BYD Co. Ltd. (OTCPK:BYDDY) saw its stock price hit recently by changes in Chinese Government regulations concerning EVs (electric vehicles). The stock price is now recovering as the uncertainty of EV incentives was only temporary. Latest figures from China show the company sold 186,920 autos in the first 5 months of the year. Of these, 57,796 were NEVs (“new energy vehicles”). The target for the whole year is for 200,000 NEVs, so that is still quite a big ask.
Investors may have underestimated the comprehensive suite of new energy products from the world’s largest EV manufacturer. These include e-trucks, a monorail system, energy storage, and battery manufacture. The synergies are very advantageous to BYD in comparison to its competitors.
E-buses look like being very meaningful for the company’s bottom line. They are not essentially costed into the value of the company. The company’s value is mainly predicated on its status as the world’s largest EV manufacturer and one of the two largest Chinese battery manufacturers.
The World E-Bus Market
As my article in November last year detailed, the world market for e-buses is booming with 33.5% CAGR expected between 2017 and 2025.
Much of this boom is coming from China. Sales totalled 89,546 units in 2017. Even this impressive number was lower than that of 2016. The decline was due to uncertainties about future government subsidies. The very high proportion of the world’s e-buses which are on Chinese roads is likely to continue.
The numbers are in stark contrast to those from the USA. Of 65,000 public buses on the road in the USA, about 300 are electric! The local players such as New Flyer and Proterra are talking small numbers at the moment. These figures emphasis once again China’s commitment to clean energy transport compared to that of the current U.S. administration.
A limited subsidy programme for e-buses introduced by President Obama is due to expire in 2020. Given the current political situation in Washington, this seems unlikely to be renewed. CALSTART has estimated that 50% of public buses purchased in 2030 will be e-buses. That seems overoptimistic. A better market right now might be for more specialist buses from private operators, such as in airports or port areas.
In Europe, the picture is still small-scale, as the graph below illustrates:
However, with the commitment by countries throughout Europe to reduce urban pollution and with falling battery costs, there seems little doubt that most cities in Europe will follow the example of Shenzhen. This gives huge business opportunities for companies such as BYD.
There is much talk about the potential of the e-truck market. This may be partly due to the usual publicity over the offering of Tesla (TSLA). I covered BYD’s activities in e-trucks in an article in November last year. The company continues to score major successes. However, e-buses will be a much more significant market in dollar terms.
The Chinese Market
Not surprisingly, the Chinese market is very competitive. Profit margins may decline in the short term due to lower government subsidies. Last year, 86% of e-buses were pure electric with the balance being hybrids. A significant proportion of the cost of an e-bus lies in the battery.
Last year, Yutong was the biggest seller. BYD came second in volume terms with 12,777 units. BYD may see significant advantages in coming years due to the fact it is a major, and growing, battery manufacturer. Smaller competitors are also likely to be squeezed out as a consequence of government policies.
Volume seems unlikely to fall anytime soon. One-third of the one million buses on China’s roads are over 5 years old. 17% of all the country’s buses are currently e-buses. The way the country is going is illustrated by the example of the city of Shenzhen in southern China. All of the city’s 16,359 buses are electric and supplied by BYD. The photo below of Shenzhen illustrates the distinctive green and blue BYD e-buses:
All of Shenzhen’s taxis are targeted to be electric by 2020. BYD will get a fair proportion of this EV taxi business as well.
Many other cities are mandating that all future bus purchases should be of e-buses. The government remains committed to its non-ICE vehicle policies. It is estimated that up to 41% of PM2.5 particulate pollution in Chinese cities is caused by road vehicles.
According to a recent report, sales in China are forecast to reach 354,000 units by 2025. Other reports estimate 125,000 units per annum for the next 8 years of which half would be e-buses. This would give the Chinese market 62,000 e-buses yearly out of a total in the world of 200,000 e-buses (other analysts see that total figure of 200,000 as overoptimistic). Non-Chinese markets will grow more rapidly than China but from a much smaller base. Necessary replacement of old diesel buses and falling battery costs will drive this demand.
BYD’s Overseas Market
BYD has continued to score tender wins in recent months.
In India, they have a joint venture with local company Goldstone called Goldstone Infratech. This complies with the government’s “Make in India” policy. E-buses are being manufactured for the huge potential Indian domestic market and for export to neighbouring countries. The current manufacturing capacity is for 2,100 e-buses annually. To show how serious BYD is about e-buses, they are the focus of their activities in the huge Indian market. There is no date set to launch their autos in the country.
In the USA, most recently they secured a contract in May for twenty 60-foot articulated e-buses for the Los Angeles Airport Authority. The company has a manufacturing facility in California at Lancaster which it has been expanding recently. This now has an annual capacity for 1,500 e-buses and 400 e-trucks.
