Cars

Electric Cars-BYD Leads The Chinese Charge – BYD Co., Ltd. ADR (OTCMKTS:BYDDY)

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BYD Auto (OTCPK:OTCPK:BYDDY) has launched a substantive international push on the back of its strong position in China. The company is the world’s largest manufacturer of electronic vehicles (EV’s). It is a substantial battery player with the vertical integration which the new paradigm of renewable energy will demand. Tesla (NASDAQ:TSLA) has ambitions to be vertically integrated. Some criticise it for that. BYD already has this vertical integration in place and apparently the finance to back it up. The EV market in their home territory of China is on a strong upwards trend again after regulatory issues earlier in the year depressed sales.

China.

BYD sold over 100,000 EV’s in China last year. In addition it sold about 15,000 e-buses (out of a total of 240,000 in the country). Recent new rules from the Chinese Authorities will benefit BYD and other large manufacturers and disadvantage the plethora of small companies. It has been decreed that 8% of all sales by an auto manufacturer must be EV’s by 2018. This rises to 10% in 2019 and 12% in 2020.

The resultant carbon credit scheme means BYD could even sell its carbon credits as a source of income. It has for instance been reported that Volkswagen (OTCMKTS:OTCPK:VLKAY) will be purchasing carbon credits from its joint venture partner JAC (Jianghuai Auto Co) to enable it to roll out its planned EV’s in the country. At present BYD is the only Chinese auto maker producing EV’s with a range in excess of 188 miles.

EV sales earlier in the year had fallen in China due to uncertainty over changes in Government regulations. Sales for the first 6 months are charted below:

It can be seen that the recovery got under way in mid-year. Indeed, BYD sold a total of 11,000 EV’s in June alone.

The sales growth continued in July. In the first 7 months of the year the company has sold over 53,000 plug-in autos. According to official figures just released, “New Energy Passenger Vehicle” sales in the first 7 months of the year rose by 34% year-on-year to total 201,000 units. This was despite the decline at the start of the year due to uncertainty on Government incentive measures.

Sales for the month of July show BYD has 3 vehicles in the top ten models, as per the graphic below:

Much of BYD’s sales came from their new models. The fully electric Song has just been launched, pictured below:

This good-looking SUV is a crucial development. The company is now starting to sell vehicles that should have international appeal. This is seen to be a development following their hiring of the previous Audi design chief, Wolfgang Eder.

The company is also bringing out the Song in a hybrid version. This is named the “Song Max MPV”. Below is a detail of interior:

BYD also has a joint venture auto company called BYD-Daimler Denza. This has been somewhat unsuccessful despite claims that its current model has a range of 350 kilometres. It is said to be launching a new electric SUV in 2018.

The auto market in China is booming. The sales of passenger cars in general were up 7% in the first 7 months of the year. “New energy vehicles” sales were up over 90%.

93% of EV’s sold in June in China were from domestic manufacturers. By far the most successful of the balance was Tesla with 6% (leaving a paltry 1% for BMW and others). The Model S sold 1600 units and the Model X sold 500 units. This illustrates the strength and weakness of Tesla in China. The brand is very strong and consumers wants the product. Long-term though Tesla needs to manufacture in China. For that it will need a partner with substantial capital infusion. One possibility for that might be from Ten Cent who have bought a share in the company.

Other Chinese auto companies are strong on the ground as well. These include Geely Automobile (OTCMKTS:OTCPK:GELYY) which owns the Volvo brand. Geily is ramping up its production capacity of EV’s rapidly. Because of the attraction of the Volvo brand in overseas markets such as the USA, Geely is one company investors may care to consider.

News reports coming out of China suggest that one of the major Chinese players may be preparing to make a bid for Fiat Chrysler (NYSE:FCAU). That would certainly be a quick route for Chinese manufacturers to penetrate Western markets. Further news is awaited on this rumor but Geily would be a likely suitor.

State-owned GAC (Guangzhou Automobile Group) launched its first all-electric auto in July. State-owned BAIC Motor Corp has the most aggressive EV policy of the State-owned companies. It recently opened a new factory in Beijing with an annual capacity of 300,000 EV’s. There is also Shanghai Automotive which owns the MG brand. Coming from the IT side of the equation there are companies such as Baidu Inc (NASDAQ:BIDU). They are the Chinese equivalents of Google (NASDAQ:GOOGL) (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), getting involved in areas such as autonomous driving.

