China's Byd Is A Great Buy

| About: BYD Co., (BYDDF)

Summary

Byd's electric-vehicle sales appear below target so far for 2016, but are likely to pick up strongly in the second half.

Byd's strength is its Chinese location and product diversity: For 2016, it is currently No. 1 globally in ebus sales and No. 2 in electric car sales.

Byd stock looks undervalued on a 2017(e) PE of just 27.8 for a company growing sales and earnings growth estimate at 39% per annum.

Build Your Dreams (NYSE:BYD) is a Chinese company based in Shenzhen, China. Its business is based around battery manufacturing, with expansion in recent years into conventional and electric car production. They also have energy storage, solar PV, IT and lighting divisions.

Byd Co (OTCPK:BYDDY) (OTCPK:BYDDF) (HK:1211) (SHE:002594) was the global number 1 in 2015 in Electric Vehicle (NYSE:EV) sales, with around 60,000 sold. Tesla (NASDAQ:TSLA) was number 2 with around 50,000 sales in 2015. I have written previously on Seeking Alpha about Byd, which you can read here, here and here.

Since my first article on Byd, things continue to get better.

1) China has maintained their EV target of 5 m EVs on the road by 2020.

2) The Chinese government has said they will speed up the construction of charging stations, to meet their target of 5m charging station by 2020. The number of public charging piles grew from 1,122 to 49,000 at a CAGR of 87.7%, between 2010 and 2015.

3) China plans to boost energy storage by ten fold to 14.5 gigawatts, by 2020.

All three items above have huge benefits for Byd as they are primarily a battery and EV company, with energy storage using lithium ion batteries as a growing new business, much like Tesla.

China EV sales update

Chinese EV sales surged 223% or 188,700 units in 2015, for a total of 0.9% market share for the 2015 year. The graph below shows the massive year on year.

Source

Byd sales 2016

Byd ranking 2nd for global sales as of end March 2016

Ranking Company YTD sales market share %
1 Nissan 17,113 13
2 Byd 16,783 13
3 Tesla 14,820 11
4 Mitsubishi 10,607 8
5 BMW 8,524 6

Source

Byd has had a typical slow start to sales for 2016, especially given its target for 120,000 sales in 2016. At the current rate of 16,783 for the first quarter, yearly sales would extrapolate to 67,132. Better than 2015, but nowhere near the 120K target.

I would expect things to speed up otherwise the 120,000 target is in trouble. The graph above shows Byd's sales accelerated strongly throughout 2015. Given last year December was Byd's best month, and that the EV subsidies will reduce by 20% at the end of 2016, I am confident 2016 will still be a big year for Byd EV sales. The company has previously stated that they cannot keep up with demand especially for electric buses and taxis. Also CEO Wang stated just last March in Hong Kong, that he thought Byd would sell 150,000 EVs in 2016.

There was also some negative press in the past few months with some Chinese EV car companies allegedly cheating the subsidy system, however Byd was not involved.

2016 Byd Yang SUV - Byd's top selling model

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Latest Byd company developments

  • April 16, 2016 - Byd's new Shanwei electric bus plant produced its first bus, and plans to be fully operational by June 2016 and able to initially produce 5,000 ebuses per annum. Byd has received 6,434 new ebus orders for the new plant. Investors should be aware that the PRC has been considering reducing subsidies for ebuses by as much as 32-49.5%.
  • March 31, 2016 - Byd introduced two new fully electric models- the QinEV300 (4 versions with prices ranging from 259,800-309,800 Yuan), and the e5 (3 versions with prices ranging from 229,800-249,800), with ranges of around 300km.
  • December 11, 2015 - Byd launched the first 100% electric taxi fleet into Chile. The initial trial was with three Byd e6 EVs.

Byd's new Shanwei China bus manufacturing plant

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Byd launches 100% electric taxi fleet in Chile

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Byd's strengths

  • Global No 1 in electric bus sales.
  • Global No 2 (was No 1 in 2015) so far in 2016 for electric vehicles sales.
  • Growing residential and commercial energy storage business. The Byd B-Box modular energy storage system sells in 2.5kW modules. A family home would typically purchase a 10kW box.
  • Solar panel sales.
  • Strategic parnerships with Uber (private), Didi Kuaidi (private), JD.com (NASDAQ:JD), Huashang Sanyou, and Diandong.com.
  • Excellent CEO in billionaire Wang Chuanfu.
  • Strong connections with the Chinese government.
  • Strong institutional backing including Warren Buffet and Charlie Munger's Berkshire Hathaway who now own 24.6% of the Hong Kong listing. Berkshire recently bought into a major US car dealership (Van Tuyl), so that may have a potential future synergy with Byd.
  • Byd is likely to soon become a Fortune 500 company.

Byd billionaire CEO Wang Chuanfu (The "Elon Musk" of China)

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Byd's advantage over its western competitors

Byd has the following advantages over its western competitors:

  • Large Chinese government subsidies.
  • Chinese government paying for the charging network (compared to say Tesla, which is paying for its charging network).
  • Cheaper labor costs.
  • China is the largest car market for new car sales in the world.
  • Strong need to improve the Chinese pollution problem.

Byd's has huge potential to supply the world with electric taxis and buses.

In 2015, BYD aimed "to sell about 15,000 electric cars to taxi fleets and about 6,000 electric buses this year, according to Hou Yan, the company's head of sales." In 2016 Byd plans to start selling electric trucks.

Currently there are (at a best guesstimate) about 24 million taxis (2% of vehicles x 1.2b vehicles globally) in the world. If Byd was to gain just a 13% share (equal to their EV global market share), then that would be a potential market of around 3.12 million electric vehicles. Spread over say 20 years to replace the fleet that would be 156K EV sales per annum to Byd, just to supply the global taxi market.

