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As the author of this article says, BYD

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santafe2 Member Level  Tuesday, 04/27/21 03:00:41 PM
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As the author of this article says, BYD is not a steal at this price but is fairly valued. I hold BYDDY in two portfolios and plan to transfer it out of my IRA later this year to a brokerage account to meet my 2021 RMD. Hopefully it remains boringly flat for a few more months.

BYD: Why Buffett's EV Choice Is Better Than The Rest

Summary

BYD is a lesser-known EV company, even though it is a major player in different markets.

The company has a lot of potential in both personal and commercial EVs and offers exposure to the high-growth battery industry on top of that. Valuations aren't low, but they are way more reasonable compared to most other EV stocks.

Article Thesis

EV stocks have been a favorite investment of many throughout the last year, and currently, many stocks in this space seem to be priced for perfection. Not everything is extremely expensive, however. BYD Company (OTCPK:BYDDY) (OTCPK:BYDDF) is an under-followed Chinese EV maker that is active in a range of other businesses as well, and which has Buffett's Berkshire Hathaway (BRK.A) (BRK.B) as one of its top shareholders. In this report, we will shine some light on this lesser-known EV play and outline why Buffett has chosen BYD over the likes of Tesla (TSLA), NIO (NIO), and other better-known EV companies.

BYD: One Of The Top Players That Is Not Very Well Known

In 2020, EV stocks around the globe have jumped upwards, delivering hefty returns for shareholders. This was likely driven by a combination of ultra-loose monetary policy, growing adoption of EVs, and the fact that there was a large wave of new investors joining the market, many of them young and interested in potentially "disruptive" technologies.

Market capitalizations of the likes of Tesla, NIO, and many more soared as new capital was rushing into the sector:

Market capitalization increases of hundreds of percentage points seem baffling for sure, and it seems quite questionable whether those are warranted by the companies' underlying growth. After all, Tesla didn't grow its sales by 400%+, nor did NIO grow its sales by 1,600%.

Not all EV-related stocks felt the same love over the last year, however. BYD saw its shares rise as well, but not to the same degree as Tesla, NIO, and many others. This could, I believe, be due to the fact that the company isn't well-known among retail investors. Looking at the "Followers" the stock has here on Seeking Alpha, about 12,000, we see that the company is much less followed compared to the likes of NIO (173,000), XPeng (XPEV) (44,000), or even Nikola (NKLA) (53,000). BYD is, however, a larger and more successful company than these widely followed EV companies.

BYD Seeks To Profit From The EV Trend Through Several Ways

Companies such as NIO, Tesla, XPeng are mostly focused on developing and selling EVs, while BYD has a wider approach. The company is an EV OEM, but on top of that, BYD also has exposure to the space through other business units.

Batteries

First, BYD is a battery producer that does not only use the batteries it manufactures for its own EVs, but also sells batteries to other OEMs on top of that. This seems like an approach that could pay off in the long run. It is not yet known whether the current leaders in the EV space will remain the top performers for years or decades in terms of market share, but it seems pretty obvious that EV adoption, overall, will continue to grow. This means that more and more batteries are needed, which means that the battery manufacturing business BYD is active in should do well, whether the EV leader in 2030 is Tesla, Volkswagen, or any other company.

Due to growth tailwinds for the battery industry as a whole, stemming from growing kWH per EV (to increase range) and from a rising number of overall EV sales, battery manufacturing is a business that should see strong growth for many years. On top of that, battery manufacturing is not only tied to personal EVs, but BYD can also supply its batteries to manufacturers of commercial vehicles - e.g., electricity-powered busses or trucks.

Commercial Vehicles

BYD is not only selling batteries to commercial vehicle producers, but is also designing and manufacturing its own products. BYD's portfolio includes electric busses, electric trucks, and electric vans. E-bus technologies look promising and have a range of tailwinds. Commercial electric vehicles don't get a lot of attention, but there is a lot of potential for disrupting that industry eventually. E-buses, for example, are a viable alternative to ICE-powered buses, as low average speed and travel range means that range considerations are not a major issue for the electricity-powered versions. On top of that, using EV technology instead of diesel-powered vehicles will lead to lower local emissions and can thus translate to cleaner air. Especially in huge cities where air pollution is a serious concern, such as in parts of China, growing e-bus adoption seems very likely. BYD also has developed and sells a monorail system called Skyrail, which is being deployed in a wide range of countries, including Brazil, Egypt, and China.