As with EV’s, so goes battery capacity. The country’s current battery cell manufacturing capacity is 125 GWh. This is expected to double to 250 GWh by 2020. That would represent 70% of the world’s battery capacity. Contrary to what some critics of Tesla say, this would seem to indicate that Elon Musk’s Gigafactory in Nevada is hardly a white elephant. As with EV’s the Chinese Government is encouraging the larger, better quality companies. Subsidies will be targeted toward them. Again this favours BYD. They are a leading battery manufacturer as the chart below illustrates:

The company’s emphasis on energy storage is favourably impacted by their production roll-out. Battery costs keep getting lower and production going up. For companies like BYD this means they are increasing market share but profits are probably falling on battery products. At present margins are perhaps being given priority over market share.

Finances.

Financial details of Chinese companies tend to be somewhat opaque and BYD is no exception. Investors should do their own due diligence. Unlike most of its competitors, BYD is listed on the U.S. exchanges as an ADR. For this it has to comply with some regulatory requirements. This however is not always as much as an investor might wish.

The financing appears to be sound. Its Quick Ratio of 0.78 and Current Ratio of 1.00 are acceptable for a cautious investor. Its total debt is US$1.58 billion. The debt position is very much going in the right direction as per the details (from Charles Schwab, subscription required) below:

A 9% stake is held by Warren Buffett and there was investment last year by Samsung (OTCMKTS:OTC:SSNLF). The Koreans took a 4% stake in the company. Samsung’s investment is reckoned to be part of their drive to get into the market of the EV supply chain, especially in regard to semiconductors.

Pricing valuation metrics are sound. Compared to the S & P 500:

Price/Earnings 22.73 (S & P 500 22.27).

Price/Tangible Book 2.88 (S & P 500 3.20).

Price/Sales 1.26 (S & P 500 2.12).

Dividend Yield 1.25 (S & P 500 2.00). The company resumed paying dividends last year.

Margins are about what one would expect in the auto industry. The graphic below illustrates the continuous improvement the company has been making:

Gross margin in 2016 was 18.98%. This is up from 13.77% in 2014 and 14.28% in 2015. Net profit margin in 2016 was 5.47%. For comparison purposes, the 2016 figure for Ford (NYSE:F) is 2.49% and for GM (NYSE:GM) it is 5.97%. The net profit margin figure is up from 1.34% in 2014 and 4.04% in 2015 (all figures from Charles Schwab, subscription required).

The company is well diversified and divides itself into 5 sectors. These comprise autos, PV solar, energy, IT and lighting. It is a major player in all 5 sectors. Its focus on vertical integration is shown by its recent involvement in mining of lithium carbonate to protect its raw material sources for lithium batteries.

Their battery plant in Shenzhen has an annual capacity of 8.6 GW which will be expanded to 12.6 GW by the end of the year as detailed previously. They are the second largest lithium battery producer in the world behind Panasonic (OTCPK:OTCPK:PCRFY). My article in April gave details on their battery production. Panasonic of course are the partners of Tesla in their battery production.

One has to factor in also whether the State-owned auto companies will get some sort of hidden benefit over the privately held ones such as BYD. The company is to me the best bet because of its strong vertical integration model, international exposure and apparently sound financing. The previous article gave some of the other options for those who might want to invest in the Chinese auto sector.

North America.

BYD’s manufacturing plant in Lancaster, Califorina has been mainly concentrated on the company’s e-bus range. They are also working on electronic refuse trucks (in partnership with Wayne Engineering) and forklifts from this plant. They stated in July their plans to expand the workforce to number 700 personnel and start an EV auto line there.

The company scored another contract success in July from the Los Angeles Metropolitan Authority. 60 e-buses are being purchased at a cost of US$66 million to run on the 29 mile “Silver Line”. Another smaller order was given to U.S. company New Flyer. The Authority runs a fleet of 2,200 vehicles and is aiming to be zero-emission by 2030. The huge potential is obvious. BYD has secured e-bus orders elsewhere in Southern California in Long Beach, Palm Springs and Anaheim. In August the company delivered the first of 20 e-buses to the city of Albuquerque in New Mexico.

The company’s recent Skytrain Transit Division has attracted interest in the USA. There are negotiations ongoing with the Los Angeles municipal authorities. They have also had some success with LED streetlight contracts in the USA.

China is now the largest foreign investor in the USA. BYD is one of the companies highlighting this trend. It seems to be only a matter of time before BYD autos are on America’s roads. Ford (NYSE:F) is planning to sell the China made “Focus” in the USA as from 2019.

It will be interesting to see how the American consumer reacts to autos made in China. Previous initiatives by Chinese auto brands in the USA have not been successful. There have been both quality issues and technological barriers. The company currently has its rather dated e6 model being tried out by Uber in Chicago. Long-term it is likely consumer sentiment will follow the path blazed in the past by Japanese and Korean vehicles. China is by far the largest manufacturer of autos in the world. In 2016 it produced 24.4 million autos. Japan produced 7.8 million, the USA 3.9 million, and South Korea 3.8 million. It is likely that Chinese auto brands will in time follow the huge success of those we have seen from Japan and Korea.

