Investors Think China's Number One EV Maker BYD Is About To Take Off

Amid all the hype over EVs, China’s largest producer of energy-efficient vehicles has been getting less love that some investors think it deserves.

With sharply rising sales, improving margins, and rapid overseas expansion in both low-cost and high-end luxury vehicles, BYD Company Limited BYDDF BYDDY is poised for a quick spike upwards soon, say analysts.

Year-to-date, BYD has underperformed most of its peers. While Tesla Inc TSLA is 130% higher, and XPeng Inc XPEV and Li Auto Inc LI are up 60%, BYD has climbed a comparatively modest 20%.

Part of that is down to the flagging demand for Chinese shares this year, while another part of that is due to the market ascribing the company a lower multiple associated with Chinese auto-parts firms and not to the company’s status as an EV seller, according to Livy Investment Research, a stock research group.

That means that BYD is selling for at least half the multiple of rival firms and trades more like EV components suppliers such as LG Electronics Inc, Samsung Electronics Co Ltd and Panasonic Holdings Corporation PCRFY.

“We believe markets are underpricing this mix shift, which likely sets BYD up for a potential upward re-rating on its valuation multiple, moving it closer to those attributable to its high-growth EV manufacturing peers,” wrote Livy’s analysts in a recent note. Livy has a target of $52 per share on BYD, around 75% higher than its present price.

In fact, the evidence shows that the company’s battery business, which supplies many of the new EV upstarts as well as legacy automakers such as Toyota Motor Corp TM and Kia Corp KIMTF and commands 16% of the global EV battery market overall is what has enabled BYD to maintain profit margins over 18% despite its price war with Tesla. 

DBS Bank analyst Rachel Miu maintains a similarly bullish outlook to Livy’s for the number one Chinese automaker. She expects the stock, which is currently trading at around HK$240 in Hong Kong, to increase to HK$410 per share.

DBS cites strong vehicle sales, a net cash balance of 62 billion RMB ($8.4 billion) to support expansion, partnerships with phone handset makers such as Apple Inc APPL to develop EV electronics apps and a solid overseas market strategy in particular in South East Asia, Latin America and Europe as reasons for their bullish forecast. DBS is currently invested in BYD.

In markets such as Thailand, BYD has been gaining significant market share, not just among the country’s auto-crazed consumers but also for heavier EVs too. Finansia’s Suwat Sinsadok estimates BYD will double its sales of EV busses in 2023 to the South East Asian country after making a local acquisition last year.

However, some analysts are still shy of calling for an all-out rise in the stock any time soon. CMB International analysts led by Shi Ji are still rating the company as a Hold despite the better-than-expected earnings growth. CMB says the company is fairly-priced, even if earnings are now expected to increase in the near-term.

“We are of the view that the margin dent on BYD from the price war could be more severe than we had expected last year, but BYD still has plenty of room to cut expenses,” CMB’s analysts wrote in their last research note.

The fact that BYD is a Chinese company is also a risk, say others, since the government can arbitrarily influence the performance of its local players with much greater ease than for other major economies.

This was the case with the leading ride-hailing company Didi Global Inc. DIDIY, which after filing for an IPO in New York was ultimately forced by China’s government to delist and given a hefty fine. (The company still maintains an over-the-counter listing in the States.)

Still, Chinese government policy seems to be mostly geared to encouraging the expansion of EV makers and driving sales. Monday, China’s financial regulator pushed banks to ease up on lending for, among others, sales of EVs to Chinese consumers. In particular, it told lenders to relax auto application loan requirements, lower down payments, extend loan terms and even to design custom loan packages tailored to specific vehicle EV purchases.

In terms of Didi Inc., the country’s sovereign fund is now investing again in the company’s return to mainboard listing status, this time in Hong Kong. That could end up generating another round of windfall sales for BYD as China’s government doubles down on its energy-efficient drive, say local market-watchers.

Amid the constant sales drive, Dair Sansyzbayev, an executive of a Dubai family office, points to BYD’s ability to convert revenue into profit growth as the most attractive fundamental reason to value BYD much higher than its current price.

In the first half of 2023, BYD increased revenue by 73% but more than tripled its net profit vs. the same period last year to 260 billion RMB and 10.95 billion RMB, respectively.

Taking that into account and discounting the earnings growth by 15% for geopolitical risks, then fair value for the company is around $300 billion market capitalization – around three times what it stands at presently, writes Sansyzbayev in a recent note.

“The company's fair value is far above the current market cap, meaning the stock price has a massive upside potential,” said Sansyzbayev.