Article Thesis
BYD (OTCPK:BYDDY)(OTCPK:BYDDF) has become the largest electric vehicle company in the world in terms of deliveries, even when one excludes plug-in hybrids. BYD’s recent earnings results were strong, and the outlook for the current year is positive as well. Despite demand issues in the EV industry and an ongoing price war, BYD will grow meaningfully this year. While China-related risks remain, international expansion is progressing nicely and the low valuation makes BYD look attractive.
What Happened?
BYD, which stands for Build Your Dreams, has been the leading Chinese EV company for a while, even though it has not gotten a lot of attention from most investors, relative to its much smaller peers such as NIO (NIO) and XPeng (XPEV). But during the fourth quarter, BYD made a huge step forward — it is now not only the biggest EV company in China but the entire world.
When one accounts for plug-in hybrid vehicles, BYD has been leading the sales statistics for some time, but many EV investors argue that only pure battery-electric vehicles should be counted. By that logic, Tesla (TSLA) had been leading the sales statistics for years, but BYD overtook Tesla in the most recent quarter when BYD sold more than 526,000 vehicles versus Tesla’s 484,000.
But BYD is not only larger in absolute size, it is also growing a lot quicker. Tesla managed to grow its deliveries by 38% over the last year — strong, but not enough to hit the internal growth target of 50% per year. BYD, on the other hand, grew its deliveries by 62% over the last year, which makes for more than 1.6x Tesla’s growth rate.
BYD: Strong Fundamentals
But BYD’s delivery growth rate, which has been known for some time, has not been the only positive about the company. BYD also has been growing its profits handsomely, in stark contrast to Tesla, where margins have been declining for some time. Just this week, BYD released its FY2023 earnings results.
The company saw its revenues rise by 42%, making for one of the best revenue growth rates in the EV industry. For comparison, Tesla grew its revenues by 19% in 2023, while NIO grew its revenues by 10%. XPeng grew its revenues by 11%, while Li Auto (LI) experienced a hefty revenue growth rate of around 160%. Behind Li, BYD thus saw the second-best revenue growth rate, generating more than twice the growth of Tesla — the highest-valued EV company — generated over the same time frame.
BYD’s earnings soared as well, with the company seeing its earnings per share come in at $1.43. That was not only up more than 70% versus the previous year, but it also represents a new record for the company. Most of BYD’s peers did not generate positive net profits during 2023, including NIO, XPeng, Lucid (LCID), Rivian (RIVN), and many more. Tesla was an outlier, being profitable during 2023, but its earnings per share growth was considerable weaker than that of BYD, as Tesla delivered a high-teens earnings per share growth rate — BYD’s earnings per share growth was around 4x as high.
Unlike many other growth companies, BYD is even paying dividends. BYD’s unprofitable EV peers unsurprisingly do not pay any dividends, and even Tesla, which is profitable, has never made any dividend payments in the past. BYD declared a dividend of RMB3.096 for the year on a per-share basis, which pencils out to $0.43 once denominated in US Dollars. Note that this is for BYD’s BYDDF shares, while its ADRs with the BYDDY ticker represent two shares — the dividend on these will thus be twice as high, at $0.86 per ADR. This makes for a dividend yield of around 1.7%. While this is not an ultra-high dividend yield, it adds nicely to the expected total returns from BYD, and BYD’s dividend yield also compares very favorably to the yield of the broad market (around 1.3%) and to the yields of other growth stocks:
– Microsoft (MSFT) offers a dividend yield of 0.7%
– Meta Platforms (META) offers a dividend yield of 0.4%
– Apple (AAPL) offers a dividend yield of 0.6%
– Nvidia (NVDA) offers a dividend yield of less than 0.1%
Both relative to its EV peers, which don’t offer dividend payments at all, and relative to other growth stocks, BYD’s dividend yield thus looks highly appealing.
BYD: Strong Growth Outlook
The law of large numbers dictates that relative growth rates can’t be very high forever. If a company were to grow its revenues by 50% per year in perpetuity, its sales would eventually be higher than the globe’s GDP. Declining growth rates are thus a given for growth companies as they grow in size.
We will see the same this year when it comes to BYD, as the company is forecasting that its sales volume growth will be weaker this year, relative to 2023, on a relative basis. BYD forecasts volume growth of around 20%, which will lift this year’s sales to more than 3.6 million vehicles (assuming the company hits its target). In absolute numbers, that’s still excellent growth of more than half a million vehicles in a single year. Note that BYD’s volume growth forecasts includes both BEV sales and plug-in hybrid sales. We could see the ratio shift towards BEVs this year, meaning that the BEV sales growth could be north of 20% for the current year as long as the hybrid business grows by less than 20% in 2024.
Considering the headwinds in the EV industry — the ongoing slowdown and worsening consumer appetite for EVs has been well-covered — the forecasted 20% volume growth is quite positive, I believe. Competitor NIO has just cut its sales forecast for the current year, for example, due to a worsening demand picture. If BYD is able to grow its business by 20% during the bad times, then that’s still a pretty strong performance, although not quite as strong as what we have seen in 2023.
International expansion is part of BYD’s growth strategy, and it looks like sales are accelerating in the non-China business. BYD is working on deals to expand to both Brazil and Mexico, and BYD even started buying ships to transport its EVs to Europe and other international markets. There is, of course, no guarantee that BYD will ultimately be successful with this strategy, but especially in middle-income markets, BYD’s attractively-priced EVs have a major competitive advantage versus the much more expensive EVs that US-based and European EV manufacturers are selling. An example of this is Thailand, where BYD has become the top EV player with a huge market share of around 40%. It seems quite possible that BYD will replicate this success in other markets such as Indonesia, Brazil, Mexico, and so on.
Risks And Valuation
As a China-based company, BYD would be heavily affected if the country were to get into an economic crisis. If Chinese consumers became reluctant to spend money on discretionary consumer goods, BYD would be among the companies to suffer from that (although some US companies such as Apple or Tesla would be heavily impacted as well). There are also political risks, such as a forced delisting in the US or nationalization, although I believe that neither of these are very likely.
BYD is forecasted to earn $3.40 per ADR this year, which makes for an earnings multiple of 15. An earnings yield of around 7% is far from demanding for a company that has delivered 70% earnings growth last year and that expects to grow its sales by 20% this year. It thus looks like the potential risks are already reflected in BYD’s share price right now. Relative to the valuation of other EV companies, BYD is cheap — most are unprofitable anyways, and Tesla trades at around 60x net profits, or a 300% premium to BYD.
Takeaway
BYD does not get a lot of attention, but it should. Industry-leading EV volumes, excellent growth, improving margins and rising profits, an undemanding valuation and a shareholder return program make BYD stand out relative to its peers. It is the best pick in its industry, I believe.
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.