However BYD will need to improve the interior trim and fittings of its products if it is to appeal to the U.S. consumer. My recent article detailed how it seems to be achieving this under a new design team.

South America.

BYD have been getting a series of contract successes around the continent. Recently they secured an order for e-taxis in the Brazilian city of Belo Horizonte. They have previously supplied e-buses and minibuses to the city. They have secured e-bus contracts in Brazil, Argentina and Uruguay. The company forecasts sales of 2,000 EV’s in Brazil in 2018.

BYD has e-bus factories in Argentina and Brazil. They will soon be opening one in Ecuador, where they have supplied e-taxis. They have a solar photovoltaic plant in Brazil. They have recently secured contracts for e-taxis in Uruguay’s capital city of Montevideo. In a sign of a studied long-term approach to overseas markets, they have signed a research and co-operation deal with a university in Chile.

In South America, as in Europe and Asia, the company has a comprehensive network of sales agents or subsidiary companies. It might be supposed that this international sales effort would put a financial strain on the company. The financial figures would seem to argue against this. An important metric is perhaps the sales figure per employee as below:

If you can improve profit margins and salesforce productivity, then taking on more debt can be seen as a healthy end-product of growth.

Europe.

The company announced in July a further order for their e-buses being built in partnership with British company Alexander Dennis. This brings the total recent orders in London for them to 95 units. They have supplied e-bus contracts to Edinburgh, Nottingham, to Piedmont in Italy and to Amsterdam’s Schiphol Airport amongst others. In August the company announced an order for 17 e-buses for Haifa in Israel. It is expected that further requirements will follow on from this.

BYD has an e-bus plant in Komarom in Hungary. This is also producing forklift trucks and light commercial vehicles. Soon it will have another at Beauvais in France, as detailed in a previous article. The e-bus annual market in Europe is about 25,000 units this year. This is expected to increase rapidly in the next few years.

The announcement on EV’s at the end of July by the U.K. Government will be a boost to BYD’s prospects in the country. Apart from the main focus on autos, the Government has stressed the promotion of e-buses. This represents a very substantial dollar value business.

Asia.

Details can be found here of some of the company’s successes around Asia. The company is present in 20 Asia-Pac countries. Recently, they have secured e-bus projects from Jeju Island in South Korea and from Australia’s airport bus company Carbridge. In August they received e-bus orders from Macao, where their electric delivery truck is also being trialled. They have e-bus trials ongoing in New Zealand and Singapore.

Their e6 EV is being used in Singapore on electric taxi programs. This is the largest e-taxi fleet in S-E Asia. The first e-bus was delivered to the Singapore Government by BYD in August.

In Iran BYD have a partnership with local manufacturer Kerman Motor. This is an illustration of their keenness to be engaged in markets everywhere.

The company is aggressively marketing its new range of residential energy storage battery products around Asia, as indeed it is in Europe. Again we see the parallel here with Tesla and their efforts with energy storage.

In Iran BYD have a partnership with local manufacturer Kerman Motor. This is an illustration of their keenness to be engaged in markets everywhere.

Conclusion.

The Chinese Government has launched its massive “Silk Road” project linking the country with Europe. It is solidifying its links with countries throughout Asia. This is sound long-term planning. It is also opportunism to take advantage of the Trump Administration’s perceived trade protectionism policies and withdrawn from the TPPA (Trans Pacific Partnership Agreement).

BYD is an example of a company taking advantage of this and spearheading the international launch of Chinese high tech and New Energy companies. Companies such as Volkswagen and Mercedes (OTCMKTS:OTCPK:DDAIY) are scrambling to ramp up battery supply. Along with Tesla, BYD has the crucial advantage of manufacturing its own batteries on a huge scale. This could be the crucial factor which makes it the best bet of any New Energy and EV company. Time will tell if they can replicate their auto success in China in overseas markets, but the intention is clear.

The main negative for BYD would seem to be the of investing in any Mainland China company. That focuses on a lack of some financial clarity and being subject to uncertain policy proposals going forward from the Government. Investors need to be aware of the risk that can represent.

BYD does though have many positives. It is a leading player in what is undoubtedly a growth area. It is vertically integrated. It is apparently well financed. Its valuation metrics have been improving over the past 3 years. It has rapid and apparently successful international diversification.

Disclosure: I am/we are long BYDDF, FCAU. AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.

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