Additionally, the taxi market and ride hailing app companies are seen to have huge potential, an example being Apple's (NASDAQ:AAPL) recent $1b investment in Didi. These companies will compete fiercely to cut running costs. The 61.4kWh Byd e6 can be fully charged for around USD 9 (0.3 kWh/mile) in 2 hours, and has around 250 miles of range.

A similar scenario with the global bus fleet, could yield Byd with say 13% of 2.4 million buses (I had to guess 10% of taxi numbers, as I could not find any data on this), making a total of (13% x 2.4m) 312K buses. Or (312K/20) 15.6K ebus sales per annum for Byd, 10% of the etaxi figure.

Whilst these are just my best guesstimates, the purpose is to understand the enormous potential for Byd just in etaxi (156K per annum) and ebus (15.6K) sales per annum.

Post publication edit - Thanks to commentator Davecmart.

"Global demand for buses is projected to advance 5.3 percent annually to 664,000 units in 2018. The Asia/Pacific region will remain the dominant market, while the Africa/Mideast region will grow the fastest. Motor coaches will outpace other types based on increasing private sector use, and on their greater comfort, safety and onboard services." Byd's stated it's 2020 goal is for "maybe 40,000" bus sales pa by 2020.

My best guesstimate of a potential 15.6K ebus sales pa for Byd going forward, may have been a bit conservative relative to Byd's "maybe 40,000pa by 2020, however given Byd sold around 6,000 ebuses in 2015, only time will tell.

In any event, the point is that Byd has a large potential market going forward for both etaxis and ebuses. This is really just icing on the cake, on top of their regular electric car sales.

History lesson

It is said history often repeats itself. Electric taxis are coming back from the dead.

New York City's first taxicab firm was the Electric Carriage and Wagon Company, which started in 1897.
In London, Walter C. Bersey designed a fleet of such (electric) cabs and introduced them to the streets of London in 1897. They were soon nicknamed 'Hummingbirds' due to the idiosyncratic humming noise they made.

Competition

Chinese competitors include BAIC (OTC:BCCMY)(HK:1958), SAIC, Kandi (NASDAQ:KNDI), Geely (OTCPK:GELYF)(0175:), Zoyte (private), and soon Faraday Future (private). However BYD currently has around 39% market share in China, so is a dominant leader for now. BAIC is the closest Chinese competitor, currently ranked 8th globally, and 13% Chinese market share.

Foreign competitors are Tesla, Nissan (OTCPK:NSANY), General Motors (NYSE:GM), Mitsubishi (OTCPK:MIELY), and other ICE companies. Most of these have difficulties selling in China, as seen by only Tesla making the top ten, finishing in 8th position in China, so far up until the end of March 2016.

Byd current financials and valuation

Byd's top and bottom line have been steadily improving and forecast to improve going forward. In 2015 Byd achieved USD 12.3b in sales, increasing 38% from 2014.

Debt levels are manageable at 43.9b CNY (USD 6.7b) in 2015, but forecast to drop considerably in 2016 to 19.0b CNY (USD 2.9b). A recent capital raise has caused about 10% dilution in 2016 EPS, but helped to pay down debt.

Net profit margins are a bit tight at 3.53% in 2015, forecast to improve to 4.25% in 2016, and 5.08% in 2017.

2016(estimate) EV/Revenue is 1.46x, and 2016 Price to Book value 4.01x.

Cap Ex is also forecast to drop by around USD1b (CNY12,290m-CNY 5,508m = CNY6,782m = USD1.038b) in 2016. Cap Ex 2016 CNY 5.5b or USD 0.84b, 2016 Cap Ex/Sales 5.61%.

2015 2016 (est.) 2017 (est.) 2018 (est.)
EPS (Yuan) 1.12 1.53 2.13 2.98
PE 38.7 27.8 19.9

NB: The above PEs are based on the Shenzhen listing of Byd which trades at a richer valuation than in Hong Kong or the US.

In summary, we're looking at rising earnings per share and falling debt, with a very reasonable PE, given the rate of EPS growth at around 39% per annum. EPS will have almost tripled from 2015-2018 if estimates are met.

(Source)

Byd's current market cap is HKD 147.8b, or USD 19b. That is a 31% discount to its nearest rival Tesla with a market cap of USD 27.8b. Both companies are on a similar pathway with their EV sales ramp up.

Byd Tang at the 2016 Beijing motor show

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Conclusion

If you believe in the future of EVs and energy storage, then Byd is exceptionally well positioned to benefit from this.

Byd is the 2015 global No 1 in EV sales, the global No 1 in ebus sales, and a dominant force growing in energy storage and to a lesser degree solar.

Byd has an astounding potential to grab a huge market share in etaxis and ebuses and is doing that already. Add to that we are quite likely just at the beginning of the EV adoption S curve, as I discussed here.

The stock is not expensive trading on a 2017 PE of 27.8, especially when you consider the high growth in EPS (consensus 39% estimate growth, Goldman Sachs 57% estimate growth), likely to come through in the next few years, provided they can continue to successfully produce and sell EVs and energy storage.

The only cloud on the horizon is the 2017 20% drop in EV subsidies, and the possible reduction in bus subsidies.

Analyst consensus targets for end 2016 are for Byd (HK:1211) to reach HKD 54.47, or for BYDDF to reach USD 7.01.

I view these targets as conservative, and not yet fully factoring in the EV sales ramp up to 120,000 in 2016, and around 200,000 in 2017.

Of 22 analysts 9 rate Byd a buy, 5 an outperform, 3 a hold, 3 an underperform, and 2 a sell.

Investors should add to Byd now and again on dips if they believe in Byd, and the long term EV/energy storage "dream".

Disclosure: I am/we are long BYD CO (HK:1211).

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advise.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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