic slowdown notwithstanding.  

Up until now, the National Bureau of Economic Research (NBER), the official judge on whether the US economy is in a recession or not, has yet to declare so.  The NBER deems the current labour market to be strong, and business inventory levels to be healthy … so no recession.

What about the condition of the world’s 2nd largest economy?  The Chinese economy registered a 4.8% growth in the 1st quarter before weakening significantly to just 0.4% growth in the 2nd quarter.  

Still not a recession for China’s economy for now but what is the 3rd quarter going to be like?  Will the USA announce a recession in the 3rd quarter?

The economic and political tea leaves seem to point to a postulation that the recession will make its unwelcome entry before the year ends.  Inflation is still white-hot.  Global supply chain is still a tangled mess. Russia’s war on Ukraine is still unabated.  Tension in the Taiwan Straits remain volatile and could spill over into S.E. Asia. The US-China relationship has grown more contentious.

Basically, it is foolish to look at current world affairs, whether politically or economically, with rose-tinted glasses.  Hence I am leaning more towards the view of a recession arresting the world economy sometime in the very near future, if not by the end of this year, then in 2023.

Again I might be reading the recession tarot card wrongly: the recession might come much later beyond my expected timeline or even not at all. Given that I might be wrong, I decide that I should still continue to invest in the stock market regularly while keeping some cash at hand.  Going 100% in cash is counter-intuitive.  After all, it is time in the market that matters over the long run, rather than timing the market which no one is an expert in. 

I continue to DCA into my MoneyOwl portfolio, Syfe Core Equity and Reit+ accounts.

The time-weighted return for these portfolios are as follows:

Money Owl Equity Portfolio: 33.73%

Syfe Core Equity: -11.27%

Syfe Reit+: -2.96%

I used to hold the Syfe Reit+ portfolio but decided to sell all my units so as to get Reits on my own on my CDP account.  However, I am not always diligent in monitoring these Reits all the time myself and find the robo-advisory solution just the answer for investing in blue-chip Reits every month. So last month, I restarted the Reit+ portfolio with Syfe.

I also invest in the US market using Syfe Trade regularly.

The US market has seen quite a fair bit of volatility since the beginning of the year, what with record-high inflation and interest rate hikes.  The S&P 500 has fallen twice into bear territory, the first time just briefly on May 20, and again on June 13 for a longer period of time.  In July the S&P 500 seemed to have recovered some but optimism in Wall Street remained muted.

With all these uncertainties that prevail in market sentiments lately, one can be paralysed to act.  To buy some US growth stocks at reasonable prices or not, that’s the question!  In the end, I decided to the plunge.  To not take advantage of market downturns, whether these downturns are just transitory or protracted, is just such a waste of opportunities.

So I’ve gotten me these stocks on Syfe Trade::

1. Alphabet (Google)

2. Amazon

3. iShares US Aerospace Defense ETF (to take advantage of the global arms race)

4. Microsoft

5. Nu Holdings 

6. Nvidia

7. Robinhood Markets 

8. VanEck Vietnam ETF (to take advantage of Vietnam’s rising economy as manufacturing firms move out of China to Vietnam)

The bond market is also looking attractive. Rising interest rates have made bond yields attractive.  I’ve made an application for the latest Singapore Savings Bond, SBSEP22 (2.8% average return over 10 years).  I kick myself for missing SBAUG22 which offers the highest long yield of 3.0% in SSB history.  The SSB is a good alternative to park excess cash as it is principal guaranteed, and for the September issue, the interest rate is higher than CPF OA interest rate of 2.5%. 

The water may seem disturbed now, with turbulence in the depths beyond detection. So the advice I give myself is to wade in slowly and calmly, and keep my emotions in check when dealing with my investments.

May there be more low-hanging fruits for the picking in the months ahead.

Almost all the great investors I know are unemotional. Unemotionalism is one of the most important criteria for being a successful investor

Howard Marks

Managing Life and Investments in Current Market Jitters

It does look like the world stock market is approaching an imminent crash in the months ahead in the current climate of high interest rates, impending inflation, the Russia-Ukraine military conflict and the resultant energy and food crises.

Some say that the current jitteriness seen in the stock market is akin to a crash, while others say that the stock market crash is not here yet, with the premonition that the worse has yet to come. I am of the opinion that what we are seeing right now is just a market pullback, albeit a very unsettling and deep one .

Since January, I have only committed some SGD7000++ to my investment portfolios. I am putting aside more for my warchest so that I have more cash to deploy in the event of an actual market crash. Currently my warchest is about 20% of my total portfolio value, which is not a lot actually. I hope that by the time the Great Winter Sale comes around, I have already amassed 25% (or better yet, 30%) of my current portfolio in cold, hard cash.

It’s time to cut back on spending and work harder to earn more.

With inflation getting worse by the day, it’s hard to cut back on overall spending … but one must never give up trying. It’s a good thing that we don’t own a car and hence not have to worry about high fuel prices. I can’t even remember when the last time was that I tapped on the Grab app or flag a taxi down on streets. We use public transport all the time now.

Our family has also basically stopped eating hawker food. We, as a budget-conscious family, have not gone to a restaurant for a long time. Even a McDonalds meal was a while back in January. We are nowhere close to sampling Jeanette Aw’s “whatthefudge” or any of FannWong’s bakes any time soon. We have resorted to cooking at home or going over to our siblings’ or parent’s place to eat (when invited, of course!). Mum has been an excellent blessing cooking for all of us, and buying us food from the market to take home (cue the music 世上只有妈妈好).

