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Elevator Pitch
I rate BYD Company Limited's (OTCPK:BYDDF) [1211:HK] shares as a Hold.
Investors should watch out for factors which could depress demand for New Energy Vehicles or NEVs in China and the potential for further COVID-19 lockdowns in the country, when assessing BYDDF's outlook and growth prospects for 2022.
Although BYD Company Limited deserves a valuation premium for being the market leader in China's NEV industry, it could suffer from a valuation de-rating in the short term if its financial results in subsequent quarters don't live up to the market's lofty expectations. Considering the significant risk relating to potential earnings misses in 2022 and its expensive valuations, I decided to assign a Hold (rather than Buy) rating to BYD Company Limited.
How Did BYD Stock Do In 2021?
BYD Company Limited's shares did reasonably well on an absolute basis in 2021, with its stock price rising by +28.7% from $26.43 as of December 31, 2020, to $34.00 as of December 31, 2021.
BYD Company Limited's 2021 Stock Price Performance
Source: Seeking Alpha's Charting Data For BYDDF
BYDDF's 2021 share price performance was also satisfactory on a relative basis. BYD Company Limited's stock price increase in 2021 was on par with that of the S&P 500 as per the chart above; while its shares outperformed the Hong Kong benchmark Hang Seng Index, which was down by approximately -14% last year, by a wide margin. Note that BYD Company Limited's shares are also listed on the Hong Kong Stock Exchange.
Based on S&P Capital IQ data, BYD Company Limited's consensus forward next twelve months' normalized P/E multiple expanded by +15.9% from 68.5 times as of December 31, 2020, to 79.4 times as of December 31, 2021. In other words, BYDDF's +28.7% share price increase in 2021 was driven by both valuation multiple expansion (+15.9% rise in forward P/E multiple) and expectations of future earnings growth. I address BYD Company Limited's historical operating performance and future financial forecasts in the subsequent sections of the current article.
BYD Key Metrics
In order to do an evaluation of how BYD Company Limited's shares could perform this year, it is necessary to first review the company's most recent operating and financial metrics.
According to the company's latest monthly operating data, BYDDF's total vehicle sales (including both passenger and commercial vehicles) grew by +82.3% YoY from 53,943 units in November 2020 to 98,340 units in November 2021, while its total vehicle sales jumped by +72.9% YoY to 641,019 units in the first 11 months of last year. Specifically, BYD Company Limited's New Energy Vehicle or NEV sales surged by +241.8% and +217.0% YoY to 91,219 units and 509,838 units in November 2021 and 11M2021, respectively.
In its media release detailing November 2021 vehicle sales, BYD Company Limited highlighted that it "has secured sales growth for nine consecutive months" and noted that the company's substantial vehicle sales in the first 11 months of 2021 "greatly underscored its leadership in the NEV world."
BYDDF's excellent operating performance (i.e. sales volume growth) translated into robust top line expansion for the company. BYD Company Limited's revenue increased by +22.0% YoY and +38.3% YoY to RMB54.3 billion and RMB145.2 billion for Q3 2021 and 9M 2021, respectively. Separately, BYD Company Limited's net income attributable to shareholders decreased by -27.5% YoY from RMB1,751.1 million in Q3 2020 to RMB1,269.5 million in Q3 2021, while its bottom line contracted by -28.4% YoY to RMB2,443.1 million in the first nine months of 2021.
On the positive side of things, BYD Company Limited's net profit attributable to shareholders actually increased by +35.6% on a QoQ basis. In the company's 1H 2021 interim financial report, BYDDF acknowledged that its "overall profitability (in the first half of 2021) is affected to some extent by factors including rising prices of raw materials such as bulk commodities." BYD Company Limited's strong QoQ earnings growth in Q3 2021 suggests that it should have already witnessed the worst of cost headwinds.
What Is BYD's Forecast For 2022?
Sell-side analysts see BYD Company Limited's revenue and normalized earnings per share increasing by +30.0% and +54.1%, respectively according to consensus financial estimates sourced from S&P Capital IQ. The positive top line and bottom line growth outlook for BYDDF appears to be supported by management guidance with respect to future NEV sales. BYD Company Limited has recently guided for NEV sales of approximately 1.1-1.2 million units in 2022, which will be more than double its NEV sales of 509,838 units in the first 11 months of 2021 as highlighted above.
However, I think that BYDDF's actual financial performance and new vehicle sales this year could possibly fail to meet market expectations for two key reasons.
Firstly, China's "zero-COVID policy" might lead to more lockdowns in the country and production disruptions for BYD in 2022, especially in view of the new COVID-19 variant, Omicron.
South China Morning Post reported on December 23, 2021, that BYD Company Limited "had to cut production at its plant in Xian, after the northwestern city was hit by lockdown measures following an outbreak of Covid-19." Chinese state media Global Times also highlighted in another article published on December 24, 2021 that "Xi'an is one of the most important production bases for" BYDDF, which contributed "over half of its output" in November 2021.
BYD Company Limited's 1Q 2022 new vehicle deliveries might possibly come in below expectations due to the Xi'an lockdown, and there is significant downside risks to the company's new vehicle deliveries for the rest of the year as well if China persists with its "zero-COVID policy".
Secondly, the demand for NEVs in China in the near-term could be negatively impacted by affordability issues.
A December 31, 2021 Seeking Alpha News article mentioned that "China will reduce the EV (Electric Vehicle) subsidy by a further ~30%" at the beginning of 2022, and "no longer subsidize the purchase of new-energy vehicles" in 2023. Separately, a South China Morning Post article published on December 12, 2021 cautioned that "an increase in metal prices will force battery makers to raise prices and pass these on to carmakers and buyers", which "will be a big stumbling block to the wide use of EVs" in China.
BYD's NEV sales have certainly been very strong in 2021, and the company is also setting an ambitious NEV sales target for 2022 as noted earlier. But higher NEV selling prices and the lower subsidies might still have a larger-than-expected negative impact on China's NEV industry sales and BYD Company Limited's financial performance in 2022.
Is BYD Stock A Buy, Sell, Or Hold?
BYD stock is a Hold.
On one hand, BYD Company Limited, which Forbes refers to as "China's largest EV maker", is a key beneficiary of the growing NEV market in the country. The NEV penetration rate in China is expected to rise from 13% in the first 11 months of 2021 to 30% in 2022, according to a Bloomberg interview with Group Lotus' CEO. In the longer term, the growth prospects for the Chinese NEV industry are excellent as well. China EV100, which describes itself as a "nonprofit organization and third-party think tank aimed at boosting the development of EV industry", forecasted that China's "EV deliveries are expected to hit 5 million (in 2022) and climb to as high as 20 million by 2030", as per a December 20, 2021 Bloomberg article.
On the other hand, the market values BYD Company Limited at a very rich 79.4 times consensus forward next twelve months' normalized P/E multiple, which is supported by expectations of robust revenue and earnings growth this year. Given that NEVs are going to get more expensive in China and that there are risks relating to production disruptions brought about by COVID-19 lockdowns, earnings disappointment in subsequent quarters could lead to a de-rating of BYD's valuations.
Considering both the positive and negative factors associated with the stock, I view a Hold investment rating as appropriate for BYD Company Limited's shares.
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