BYD’s stands for Build Your Dreams and its products are probably not that well known to you, at least if you live in a western country. But it is infact a huge company with 200 000 employees and a MCAP of 20bn USD, listed both in Mainland China and on the Hong Kong Stock Exchange. Even Warren Buffet is a believer in the company and has held 9% stake in the company since 2008. It is believed that the famous Chinese investor Li Lu brought the company to Warren’s attention. Since then BYD stock price has been through several rollercoaster rides, mostly fueled by hopes of future growth in Electric Vehicle sales. The last two years has been exciting, since BYD has managed to grab considerable market share in sales of electrical buses. How well they can compete on the electric car stage is yet to be decided. I often read comments like, check out the Chinese Tesla – BYD, but that is not entirely accurate. First off I quote BYD Motors President Stella Li: ““We are in a different market than Tesla,” Li says. “Tesla is for rich people. We are for normal people.” But more than that, BYD is also a company with a much broader business set. I also recommend this Bloomberg article for all you Tesla fans out there: Take that Tesla
BYD has three reportable operating segments as follows:
(a) the rechargeable battery and photovoltaic business segment comprises the manufacture and sale of lithium-ion batteries and nickel
batteries principally for mobile phones, electric tools and other portable electronic instruments and photovoltaic products;
(b) the mobile handset components and assembly service segment comprises the manufacture and sale of mobile handset components such
as housings, keypads and the provision of assembly services; and
(c) the automobiles and related products segment comprises the manufacture and sale of automobiles and auto-related moulds and
The below picture is an important piece in the puzzle to understand the valuation for BYD:
As can be seen, the profit margins in the three different business units are very different. Batteries 7.0%, Handset 3.7% and Auto 9.0%. As of now most of the battery sales goes to BYD’s own vehicles in intersegment sales. So growth in sales in the Auto segment, will quickly increase profits on the bottom line. BYD surely has a lot of interesting prospects going on for the future, everything from solar panels and electricity storage to mono-rail trains in smaller Chinese cities. All these things could be great growth areas in the future. I chose to focus this write-up on the Auto segment and how the battery production is linked to that success.
Auto / Battery
So just to be clear, when we are talking auto, I mean regular gasoline cars, electrics car and electric bus sales. For 2015 the sales of gasoline and electric vehicles were about 50/50 in terms of sales, but in the future the electric vehicle sales is assumed to push far passed gasoline. And already today, because of poor margins for gasoline vehicles, most of the profits comes from electric. At the moment for BYD I see greatest potential in electric bus sales. Electric buses is the one area where the company has managed to push past all the well established bus and truck makers and deliver a product in its own class, much thanks to BYD’s battery capabilities.
BYD have produced 10 000 of electric buses since 2010 and from my point of view we are going to see something of the famous ketchup effect coming through in the next 2 years. As I have interpreted things, the main reason for BYD success with electric buses is that their battery technology is at the moment the perfect candidate to put in buses. They don’t have the most advanced technology in terms of energy density. But BYD’s batteries has good/fast recharging times are safer (meaning very hard to ignite), two aspects that are very important for someone buying a electric bus. In a car you need a lightweight battery with maximum energy density, in a bus it doesn’t matter if the battery weighs a little bit extra. BYD is also the only bus producer in the world with deep expertise and factories to produce its own batteries. I believe these facts around BYD’s edge in batteries is a very important insight for the probability of future success in electric bus production.
BYD has got a huge number of test orders of buses all around the world for public transport. The most famous test bus is already driving around in London:
And here are the specs:
- 345 kWh (BYD LiFePO4-type lithium-ion batteries) good for up to 190 miles (305 km) of typical urban driving according to the internationally recognised SORT test conditions.
- 10.2m long
- seats for a total 54 passengers with a further 27 standees spaces (total passengers: 81).
- features full air conditioning
- 4 hour recharging overnight at low cost off peak electricity
Their main backer on buying electric buses has been the Chinese city Shenzhen who purchased a huge number of buses so far and are running the world’s largest fleet of electric buses. For once, very impressive of China on the environmental front!
It should be mentioned that Shenzhen just recently cancelled their latest huge order (1.8bn RMB) of buses from BYD. The reason? “Due to capacity adjustment, the procurement plan for 2,919 new energy vehicles (Batch 2) has been changed and the tendering process terminated,”. Well that comment doesn’t make you much wiser. Obviously this is negative, but I don’t believe it is because of quality issues. As most things in China it’s rather political or budget reasons for the city. But that one city (albeit a huge one) can make an order of 1.8bn RMB just shows the size of potential orders when this catches on in China and the world. I don’t like to use that kind of logic, but the number of cities in the world that would want to change to electric public transport buses is mind boggling. For so many reasons (pollution, noise, and actually also economics) they will come to this conclusion over the coming 5 years. The future is electric – and right now BYD is in the driving bus seat.
To put some numbers on all this rambling. The cost of a full size electric bus (before subsidies) is around 2 million RMB. As a side note, it should also be mentioned that currently China is giving heavy subsidies for these buses (up to 1 million RMB, driving a lot of the sales and giving BYD a competitive advantage to competitors). The Global sales of all types of buses is about 600 000 every year. I believe a big player like BYD, with in-house battery production as its edge, within 10 years can catch 10% of that market, that is 60 000 buses a year. That translates to sales of 120bn RMB per year, 1.6x the whole company’s current sales, and that would be just bus sales.
