BYD
Seeking Alpha Analyst Since 2012
Summary
- BYD has been on the rise lately, following noises from China that combustion engines will be banned, although no date has been set yet.
- Perhaps this is a good time to review the situation and competitive landscape.
- BYD is playing in a fiercely competitive and capital intensive car market and needs to continue on the learning curve as the competition are coming.
The insiders view. Berkshire Hathaway's Charlie Munger has been very positive on BYD and its CEO in the past. He has spoken about the quality of the engineers. But that was a some time ago and as he himself said more recently, don't forget Berkshire bought it as a value play at a much lower multiple than today. Warren Buffett said a few years ago there are lot of very smart people trying to figure out electric cars.
Valuation. Current PE is mid 20s. BYD market cap is $23B. By way of comparison Tesla $64B. Volkswagen $82B. GM $56B. You can buy GM at 7x, Volkswagen at 9x. Electric cars are currently only 2% of the market so if BYD can maintain its position in China and electric cars get to a much higher percentage, BYD can be a much larger company.
The Disruption Factor. I buy into the idea that electric cars will, sooner than widely believed, completely disrupt combustion engines, as described by Tony Seba (youtube his excellent speech on disruption if you haven't seen it). Progress to date with the technology, completely fits the theory, that electric car development is on a learning curve, which will soon reach a tipping point when electric cars are better in so many ways that combustion engines (cheaper, faster, cooler and with lower maintenance and running costs). This is the carrot. Then add to this (outside the US) the stick from Governments who have begun to apply game changing pressure. UK, France and Germany have set dates to ban combustion engines. China is about to set a date but has already put aggressive measures in place to help electric vehicles. Clearly combustion engines are on the way out. The only debate is around how soon. I buy into the argument that there will be a tipping point within 5 years and then a fast switch. One issue is the charging network. But it will get built eventually.
The China factor. So the Chinese Government have a clear strategy to make China the world leader in electric cars. Plus, they must get rid of city pollution to stop killing their people. The plan is to force car manufacturers to produce increasing amounts of electric cars, soon to be 8% or pay for carbon credits. You cannot sell cars in China unless you are a domestic car company or are in a JV with a Chinese domestic car company. The Western car companies fear that the Chinese will use the JV system to learn the Western technology and then starting exporting and eating into the Western car companies global market share. It is expected that China will soon bring in further measures that will aim to close down some of the smaller players in the China electric car market and this is expected to benefit BYD. They are doing this as they have concerns about the quality of the products being produced. So in this environment BYD is in a somewhat protected position within China. The Chinese Government would probably rather if the state owned car companies had the best technology (but they don't). But if BYD, a Chinese company, can be a player, they will be happy.
The competition factor. There are over a hundred mass market car companies around the world. Most of them now have an electric vehicle strategy. Some more advanced than others. For example, Volkswagen, the largest global car manufacturer, recently announced a transformative investment in electric cars over the next few years, both in term of new electric models and battery production. Tesla has the best product currently but may be dependant on securing funding to realise its production dreams. In China, the car market is dominated by foreign JVs and state owned giant car companies. There is an argument that Tesla is so far ahead with their technology that the other 100 car companies will never catch up. I doubt that. The giant car companies make a margin on combustion engines and lose money on electric cars. As the technology improves, costs fall and margins rise, the giant car companies will gradually transition to electric cars. There is a difference between producing a great car and mass producing a great car.
BYD hear and now. BYD's current line up of electric cars and hybrids is impressive and I would expect them to sell well. They certainly look like cars that would even sell in the US and Europe, but that remains to be seen. The BYD CEO recently said that we are currently in the era of hybrid cars. The charging infrastructure in China cities is not there currently which is a major obstacle. At the start of 2017 there was a temporary collapse in BYD car sales. The Government clamped down on subsidy abuses and BYD refused to reduce the price of their cars and sales fell. The issue was resolved and sales have risen rapidly from June onwards. It is expected that BYD car sales will do very well during the rest of this year. However, the company has recently noted the intense competition and is cautious on margin. Geely/Volvo, for example, is currently selling very well. It is broadly expected that by the end of the year BYD will have gained market share in particular because of the expected success of the new line up of cars.
BYD the company. It its relatively short life, BYD has achieved extraordinary things. It is a company that knows how to make money and pivot towards what is profitable. There are obvious tail winds of being in a massive Chinese market, the solar opportunity, the coming electric vehicle disruption, the environmental benefits and necessity of helping to reduce city pollution in China in particular plus the long shot global opportunity. There is value in the company with various different sector opportunities including: recently announced move to small electric cars in second tier cities, monorail, mobile phones, energy storage and the electric buses.
The long term. To justify the current market cap, BYD needs remain a significant player in the electric car market or exploit some other major market opportunity. Electric cars is the main opportunity for BYD and the stock market is pricing this into the stock. But there is a lot of competition and BYD may not be successful in the long term. The Chinese Government are giving them a helping hand and there is value in that, in the local market. But BYD will need all the help it can get as it needs to continue on the learning curve as the competition are coming.
The short term. There is certainly momentum. Over the next six months expect further positive moves by the Chinese Government and strong sales of electric vehicles in the second half of 2017 compared to the first half.
It is impossible to predict what will happen but it will be interesting to watch the transition to electric cars and the role BYD plays.
Analyst's Disclosure: I am/we are long BYDDY, VLKAY, BRK.A.
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