BYD Can Boast High Sales And Profit Growth But Stock Not Too Cheap (BYDDF)

I have always been skeptical of so-called “growth stocks”. Rapidly surging revenues are usually unsustainable. Many American investors name Tesla (TSLA) as the best bet on EV companies. But as I have mentioned in my other articles, Tesla’s exceptional growth is fading. But the Chinese market seems to offer much greater potential. The largest and most successful EV maker there is BYD (OTCPK:BYDDF) (OTCPK:BYDDY). In this article, I will mostly write about BYD, its news, profitability, and financial fundamentals while comparing the company to Tesla.

My previous article on Tesla

In my previous article about Tesla, I wrote about the corporation’s deteriorating fundamentals, with a 9% decrease in sales and a 55% fall in net profit margin.

EV deliveries have fallen, operating expenses have risen, and the stock price was high compared to its close rivals. However, I was also mindful of potential innovations, Tesla’s market share growth in China, and strong global EV sales. But the stock was too expensive to consider it a sound buy.

In this article, my position about Tesla remains unchanged. It is interesting to compare TSLA, the largest American automaker, to the largest EV-maker of China because the Chinese market has a lot of growth potential versus the American market, which is often said to be saturated by experts. Unlike the US market, on an international scale, China is forecasted to generate the highest sales revenue in the EV market in 2024, a fantastic $376.4 billion. This highlights China’s leading position in the global EV market industry.

BYD’s sales and how these compare to Tesla’s

BYD has recently reported a strong set of production and sales results.

Here is an excerpt from the company’s press release.

In August, BYD Company posted another strong month of new energy vehicle sales. The selling volume of plug-in hybrid EVs hit a sixth consecutive record high since March. China’s most popular EV brand’s sales in August totaled 373,083 vehicles, exceeding July’s record high of 342,383 units. This was 30% in annual growth. The company’s total passenger vehicle sales, meanwhile, totaled 370,854 units with a yearly growth rate of 36%. The plug-in hybrid electric vehicles also hit a record high of 222,384 vehicles, a 73% rise on a yearly basis. The sales of battery-electric vehicles increased by 12%, totaling 148,470 units. BYD’s commercial vehicles sales were 2,289 in August, a dramatic surge from just 300 units in August 2023. YTD, BYD sold 2 330 000 new energy vehicles, a 9.3% rise Y/Y. BYD’s production volume was 366,973, totaling 26.6% in annual growth rate.

Very well. How does it translate into revenues and earnings?

BYD’s sales and profit history

Quarterly earnings and sales show rather a mixed picture. But overall, they seem to be in an upward trend.

BYD’s annual sales and net income (the data are given in $million)

The data are given in $million

BYD’s annual sales and net income (the data are given in $million)

However, BYD’s annual sales and earnings surged, which can very easily be seen from the diagrams below.

The data are given in $million

The data are given in $million

It was particularly impressive after COVID-19 when the Chinese economy started its post-pandemic recovery. So, in 2021, the earnings and sales surge was extraordinary, and that upward trend still continues.

BYD’s mid-to-long-term financial performance and trends and market opportunities for BYD

I have always been skeptical about companies reporting brilliant growth because it is often unsustainable and often has to be achieved at the expense of the cash reserves and excessive debt. However, analysts estimate the high growth will continue in the next couple of years, at the very least, provided there will be no recession or any other “black swan” events.

Analysts make the following estimates:

In 2024, the annual sales should total between $88.59 billion and $122.58 billion. This is in contrast to the $83.19 billion recorded in 2023. In 2025, BYD should do even better. It should record between $103.19 billion and $144.49 billion.

BYD is also expected to record higher EPS both in 2024 and 2025. The EPS reported by BYD in 2023 totaled $1.45. In 2024 and 2025, these are expected to be $1.69 and $1.94, respectively. Even if we assume the analysts’ estimates are not accurate, BYD’s post-pandemic net profit and sales growth rates have been exceptional. So, if there is no economic slowdown, this trend is likely to continue in the next few years. But what should be the main operational and market opportunities for BYD? Well, to be quite honest, BYD’s opportunities to expand production in Europe and the US are quite limited due to policy uncertainties around Chinese EV exports to major markets like the US and the EU. BYD is raising overseas sales by locating production to regions perceived as more friendly. That is why BYD is now building facilities in Thailand and Brazil. The company has also announced plans to expand in Indonesia, Hungary, and Uzbekistan. BYD sold 70,000 EVs in Southeast Asia last year. Its market share in the region is 35%. According to data from Counterpoint Research, it is far ahead of rivals VinFast (VFS) and Tesla. Right now, the company is investing $1.3 billion to build an EV factory in Indonesia in 2024. This year, BYD is also said to considerably increase the number of its stores in Singapore and the Philippines. These emerging markets can mean sound growth potential for BYD. At the same time, China remains by far BYD’s largest market. From more than 3 million new energy passenger vehicles the company made last year, just over 242,000 were exported abroad. Everything is fine so far.

The only major challenge I see is the industry’s growth rate slowdown, which could be due to fading market demand. This sometimes happens when most customers have already bought the products they desire, while new customers that have not are simply not there. The same can happen to the EV-market in China, the biggest market for BYD. This forecast can also be seen from the diagram below.

