Is BYD Auto the Tesla of China? Or Something More?
If you think about it, the sole reason any species is on this planet is to procreate. If procreation is the ultimate game, who is winning when it comes to humans? As it turns out, it’s the Chinese. There are 1.371 billion Chinese on this planet, and they’re living longer than anyone else. They also seem to be pretty adept at staying out of political turmoil and keeping to themselves. In addition to investing heavily in artificial intelligence, the Chinese have also decided that the only way forward is to go green, and as investors we want to understand how we can get some exposure to that theme. One lesser known company that we decided to check out is BYD Auto which may well be the Tesla of China – or maybe even something much bigger than that.
Founded in 1995, BYD Company (HKG:1211) is a Chinese manufacturer of automobiles and electronics, the name of which stands for “Build Your Dream”. American investors will be pleased to hear that the Oracle of Omaha himself bought 10% of BYD about 9 years ago for $230 million on the thesis that “BYD has a shot at becoming the world’s largest automaker, primarily by selling electric cars“. Buffet originally wanted 25% of the company but they wouldn’t give up that much which Buffet saw as a “good sign“.
In order to provide our readers with some point of reference, we’re going to try and use Tesla (NASDAQ:TSLA) as a comparison. The first thing we noticed was that although Tesla is 3X the size of BYD Company by market cap, they’re only producing half the revenues BYD does:
|(Numbers are USD billions)|
What’s more relevant though is profitability. BYD is in fact a profitable company with tight margins that presently sits on around $1 billion in cash. While Tesla sits on $3.3 billion in cash, they’re burning through it like nobody’s business. BYD breaks down their revenues into 3 distinct areas as seen below:
The “handset and assembly services” is a play on electronics so that needs to be accounted for when trying to compare Tesla vs BYD. We also need to realize that the “automotive” revenues reflect mainly petrol powered vehicles. Chinese consumers purchased 28 million automobiles in 2016. That’s a staggering number when you consider that in 2016, only 17.5 million brand new trucks and cars were sold in the United States. BYD managed to sell 326,000 vehicles total in 2016, with the below SUV called “Song” selling 10,000 units a month since its launch in September of 2016:
Since we’re trying to compare BYD to Tesla, we want to focus solely on electric vehicle production. In all of China, 409,000 pure electric vehicles were sold in 2016. Compare that to the 542,000 electric cars TOTAL on the road in the United States and you can see how meaningful that number is, especially when you consider it increased by 65% compared to the year prior. So how many of the 409,000 electric vehicles sold in China were produced by BYD Auto?
In all of China, 507,000 “new energy” vehicles were sold (409,000 were pure electric and 98,000 were hybrids). In 2016, BYD Auto sold 96,000 “new energy” vehicles giving them a global market share of 13% and a market share in China of 23%. Of those 96,000 electric vehicles BYD Auto sold, 10,000 were electric buses like the one seen below:
Just this month, BYD delivered their first bus in North America which is 1 of 13 to be deployed in Los Angeles. In fact, the BYD K9 electric bus is being sold across the globe now from New Zealand to Brazil. That’s incredible to think that BYD sold 10,000 electric buses in 2016 alone which was a +120% increase over the number sold in 2015. Their plug-in hybrid passenger vehicle, “Tang”, sold 25,000 units alone and was the highest selling electric car in China during 2016. Finally, of the 326,000 vehicles sold by BYD in 2016, we see that nearly 30% are electric or hybrid.
Think that whole “made in China” thing means substandard quality? Think again. An e6 pure electric taxi operating in Shenzhen has now accumulated 571,661 miles on the odometer. Try doing that with an American made vehicle. Perhaps even more impressive is the world record set for the “longest ride in public transportation” with a single K9 electric bus from BYD reaching 229,907 miles traveled.
According to one of our foreign correspondents who lives in Hong Kong, pretty much everyone over there drives a Tesla. While Hong Kong bears little resemblance to “the mainland”, it just goes to show that electric vehicles are seen as “cool” in the eyes of the Chinese. Since the Chinese enjoy conspicuous consumption as much as Americans do, pressure will be exerted on the government to put in place an electric charging infrastructure for all these electric vehicles. Incredibly, the number of public charging stations for electric vehicles in China reached 100,00 in 2016, a 10-fold increase over 2015. So in addition to our observations about the Chinese multiplying a lot and living long, we’ll add one one more thing to that list. The Chinese know how to get isht done.
One other angle worth noting is BYD’s Skyrail which is targeting the $450 billion Chinese monorail market. While a number of startups are hard at work developing Elon Musk’s vision of a hyperloop, BYD spent $750 million developing a new monorail system which required 80% less capital than a typical metro system and takes two-thirds the time to build:
We were so intrigued by BYD when we started digging in that we barely scratched the surface on whether or not this is something we would like to invest in. A look at the 5-year chart shows some consolidation around the $40 mark as seen below:
Like the Chinese lithium firm we talked about recently, you need to be aware that “Enron-type risks” exist in China that may seem absurd to Americans. Sometimes company directors just disappear with all the money, or they just disappear full stop. These things happen.
If you want to buy shares in BYD, you can do so on the Chinese stock exchange (SHE:002594) or on the Hong Kong stock exchange (HKG:1211). In one instance you’re getting almost zero currency exposure to HKD (it’s pegged to the U.S. dollar) and in the other case you’re getting currency exposure to the Chinese Yuan.
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