Below is a photo of the assembly line before the recent expansion:
In the same month, the company announced a partnership with United States Hybrid Corporation to manufacture the first hydrogen fuel cell e-buses for Honolulu Airport. The State of Hawaii has a target for all vehicles to be electric by 2045. As elsewhere in the USA, the drive for EVs is coming from state authorities rather than from central government.
In April, the company secured a contract with the University of California at Irvine to supply 20 e-buses to the university campus.
In South Korea, they secured a contract for twenty e-buses from the tourist-based Jeju Island.
In Portugal, the company secured a contract for e-buses for the city of Coimbra in March. Portugal became the tenth European country where BYD’s e-buses will be operating. BYD has European factories in Hungary and France and a joint venture in the U.K.
Last year, BYD secured contracts in countries as diverse as Argentina, Colombia, Israel, and Australia. It has ongoing trials in numerous overseas markets.
BYD’s co-operation with the state-owned Shenzhen Bus Group may also stand it in good stead. They are looking to work together on overseas projects. One such attempt is being made in Singapore, a city-state which would be ideal for electric vehicles though one which has been slow to adopt electric vehicles in general.
There are about 200,000 buses manufactured every year worldwide. If these were all e-buses, the market value would be about US$150 billion. BYD’s near-term target is for e-bus sales in North America to total US$1 billion and in Europe to total US$700 million. That would add to current e-bus revenues in Asia of about US$1 billion. It is a significant chunk of the company’s total revenues last year of US$16 billion (yuan 102 billion).
The fall in the stock price earlier this year was caused by doubts from adjustments in EV incentives by the Chinese government. The new regulations should, in fact, benefit BYD as they favour autos with a longer range and favour the larger companies. The 3-year chart below illustrates the stock price effect though.
Although still showing good upside for the long-term investor, the stock price did fall significantly for the reasons I have cited.
There are, of course, risks involved in any stock trade, especially perhaps in Chinese companies. My article in September last year highlighted some of these.
It is not always easy to get full financial details on Chinese companies. In particular, one needs to look at the financials and debt situation. In the case of BYD, overseas investors can buy over the OTC Pink market, but this has less stringent reporting restrictions than Western bourses. The best study of the financials to which I have access is from Charles Schwab (which is behind a paywall). This shows a healthy position.
It should be noted that the substantial international expansion has led to an increase in long-term debt. Long-term debt to equity is 0.20. Supplemental interest expense in calendar year 2017 increased to US$360 million from US$259 million in 2016 and from US$234 million in 2015. Much of the debt has been switched from the short term to the long term. The quick ratio (cash and short-term investments compared to financial liabilities) is quite healthy at 0.72. The current ratio (year ahead liabilities compared to cash in hand) at 0.98 is quite manageable. Long-term debt has increased from investment in long-term manufacturing facilities. This should be seen as a positive for the business.
Readers should do their own due diligence. BYD does have strong investors, including Berkshire Hathaway (BRK.A) and Chinese state-linked companies. Income before tax last year was US$864 million on revenue of US$15.77 billion (US$ equivalents to yuan figures). Gross profit margin was 17.47%. Operating profit margin was 7.95% and net profit margin was 4.79%.
The recent stock price pull-back has served to make BYD a better stock buying opportunity than ever. Analysts expect strong stock price appreciation as the year moves forward. The revamped government regulations should actually benefit BYD as smaller Chinese EV companies get squeezed out. More important though is the wide diversification of the company and its international expansion.
One area which seems certain to boost BYD revenues substantially is in battery production. The company is reported to be planning a huge battery plant in Europe. BYD probably has the lowest costs of any battery manufacturer and its own in-house demand.
BYD is the world’s largest manufacturer of EVs. Its comprehensive ecosystem is soundly based on its roots as a battery manufacturer. Its short-term stock price may depend upon auto sales. Long term, it will reap substantial sales in batteries, e-buses, energy storage, e-trucks, and in its monorail system. The monorail system also seems to have been underestimated by the market as my article in September last year detailed.
The company’s chairman and founder Wang Chuanfu has very ambitious targets for a huge increase in revenue by 2025, as I detailed here. This will incur further large sums in capital expenditure. Battery and energy storage may comprise a significant chunk of revenue.
The synergies, combined with its sound financial position, give BYD the advantage over its Chinese rivals. As for its European and American competitors, their offerings are quite underdeveloped compared to BYD. Their activities geographically less well spread. Competitors have the added disadvantage of not yet having the large home-based market enjoyed by BYD. It will be hard for them to catch up and match BYD’s substantial lead.
This lead is based on its battery technology, vertical integration, and economies of scale. Its international reach is unmatched. E-buses are set to remain a leading source of growing revenues for the company. In my opinion, the lower stock price fails to reflect the huge potential of e-buses and the expansion plans of the company.
Disclosure: I am/we are long BYDDY.
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.