EV sales revenues in China forecast

But right now, BYD’s growth track record seems to be even better than Tesla’s.

Tesla’s sales and profit growth

As you can see from the table and diagram below, Tesla’s sales and net profit growth has stalled. After 2022, there was practically neither sales nor EPS growth.

Tesla’s revenues and net profits in $millions

In fact, the net profits even decreased in the last two quarters. This can easily be seen from the diagram below.

But let us have a look at BYD’s and Tesla’s profitability, cash and debt indicators.

BYD’s versus Tesla’s fundamentals

Overall, we can say that BYD’s profitability indicators are roughly in line with the median indicators.

In fact, some of these indicators are mediocre if not poor compared to the industry’s medians. These are the gross profit margin and the levered FCF margin (the money left over after all the company’s financial obligations are met). However, BYD also reports high amounts of cash from operations, has high returns on common equity and total capital. So, overall, the company’s profitability margins and efficiency indicators are sound but not extraordinary compared to the EV sector’s average.

A “good” debt-to-equity ratio should ideally be below 1 and 1.5. BYD’s is just 25%, which suggests the company has a low debt load. Also, BYD’s net debt (calculated by subtracting a company’s total cash and cash equivalents from its total short-term and long-term debt) is negative, which suggests the company is relatively financially stable. BYD’s covered ratio is a whopping 18.84, which suggests the company is able to pay interest on its debt 18.84 times. Analysts usually prefer to see a coverage ratio of 3 (or higher). The only rather unpleasant indicators I have discovered are the company’s quick and current ratios. Both of these are even below 1.

I have also checked BYD’s changes in cash flows. These have declined TTM but were rising from 2019 to 2023. As can be seen from the excerpt below, the net change in cash was negative $3.44 billion.

Now that I have discussed BYD’s indicators, let me go to Tesla’s financial fundamentals.

Since my article is primarily devoted to BYD, I will only touch on a few of Tesla’s financial indicators.

First, let us talk about the company’s key profitability ratios.

Truth be told. Tesla’s net profit margin of 13% is substantially higher than BYD’s. Also, TSLA’s levered FCF margin is higher. However, Tesla’s return on common equity is somewhat lower than BYD’s.

But overall, the profitability indicators seem to be quite strong for both of the EV-makers.

Tesla’s net debt is also negative and the debt-to-equity ratio is also quite favorable and in line with BYD’s indicators. However, Tesla’s liquidity indicators, namely current and quick ratios, are much better than BYD’s, which means Tesla can very easily pay off its current liabilities with its current assets.

BYD’s fair stock price and Tesla’s valuations

To start with, some might say that BYD’s valuations are above the industry’s medians. However, this is not entirely so. Indeed, the price-to-book ratio of 4.46 is much higher than the industry’s average of 2.22. But some indicators, including the EV/EBITDA and the price-to-free cash flow ratios, are even better than the averages. The company’s P/E ratios are only slightly higher than the sector’s medians.

In my view, BYD’s slightly higher than average GAAP P/E of 19.51 is justified because it is the leading Chinese EV-maker. If we assume the current P/E will remain unchanged in 2024 and the EPS totals $1.69, then the current fair value for BYD is $32.97, somewhat higher than the current stock price of $29.80 as of the time of writing. So, BYD’s stock price is only slightly undervalued, if we accept my method of judging the company’s value as fair. But how about BYD’s fair value if analysts’ 2025 EPS estimates turn out accurate? Well, BYD’s 2025 EPS are forecast to total $1.94. The company’s current P/E is 19.51. So, multiplying $1.94 by 19.51 gives us a forward stock price of $37.85. So, there is upside potential for the stock

Now let us have a look at Tesla’s valuation indicators. Absolutely all of these ratios are 5 or, in some cases, 10 times above the industry’s averages. This means that Tesla is much more expensive than BYD and much more expensive than all the companies in this industry.

Key risks

Despite BYD being the greatest EV-maker in China and even surpassing Tesla in terms of growth, the company still faces a number of risks.

• First, as I have mentioned many times before, high growth is often hard to sustain. Many companies reporting quarters and even years of exceptional sales growth usually tend to have cash and debt problems. Moreover, competition also usually steals some revenues and profits from such high-growth companies.
• BYD’s cash piles are also decreasing even though its net debt is negative. Current liabilities cannot be repaid at the expense of current assets.
• The main risk is mostly external, namely a possible recession ahead. The demand for EV-cars is quite cyclical, meaning that it depends on consumers’ disposable incomes.
• Finally, American investors would rather buy shares of companies based in the US in order to reduce accounting and corporate governance risks they may perceive are higher in China than in the US. However, buying shares of US-based companies does not guarantee investors any protection from poor corporate governance and accounting.

Conclusion

In conclusion, we can safely say that BYD is a high-growth company with negative net debt, good profitability margins and a reasonable balance sheet. I would personally prefer BYD to report higher net cash flows and have more favorable current and quick ratios. The company is much better valued than Tesla, even though it is also one of the world’s EV leaders. However, BYD’s stock is likely to depreciate if there is a recession anytime soon. Although I consider BYD to be a much better buy than Tesla, I currently rate it as a “Hold” because of the EV sector’s cyclicality.

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.