1211.HK TSLA.US
This Chinese maker of electric vehicles has emerged as the No.4 auto brand in the world after Toyota, Volkswagen and Honda.

The Chinese maker of electric vehicles has emerged as the No.4 auto brand in the world after Toyota, Volkswagen and Honda

Key Takeaways:

  • BYD has forecast its net profit will surge to between 9.55 billion yuan and 11.54 billion yuan in the third quarter from the year-earlier period
  • The company has boosted its profits despite a price war in the EV sector, as an integrated supply chain helps with cost control

 

By Fai Pui

A price war erupted this year over electric vehicles as leading auto brands tried to grab bigger shares of a tightening market. In the battle so far, China’s BYD Company Ltd. (1211.HK) looks to have scored a victory against its colossal rival Tesla (TSLA.US).

The fight started early in the year and flared up again in August. The U.S. and Chinese heavyweights were joined in the price-cutting stakes by other names in the new-energy car business including Nio Inc. (NIO.US; 9866.HK), XPeng (XPEV.US; 9868.HK), Li Auto (LI.US; 2015.HK), Leapmotor (9863.HK) and SAIC Volkswagen.

The results of the contest are now coming in, and China’s BYD looks to be gaining an advantage over its arch U.S. rival.  

On Oct. 17, BYD gave investors an early steer on its earnings to the end of September, forecasting a strong rise in profits for the latest quarter and the nine-month period.

The car maker estimated its profits would surge between 67% and 102% in the third quarter from the corresponding period last year, reaching between 9.55 billion yuan ($1.31 billion) and 11.54 billion yuan. That would equate to an average daily profit of more than 100 million yuan.

For the nine months, profits were set to more than double. BYD predicted profits ranging from 20.5 billion yuan to 22.5 billion yuan, a leap of 120% to 142% from the same period of 2022. The company said its EV sales continued to hit new highs, outperforming other leading brands.

Over at Tesla, the earnings numbers told a different story. Third-quarter profits plunged 44% to $1.85 billion. Revenue rose 9% to $23.35 billion, the smallest quarterly growth in three years and weaker than Wall Street forecasts. Investors were perturbed to see the price war had depressed Tesla’s gross margin in the third quarter. The margin figure fell 7.2 percentage points to just 17.9%, the lowest level in more than four years.

Next-day action on the stock market underlined the contrasting fortunes. BYD stock rose 6.9% while Tesla shares plunged 9.3%, their biggest drop in three months, and went on to fall more than 15% last week.

BYD has grown rapidly in recent years, benefitting from Chinese policies to promote the EV industry. According to TrendForce data, the company became the world’s fourth-biggest car brand by sales in August this year, after Toyota, Volkswagen and Honda. And the Chinese company is close to matching Tesla on EV sales.

BYD’s nine-month sales rose 76.2% to 2.08 million units, taking the car maker more than two thirds of the way towards its target of 3 million units this year. The company sold 1.05 million electric vehicles, an increase of 80%. In the third quarter alone, its EV sales reached 431,600 units, 23% more than in the second quarter. That left BYD only around 3,400 units short of Tesla’s 435,000 units sold in the third quarter.

BYD has always had Tesla in its sights as the world’s top EV makers battle for global dominance. Last year BYD launched its Seal and Dolphin models against Tesla’s Model 3 and Model Y. As 75% of Seal components are manufactured in-house, the production costs are 15% lower than for the Model 3 from Tesla’s Gigafactory in Shanghai, according to an  analysis by investment bank UBS, which also found the BYD model to be 35% cheaper to make than similar Volkswagen vehicles.

Curtis Yeung, an analyst at UOB Kay Hian, said BYD’s profit growth in the third quarter exceeded the sales pace, implying that the profit per vehicle rose during the price war. This came as a pleasant surprise to the market.

“As sales continue to rise, the company’s advantage from the scale effect is coming more into focus,” Yeung said, noting that BYD produces its own batteries and has parts and chips supplied by BYD Electronic (0285.HK). “Having this kind of vertically integrated industry chain gives it an edge and makes it easier to control costs,” he said.

Unlike Tesla, BYD has committed to rolling out a continuous stream of new models. It plans to unveil at least six new types in the second half of the year, in addition to the Dolphin and Seal models. Profits have also been lifted by the launch of its “Yangwang U8 Luxury Model” into the premium market, priced at nearly 1.18 million yuan.

The battle for customers is also spreading into international markets. Two years after announcing plans to sell passenger vehicles overseas, BYD has made inroads into Brazil, Australia, Japan and Southeast Asia. Another 19 European countries were added to its list of export destinations last year. The Chinese car maker just opened two stores in the Hungarian capital, Budapest, selling three purely electric vehicles: the BYD ATTO 3 as well as the Dolphin and Seal models. The Hungarian venture tests the waters for selling BYD cars into the markets of central and eastern Europe.

Overseas engine

The company’s overseas expansion is gaining traction. In September, BYD exports of passenger cars reached 280,000 units, 2.6 times more than in the same month a year earlier and making up 9.8% of overall sales. BYD has said it intends overseas sales to become its main growth engine.

Overseas production is also being ramped up to cut logistics costs. BYD bought land for a factory in Thailand last September to cater to the Southeast Asian market. In January it announced a partnership with UzAuto, a state-owned car company in Uzbekistan, to produce cars there, possibly with an eye on the Middle East market. In July came news of a factory in Brazil. The rapid series of moves underlines BYD’s international ambitions.

BYD faces obstacles to its overseas expansion, notably in the low-cost Southeast Asian market, said analyst Yeung of UOB Kay Hian. Another issue is the limited charging infrastructure in Europe, although BYD’s price competitiveness and range of hybrid vehicles will help its growth prospects there, he said.

In terms of market value, BYD’s forward price-to-earnings (P/E) ratio is only 22 times compared to about 56 times for Tesla. The Chinese company is relatively undervalued, weighed down by a struggling stock market and Warren Buffett’s sale this year of a block of BYD shares.

However, several investment banks are still optimistic about the Chinese car maker. Goldman Sachs said BYD’s business continues to outperform its expectations, and falling battery costs will help offset the impact of the price war. Goldman has reaffirmed its “overweight” rating with a target price of HK$321. Nomura expects BYD to consolidate its strong market position, benefitting from continued expansion. It also assigned the stock an “overweight” rating, raising the price target 7.3% to HK$382.

The most bullish analysis comes from Bank of America. The investment bank raised its sales forecast for BYD for this year and 2024, lifting earnings per share by 24.9% and 13.6% respectively to HK$11.18 and HK$12.88. Its target price for the stock is a lofty HK$431.

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