Well, just let start by saying, BYD has not impressed me with its electric car products so far. I have been driven in the pure electric BYD E6 taxis in Hong Kong on several occasions and it is an OKish car. But the electric cars are very far from the quality and driving range of a Tesla. Of course they are not aiming at making expensive cars, but they need to be able to compete with the Tesla Model 3 and Chevrolet Bolt that are coming out in a few years – that will be tough. The company still has a large addressable market in China. For normal gasoline cars, large number of Chinese car companies churn out sub-par quality cars for low prices – and with the help of Chinese protectionism (of its own car makers) – it works. But just as all chinese car makers are coming closer and closer to producing cars on par with Japanese and Western car makers, so is BYD. But I’m not at all as confident that BYD will long term be able to come out as one of the successful electric car makers globally. The competition will be fierce both globally as well as by Chinese car-makers (for example Geely and Great Wall going almost all-in on electric). Near term the focus on mass sales is also not in the pure electric, but rather in Plug in Hybrid vehicles. BYD has a number of embarrassing ugly old models, but cars as the new Plug in Hybrid SUV Tang by BYD is an example of a car that is trying to close the gap towards the Western/Japanese competition. It’s not only Teslas that go fast, see the BYD Tang race against a Ferrari 458:
Again BYD’s edge would rather be in that they are a major battery producer and car maker, just as Tesla is trying to become with its Gigafactory. But for electric cars LG Chem, Samsung SDI and Panasonic in co-op with Tesla seem to have a technological advantage in terms of battery performance/density. So short term I can’t see BYD being a winner in the car space – except in China where the competition isn’t fair and BYD can enjoy subsidies and not being hit by import taxes. Since the Chinese car market is so large, being successful in China will go a long way, but as mentioned, there is many other Chinese car makers also wanting a piece of that pie. Maybe I’m sounding overly negative, BYD will for sure grow its sales in this segment, but it will be fierce competition on all fronts.
As at 31 December 2015, the Group held a 65% stake in Hong Kong listed BYD Electronics, this stake is today valued at 8.9bn HKD in the market, a little less than 3 HKD per BYD share.
As at 31 December 2015, the Group held 179,127,725 shares of Holitech, with market price today of 15 RMB per share, or about 3bn HKD, a little less than 1 HKD per BYD share . Holitech is the new owner of parts of the handset business previously run by BYD Electronics. Holitech bought the business from BYD in 2015, paid in cash and shares. Hence BYD’s large holding in Holitech. This is an attempt for BYD to focus on it’s core products and if BYD intends to keep its stake in Holitech or not, is still unknown.
I would see it as a positive if BYD could get rid of these businesses and invest the cash in the much more profitable EV and battery business.
As I have try to present, a sum-of-the-parts of BYD’s businesses shows that almost all the value lies in the future sales of electric cars and buses. My interpretation is that Mr Market is putting a too high value on potential car sales and too low value on potential bus sales. My assumption is that there will be a window of opportunity for BYD, to gain massive market share in electric buses for public transportation, with peak growth in 3 years time. My assumptions are that BYD will take a 10% global market share in the bus market in the coming 10 years. At the same time there is a window of opportunity also for the chinese market for plugin in hybrid vehicles. I’m much less certain for the long term growth case in cars. Other areas which we did not touch on are the growth in sales for Energy Storage Systems (ESS), which I see further ahead as a strong area also for BYD battery. Operating margins will also improve significantly when sales are tilted away from mobile to EVs.
My assumptions for the valuation are as follows:
I use a 10% WACC, assumptions of heavy re-investments of profits in the next 4 years (negative Free Cash Flow) and all this gives me a fair value of 75 HKD per share. When I started writing this fairly long post BYD was trading around 46 HKD and now after announcements that Samsung is taking a stake in a private placement round, the stock traded up to 51 HKD. This valuation some would call a blue sky scenario and to a certain extent I would agree that it is optimistic. Although I’m very certain of BYD success in the area of buses.
As a more bearish scenario BYD might not reach the high growth in bus and car sales, but someone else for sure will. So BYD will be able to supply the batteries for those companies. Such a scenario would obviously not bode well for the stock price. How bad? A proxy could be Samsung SDI which is more of a pure play battery-maker, it’s current market cap is about a third of BYD. Given that BYD is a even bigger battery producer than Samsung SDI a very bearish view on the company gives a floor around 25 HKD for the company.
Look into the Future
As you readers know I have a very bullish view of the future of EVs. I’m sure it will happen, just not who the winners will be. Looking at Tesla’s valuation in the stock market, it is clear these companies carry a big premium compared to BMW and others “old” car makers, which are valued at historically low P/E multiples. Most of BYD’s stock valuations is not a reflection on current profits, but an assumption of rapid profit growth over the coming years. Mainly from battery and electric vehicle sales which has better profit margins than the mobile handset business. To invest or not is based on the belief in this success, it has been a bumpy road so far as an investor, and I expect it to continue to be so. If you are a believer as I am, take advantage of the dips and buy, otherwise stay out.
What the company says of the near future
Lastly I let the latest quarterly report gives some guidance to the near future:
“Thanks to consumers’ wide recognition and the state’s strong support, the new energy vehicle market has entered into the stage of rapid development. As a result, it is expected that in the second quarter, the Group’s sales of new energy vehicles will continue to grow with increasing sales volume, thus leading to continuous improvement in the revenue and profit. In regards to the conventional vehicle business, against the backdrop of mild growth in the overall market and persistently intensive competition, the Group’s sales of conventional vehicles are anticipated to be under certain pressure. For the handset components and assembly business, benefiting from mass production of high-end flagship models by a number of the world’s leading manufacturers, the Group’s metal component sector will maintain fast growth, making a decent contribution to the Group’s profit. In view of continuous growth in market and sales, it is expected that the solar business will achieve profitability in the second quarter.”
For further BYD reading I recommend this article: