Leon Neal
BYD Global (OTCPK:BYDDF) submitted its earnings sheet for the fourth-quarter earlier this week and although the Shenzhen-based car brand missed earnings expectations, it once again proved that it is one of the most profitable EV makers in the world. The company also overtook Tesla (TSLA) in the fourth-quarter in terms of BEV sales and is one of the few Chinese electric vehicle companies that is already widely profitable… which helps set BYD apart from start-up EV companies. While EV demand seems to be slowing down globally — and a number of EV companies have either warned of slowing growth or reduced their delivery forecasts — I believe BYD is the lowest-risk bet that investors can make in the Chinese electric-vehicle market. The company’s valuation is also very attractive from a valuation point of view and the risk profile is favorable as well!
Previous rating
I recommended BYD at the beginning of the year when the EV firm overtook Tesla in terms of quarterly sales and deliveries for the first time: 2024 Could Be The Year Of BYD. I believe that BYD is an exceptional EV investment in China, especially because the company has massive scale and it is already profitable… which can’t be said of the competition in the start-up segment.
Record annual profits
One reason why I recommended BYD in early FY 2024 to growth investors with an interest in gaining exposure to the Chinese EV market was that BYD became the largest global EV player based off of sales and deliveries recently: the Chinese EV maker sold 526,000 BEVs in the fourth-quarter compared to Tesla’s 484,500 electric vehicles, thereby officially becoming the global number one EV maker.
BYD has been enormously successful in China, in part because it was one of the first companies that invested in EV technology. BYD launched a number of highly successful EV products, including the BYD Seagull, an all-electric 4-passenger hatchback that is highly competitively priced: the EV now only costs 69,800 Chinese Yuan ($9,700) and is also primed to hit more export markets in the future. The BYD Seagull has so far already been introduced in markets in South America (like Brazil and Mexico) and will likely come to other geographic regions as well.
InsideEVs
BYD’s strong sales and delivery performance was reflected in the firm’s earnings sheet for FY 2023: BYD generated 30.04B Chinese Yuan ($4.15B) in earnings in FY 2023, showing 81% year over year growth as the company, as China’s largest EV maker, benefited from growing EV adoption in China. BYD, however, missed the consensus earnings projection by about 1.0B Chinese Yuan ($138M) for the 2023 fiscal year.
BYD
One major strategic advantage that BYD has is that it is increasingly export-oriented and has had successful market entries in South America, South-East Asia and Europe. BYD’s exports soared in FY 2023, especially in the second half of the year, and the EV company reached an annual export volume of 242,759 electric vehicles. Since June, the monthly export volume increased by a factor of 3.4X to more than 30k EVs per month which is largely explained by the success of the company’s EV products, like the BYD Dolphin, another battery-powered passenger hatchback, that the company produces since FY 2021. With BYD guiding for even more market entries, like in South Korea, the export volumes are likely only going to increase going forward. I see increasing export volumes as a kind of hedge against slowing EV demand in China itself… which is one of the most competitive markets in the world for EV manufacturers.
BYD Exports 2023
BYD’s single biggest advantage is its low valuation
Besides BYD’s massive profitability and upside in export volumes, I believe the biggest advantage of the Chinese electric vehicle company is, hands down, its valuation. BYD is trading at a very competitive P/S ratio and investors should remind themselves that BYD is one of a very small number of companies in the sector that is already generating a ton of earnings.
Times are getting rougher in the electric vehicle market and the industry made some negative news lately. EV company Fisker is facing a real risk of going out of business now that the Nissan deal appears to have collapsed. Lordstown, another EV start-up, already went bankrupt, and there is a chance that more EV companies will go out of business if EV demand wanes. The best positioned companies are those that are already profitable, have export opportunities that allow them to adapt quickly to changing domestic demand patterns and whose valuations offer a safety margin.
Most EV companies are not profitable, so for a valuation comparison I am using the P/S ratio. BYD is expected to generated $110.1B in revenues this year, implying a 0.73X price-to-sales ratio. The company’s revenues are projected to ramp up to $154.2B by FY 2028, so BYD could see an annual average top line growth rate of 9%.
Seeking Alpha
BYD’s U.S. rivals — Tesla and Rivian Automotive (RIVN) — are trading at significantly higher P/S ratios while its Chinese competitors — NIO (NIO), Li Auto (LI) and XPeng (XPEV) — trade at an industry group average of 0.76X which is slightly above BYD’s revenue-based valuation factor. BYD, however, is already profitable and should be able to trade at a higher revenue multiplier than its much smaller start-up rivals. Based off of revenues, I believe shares could easily trade at 1.0X revenues given that the EV firm is already making money and I don’t see a specific reason why BYD should trade at such a large discount to Tesla… which has a P/S ratio of 4.3X. A 1.0X price-to-sales multiplier is very conservative for a fast-growing EV manufacturer and BYD managed to trade at this ratio last year. If BYD returned to this valuation range, BYD could have a fair value of $80 and 57% upside revaluation potential.
Relative to Tesla’s price-to-sales ratio, BYD trades at an 85% discount which I don’t believe is justified considering that the EV firm now is the world’s largest electric vehicle brand. As I indicated in my last article on BYD, the EV maker also has industry-leading gross margins in excess of 20% while Tesla generates gross margins around 18%. From a sales/delivery volume perspective, as discussed, BYD is now leading Tesla.
Risks with BYD
BYD is subject to intense price competition in the Chinese EV market which has caused the EV maker to introduce new electric vehicle models with an entry price of below 100,000 Chinese Yuan. Tesla earlier this year warned of slowing EV growth globally and is scaling back production at its manufacturing plants in the country as well. Li Auto (LI), a smaller, yet already profitable rival in the EV market niche, recently cut back its delivery forecast, also citing weakness in demand.
The slowdown in the EV market comes at a time of escalating price intensity as more companies feel the need to lower prices in order to compete for sales. It is this pricing pressure that caused rival EV maker XPeng to start an entirely new electric vehicle brand as a way to introduce low-priced EVs to the market. Softer EV pricing, a trend towards low-cost electric vehicles and margin pressures are reasons why BYD may underperform in FY 2024.
Final thoughts
BYD may have fallen short of earnings expectations, but this doesn’t diminish the fact that the EV maker reported its highest annual earnings in its history in FY 2023. The demand outlook may be a bit weaker than expected, but given that BYD is already very profitable (which can’t be said about its rivals in the EV start-up niche), I believe BYD has a much better chance than smaller electric vehicle companies to ride out the storm in the EV market and emerge as an even stronger company in the future. The valuation is very attractive and so are BYD’s export opportunities!
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
