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://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
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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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