A 2nd Family Income and A Side Hustle

To help mitigate rising costs of living for the family, my wife and I have done two things;

1. My wife has started on a job recently. Actually she does not have to as my income alone is sufficient to meet the family’s various needs, even during this time when prices of most things go north. She wants to use her time profitably now that the kids are older. It certainly helps to have a second income for the family. Part of her income goes to buying groceries for the family. She puts aside the rest for rainy days.

2. I restarted tutoring, my side hustle, this year. I started tutoring after I completed my O levels aeons ago. Tutoring a compulsory school subject and teaching an enrichment subject over the years have always given me a good side income. And I have done so on and off for many years before stopping entirely when the kids arrived. I picked up tutoring again after friends and family members started asking in January. I earn slightly over SGD1400 for spending 8 hours with my students per week. This amount just about finances my investments in MoneyOwl and Syfe every month.

Crypto Destruction and a Battered Stock Portfolio

The talk around town last week was Terra Luna crypto crash. At this point in time, let me just express my sympathy to those investors who had lost their investments in the Luna collapse. Some had their unrealized gain of tens of thousands and even hundreds of thousands of dollars gone up in smoke in the crash. To those affected by this crash, I wish you well and hope you will recover not just your fortune but also your confidence in investing. Please do not let any negative thoughts or any snide remarks made by others bury you deeper in your despair.

誰無暴風勁雨時,守得雲開見月明

水滸傳, The Water Margin

Thankfully, I did not hold any Terra Luna in my crypto portfolio. Nevertheless, my crypto portfolio took a severe beating in the recent crypto massacre. The absolute dollar value of my crypto portfolio dropped by a whopping 61.8%! My crypto portfolio consists of the usual suspects such as Bitcoin and Ethereum, and some metaverse tokens and a few Defi coins.

Is the slump in the cryptocurrency market a prelude to the eventual cryptocurrency winter? Will cryptocurrencies die and become obsolete in the future? Depending on who you ask, you are going to get a different answer. Personally, I think cryptocurrency is here to stay. The kind of correction in the overall crypto market that we are currently seeing is nothing out of the norm, given the volatile nature of cryptocurrency.

No one, not even so-called experts, has been able to predict the crypto market with any level of precision, and that probably won’t change any time soon. I have my own convictions on cryptocurrencies and it’s best that I follow my own persuasions. I know for a fact that the crypto market is rife with speculation. I have also come to accept that crypto prices can change direction very quickly.

Therefore I have limited cryptocurrencies to just 5% of my overall portfolio. Right now, my crypto portfolio is only 3% of my entire portfolio value. So I still have some more wiggle room in my crypto portfolio.

My growth stock portfolio is also not doing very well: XIRR -53.76%! The 3 worst performers in my battered growth stock portfolio are:

1 . Palantir -71.14% (2.85% of growth portfolio)

2. ARKK -65.96% (4.49% of growth portfolio)

3. Alibaba -44.87% (19.81% of growth portfolio).

Growth/Tech stocks have had a good run up until January this year. During the pandemic period, growth stocks valuation and price were off the charts! However, the valuation and price for these stocks are now on a downward trajectory. Is it time now to start buying growth stocks? I am thinking very hard and long on this.

Well, I need to admit to myself that the outlook for the stocks in my growth portfolio is still cloudy. It is therefore only prudent for me to wait for the turbulence in the market to subside first before adding more substantial positions. There are just too many negative signals in the growth stock market to not be cautious.

Nevertheless, I have not ruled out taking nibbles from time to time … just not big bites. I’m taking small amounts of my expendable money and investing them in high quality stocks such as Amazon, Google and Apple as their prices come down. I’m buying the dips with a few hundred here and a few hundred there.

To facilitate my small purchases, I use SYFE Trade. May is the last month (3rd month) when I get to enjoy 5 free trades and a minimum fee of USD0.99 per trade thereafter. Beginning June, I will get 2 free trades, and from the 3rd trade onwards, I will have to pay a minimum fee of USD1.49 for each trade.

My dividend portfolio is also not in a good shape, although not as badly thumped and bruised as my growth portfolio: XIRR -14.56%. The 3 worst performers in my dividend stock portfolio (after accounting for dividends collected) are:

1 . China Life -33.2 % (1.33% of dividend portfolio)

2. PingAn -28.28% (5.58% of dividend portfolio)

3. Comfort DelGro -26.97.% (2.86% of dividend portfolio).

I love collecting dividends, and it is therefore no wonder that my dividend portfolio makes up 72% of my overall investment. I find comfort and security in well-established companies that have a track record of distributing earnings back to shareholders year after year. As we head towards a bear market, dividend stocks are, in my humble opinion, safer bets than growth stocks as dividend-paying companies tend to have more defensible business models, stronger balance sheets, healthier cash flow, and less down-side risks than growth companies.

As of now, I am keeping to this portfolio structure: 70% dividend stocks, 25% growth stocks, 5% cryptocurrencies.

Closing Thoughts

One thing is sure though: signs are indeed pointing to worrying times ahead.

How long will stagflation last.should it come to pass? Will Russia launch a nuclear attack on the EU? How will the USA’s desperate attempt to contain China end? Will the tension between the 2 super-powers eventually escalate into a war, thus starting the 3rd world war? What will the world be like when climate change, food shortages and energy crisis worsen?

I really don’t know what to think!

I’m hoping and praying for peace to prevail, starting with the cessation of conflict between Ukraine and Russia. But come what may, I’ll keep investing while keeping cash at a comfortable level. I hope my faith in humanity is not misplaced and that world leaders are not stupid enough to trigger a massive war that will threaten peace and prosperity for the world.

As a reminder to myself in these uncertain times: work hard, invest wisely, and hope for the best.