Passenger EVs

BYD, of course, also sells its own passenger EVs that compete with the offerings of NIO, Tesla, etc. Unbeknownst to many, BYD is one of the top passenger EV manufacturers in the world. During the first quarter, the company sold 55,000 New Energy Vehicles, or NEVs, with 53,000 of those being plug-in EVs. If BYD were to keep that rate throughout the remainder of the year, they would sell 220,000 EVs in 2021, but due to the Chinese New Year in Q1 and planned production growth, that is likely a conservative estimate, and it seems reasonable to assume that BYD will actually sell more than 220,000 EVs this year.

Nevertheless, even at that rate, BYD would be able to easily outsell the likes of NIO, XPeng, Li Auto (LI), LUCID (LUCIDM), Rivian (RIVN), and so on. Looking at the company's sales performance on a year-over-year basis, we see that BYD has grown its EV deliveries by about 150% between Q1 2020 and Q1 2021. The previous year's Q1 was impacted by pandemic-related lockdowns in China, but that also holds true for many other manufacturers. With a 150% growth rate in EV deliveries, BYD grew significantly faster than Tesla, which saw its volumes rise by a little above 100% year over year. This seems like a very reasonable comparison, as BYD's EVs are not at all cheap entry-level cars, unlike some of the offerings by other Chinese EV manufacturers. In fact, BYD's Tang and Han models can be described as premium cars that sell for similar prices as do Tesla's offerings. BYD is thus, with relatively comparable offerings, taking market share versus Tesla. For now, BYD mostly sells its cars in its home market China, but exports to foreign markets have started and will likely continue to climb going forward, as BYD seeks to expand its international operations and gain market share in Europe, for example.

Growth At A More Reasonable Price

BYD can't be described as inexpensive at all. Even though it is not as well-known as some of its peers, its shares still experienced strong gains over the last year, and in absolute terms, they look expensive.

BYD, however, trades at a discount compared to most of the better-known EV stocks, thus one may argue that they are trading at a more reasonable price:

While peers such as NIO, Tesla, XPeng, and LI are trading for 10-25 times sales, BYD trades at 3.7 times its sales. This is, compared to legacy automakers such as Volkswagen (OTCPK:VWAGY), General Motors (GM), Ford (F), or Toyota (TM), still not a low valuation, though, as those mostly trade for 0.5-1 times sales. Still, compared to many of the EV pure-plays, BYD looks like an absolute bargain.

That also holds true when we look at how its EV business alone could be valued if it were beloved by the market. Tesla, with annual deliveries of about 800,000 vehicles, is valued at roughly $700 billion, or about $900,000 per car they sell. BYD, with an EV sales run rate of about 220,000 vehicles and a relatively comparable model lineup, would see its passenger EV business be valued at about $200 billion at a similar multiple. Add in BYD's promising commercial EV business and its growing battery manufacturing business, and BYD could be valued at several hundred billion dollars. BYD is trading for around $70 billion, though, and thus way cheaper than what one would expect when looking at how its peers are valued. I want to note that I do not believe that BYD should be valued at $200+ billion. Instead, I want to point out that there is a clear disconnect between how the market values BYD compared to most other EV companies. This could also mean that BYD's peers are very overvalued and that BYD is not undervalued.

The reasons for this disconnect are likely two-fold. First, BYD's management is not doing a good job at promoting the stock and increasing name recognition, showcased by the fact that other, even way smaller EV companies have much higher follower counts. On top of that, BYD is not releasing 10-Q/Ks in the US, so it is hard to get information on the stock, and some investors may also avoid the stock as they fear potential governance issues. These are, however, issues that could be dealt with if management wants to. They could grow their IR team and make the company a better-known EV company, and I assume that they will do so over the years, although not necessarily in the very near term. After all, BYD has ambitious goals of becoming a global leader in EV technologies and growing its sales to $100+ billion over the next couple of years, and it would only be reasonable to then also upgrade investor communication.

Takeaway

BYD is a company that is encroaching on the high-growth EV industry through a multi-faceted strategy that includes personal EVs, commercial EVs, and battery manufacturing. This approach seems sensible and has the potential to be less volatile and cyclical compared to an approach of going all-in on personal EVs, where market share battles could lead to wide margin swings.

BYD also trades at a relatively low valuation, at least compared to EV pureplay peers, although BYD still trades at a premium to legacy autos. Nevertheless, for value investors and valuation-conscious stock pickers, it seems like one of the best choices in the EV space. Buffett's Berkshire Hathaway holds a stake of more than 8% in BYD, which makes the EV play one of Buffett's top 10 holdings. Long-term Buffett backing always is a good sign, although investors should of course still do their due diligence and consider valuation before making an investment.

BYD is not necessarily looking like a steal, but I believe that shares are looking way more reasonably valued compared to most of its peers. Among EV stocks, it seems like one of the better investments from a risk/reward perspective for sure.

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