BYD Auto (OTCPK:BYDDF) has tremendous integral strengths through its vertical integration platform. This gives it certain similarities with Tesla (TSLA). In fact, its vertical integration is much deeper and broader than that of Tesla. Its potential has been underestimated by the markets because of short-term factors such as COVID-19 and trade conflicts with the USA.
In February this year, I wrote an article recommending readers to buy the stock, while it was still undervalued. The 6-month stock chart below shows this was sound advice:
Source: Charles Schwab
BYD Auto is a well-established company. It has a wide range of successful divisions. These can take advantage of the renewables future opening up away from the old fossil fuel paradigm. BYD can be seen as a precursor of how China may well dominate much of the future of transport as the world switches from a fossil fuel past to a renewables future.
I summarize the most recent developments in their various divisions in this article.
The stock price has not had the huge volatility of some of the new kids on the block. It has had substantial gains though. At its current price levels, it still remains a strong long-term Buy going forward. Recent financial results emphasize the company seems to be heading in the right direction. It is expanding both revenues and profitability.
The performance of the company in the first 6 months of the year can be seen here. The performance is quite impressive given the market conditions. The summary is illustrated here:
Source: BYD Auto
The interim results are illustrated here:
Source: BYD Auto
Gross margin increased from 15.5% to 18.05%. Strong free cash flow enabled the company to reduce borrowings.
Somewhat remarkably, and quite separate from the vertical integration model, the company became reportedly the world’s largest mask manufacturer in this period. They have built up a capacity of 50 million masks a day. This contributed to the improved profitability. It is an example of the entrepreneurship of company chairman and founder Wang Chuanfu. It shows the rapid adaptability of management procedures.
The well-established but somewhat static businesses of rechargeable batteries, photovoltaic, and handset components continued to produce solid results. The real growth though is coming from what the company declares as being at the center of its mission. That is, to provide electrification of transport at the public and private level.
In its interim report for the first 6 months of the year, the company is forecasting revenue of between 2.8 billion yuan (US$420 million) and 3 billion yuan (US$450 million) for the first 9 months. This would represent an increase of 78% to 91% year-on-year.
BYD has historically been China’s largest EV manufacturer. It also has a strong ICE division. COVID-19 and a temporary holding back of EV incentives in China have led to a slowdown of EV revenues. In the first 6 months of the year, the company supplied 60,677 NEV’s and 97,951 ICE vehicles in China. The market is now recovering. Figures for August showed a promising increase in sales over previous months this year. Sales were though still down year-on-year. The company has forecast strong auto sales for the third quarter. This should be driven by the new models, the “Han” and the “Song Pro”. These are using the company’s new “Blade” batteries. The “Han” is pictured below courtesy of the company’s website:
Source: BYD Auto
Auto revenues in China remain the most important single revenue generator at present. This will change as international and product growth ramp up. BYD’s stock price has in fact previously been adversely affected by some analysts looking solely at the car revenue picture.
BYD is starting to expand their car division overseas. The company has already supplied cars, buses and trucks to 300 cities in 50 countries. This has been mainly in Asia. There have been tentative steps in Europe. They have this year started marketing of their new SUV, the BYD EV 600, in Europe. Other Chinese companies have not been very successful in marketing cars in Europe in the past. However, Chinese manufacturer SAIC is enjoying some success this year with their “MG” brand EV. That of course has the advantage of being a European brand that consumers recognize. BYD’s early steps in Europe for cars are cautious ones, starting in EV-friendly Norway.
The company is pursuing a policy of striving to be an OEM supplier for other EV companies. This includes not just its new “Blade” battery. It covers motors, converters and controllers. Earlier this year it launched its “Fudi” and “FinDreams” brands for this purpose. This is in conjunction with five other manufacturers. There has been much talk of BYD linking up to supply European car manufacturing giants. Nothing has been confirmed as yet.
BYD has supplied over 50,000 e-buses and the business keeps growing internationally. In the first 6 months results press release, BYD stated in regard to the e-bus division:
We experienced significant year on year growth in the first half of 2020.
Following on from this, the month of August saw Chinese commercial vehicle sales up 114% year-on-year at 1274 units. Of these, 1051 units were e-buses.
Recent successes overseas include an order for e-buses in Uruguay. This follows on its South American business where it has received substantial e-bus orders from Colombia and Chile. New orders from India and Japan show interesting penetration into those new markets. Scandinavian bus operator Nobina has placed new orders for e-buses and now has 160 in operation or on firm order. These ply the roads in Norway, Sweden and Denmark. They illustrate once again the fact that BYD’s e-buses operate effectively in the cold climates of Scandinavia. The company has also received new orders this year from operators in Spain and Portugal, and received its first orders from operators in Germany. Currently, there are 1300 BYD buses either in operation or on order in Europe. Most of these are supplied from the BYD factory in Komarom in Hungary. A new factory has been set up in France to meet the demand.
In the U.K., the company has a successful manufacturing joint venture with U.K. bus manufacturer Alexander Dennis Ltd. This partnership has already supplied 269 of the iconic double-decker red buses in London.
In Australia, the company has a joint venture currently making trials on e-buses for the State of Victoria.
In the USA, the factory in Lancaster, California has been expanding and orders increasing. They recently completed an e-bus order for Link Transit in Washington State. This was their first delivery since the factory was closed down because of COVID-19. These e-buses are operating with on-route wireless charging. This is illustrated below, courtesy of the BYD website:
However, political protectionism from the U.S. government and lobbying efforts by U.S. competitors cast some doubts on future U.S. growth in the short term.
The company has a long-established e-truck business in China. The range of products is very comprehensive. This year, they are introducing some of their truck products into the European market. These include panel vans, 7.5 tonne and 19 tonne trucks, and a yard tractor.
Earlier this year, they secured an order for 20 heavy-duty electric trucks in Ecuador. They have started to get orders in the USA from the Lancaster plant.
My articles here and here gave a breakdown of their e-truck business and the tremendous potential the e-truck business offers. It has natural manufacturing synergies with their e-bus factories in China and around the globe.
BYD began life as a battery manufacturer. It is now expanding its battery manufacturing capacity in China and overseas. The company is starting to become an OEM for the EV’s of other auto companies.
Their new LFP (lithium-ion phosphate) “Blade” battery has gathered a lot of interest due to its specifications and cobalt-free status. It is being produced at the company’s new Chongqing factory. This is illustrated below, courtesy of the company’s website:
Source: BYD Auto
This factory was opened earlier this year with an annual production capacity of the Blade battery of 20 GWH. This is illustrated above.
BYD already supplies batteries to Toyota (TM) and to its truck division Hino. Talk is that they will be supplying Daimler (OTCPK:DDAIF) shortly.
This ties in with their strategy of joint ventures with leading companies around the world. My article here detailed this.
The company recently established a new LiFePO4 battery plant in Manaus in Brazil. Production will be aimed primarily for use on the company’s e-buses. The plant will be able to produce 18,000 battery modules per annum in the first instance. This is an example of the company’s vertical integration and geographical spread. They have had a bus chassis factory in Brazil since 2015 and a PV module factory since 2017. They are pursuing monorail projects in the continent. They have been successful in pursuing a range of projects in countries throughout South America.
This business had got off to a slow start. However, it seems finally to be gaining some traction. The company’s “Sky Rail” system was awarded the contract for the 12-mile Sao Paulo system in April this year. This will comprise fourteen 5-vehicle trains. It will include full system management and energy back-up control.
The company is also supplying a system in the Brazilian city of Salvador. This was contracted in a public-private partnership in 2018 but has only recently started construction. It will be supplied in two phases. It will comprise a length of 23.28 kilometers, with 26 stations. It is being constructed partly over land and partly over sea.
BYD has reportedly secured contracts for their monorail system with various second-tier Chinese cities. These comprise Yinchuan, Guilin, Shantou and Bengbu. However, information is still somewhat sketchy as to whether these have actually commenced work.
They are bidding for the planned mega project in Los Angeles. Their bid is competitive but may get derailed by the protectionist stance of the U.S. government.
The company had invested an estimated 5 billion yuan (US$750 million) in developing Sky Rail. This includes a trial line set-up at their headquarters in Shenzhen. It is still not certain if this will be profitable long-term business at this stage. Developments this year are though promising.
The newly reorganized (behind a paywall) semiconductors division has been re-named “BYD Semiconductors”. It has an increased emphasis on chips for EV’s. In particular, BYD is looking to be the prime manufacturer for China for IGBT’s (insulated gate bipolar transistors). The present biggest supplier is Germany’s Infineon Technologies AG (OTCQX:IFNNY). IGBT’s are often referred to as the CPU’s of EV’s. They are a high value element in the cost of an EV. Following a funding round in June of 800 million yuan (US$120 million), the subsidiary is now valued at 10.2 billion yuan (US$1.53 billion).
This is an example of the advantages of the company’s vertical integration model for the EV future. It also shows how Chinese companies are likely to lead the way in many respects.
U.S. investors may be wary of stocks not listed on U.S. exchanges. Possible negatives to study are:
* The financials of Chinese companies can be somewhat opaque.
* The trade war between the USA and China adds uncertainty. This may affect the company’s U.S. investments.
* The company has high debt (it can however point to improved free cash flow).
* It is not clear how profitable all the company’s overseas operations may be.
However, recent results and company forecasts indicate the company has a bright future and has entered a new growth phase. Wang Chuanfu had a target to become a US$150 billion revenue company by 2025. That may be ambitious, but growth is ramping up across the company’s many divisions.
It is concentrating on strong growth areas based around renewables and the move away from fossil fuels. BYD has a broad scope of geographical operations. It has a wide range of relevant products.
For investors, many companies in this sector look unstable and have wildly fluctuating stock prices. BYD remains an excellent long-term investment for those who want to invest in this secular growth sector.
Disclosure: I am/we are long BYDDF TSLA. 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.