BYD reports massive increase in profits (OTCMKTS: BYDDF)

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Thesis

On Oct. 18, BYD (OTCPK:BYDDF) stock jumped 7% in the Hong Kong trading session (benchmark: 1211 BYD) after the company announced third-quarter 2022 net profit could almost quadrupled from the same period a year earlier, citing strong consumer demand. Notably, BYD’s upbeat forecast comes at a time when global investor sentiment toward China-based stocks is becoming ultra-cautious, and at a time when the company’s most famous Western investor – Warren Buffet – is reportedly selling his stake. . But as I argued in a previous postand as BYD’s recent third-quarter statement underscores, sentiment doesn’t accurately reflect the EV maker’s long-term growth.

I continue to believe that investors should view any price weakness as a buying opportunity. For reference, BYDDF stock is down about 40% from all-time highs. But since the start of the year, the stock has behaved in line with the broader market.

BYD vs. SPX vs. HSI

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Profits are expected to quadruple

On Monday, Oct. 17, BYD said third-quarter earnings are expected to jump 333% to 365% from the same period a year earlier. This would imply that from July to the end of September, the company generated net income of around $764-820 million.

BYD’s strong results defy a depressed economy in China and were delivered the same day as China unexpectedly delayed the release of GDP data (arguably a signal that further underscores the thesis that economic growth in China is slowing down). Such a dispersion, in my view, clearly highlights the resilience of BYD’s business model: in the September quarter, BYD reportedly delivered 538,704 “new energy vehicles”, an increase of nearly 200% over the third quarter of 2021.

According to estimates by the China Passenger Car Association, BYD now claims an astonishing 29.7% market share in China’s new energy vehicle market – an opportunity that is expected to grow at a CAGR of 25% through 2025. ( Source Bloomberg Terminal, EV Intelligence Primer).

Ready for even more growth

In 2022, BYD achieved three major growth milestones: First, BYD delivered more green new energy vehicles than Tesla (TSLA). Secondly, the sales volume of BYD’s EV battery unit has exceeded that of LG Energy Solution – which means BYD’s battery unit only tracks China-based CATL. And third, BYD overtook Volkswagen as the third most valuable automaker, behind only Tesla and Toyota(TM).

But BYD’s growth story is far from over. In fact, the company has only recently begun to expand into international markets, including Europe and Southeast Asia. While it remains to be seen how the company can compete in Germany – in the face of engineering excellence from Mercedes, BMW and the Volkswagen conglomerate – a presence in India, Vietnam and Thailand is set to open. a multi-billion dollar opportunity. Investors should take into account that the latter markets are home to nearly 2 billion cost-conscious customers, who might prefer a lower-cost electric vehicle to the more “unreachable” Tesla, BMW and Porsche.

That said, investors should consider that against the backdrop of strong government support for green mobility, coupled with a vertically integrated production chain and cheap labor, BYD can sell cars for a lot cheaper than its western competitors. While the cheapest Tesla claims up to $47,000, the cheapest BYD claims less than $30,000.

Target Price Estimation

After a strong unexpected third quarter, I updated my residual earnings model for BYD to account for preliminary consensus EPS upgrades. However, I continue to anchor myself on a cost of equity of 8.5% and a terminal growth rate of 4% (one percentage point above the estimated nominal global GDP growth).

Given the EPS upgrades as shown below, I now calculate a fair implied stock price of $69.35, down from 66.50 previously (benchmark BYDDY).

BYD Valuation

Consensus analyst estimates; Author’s calculation

Also below is the updated sensitivity chart.

BYD Valuation Sensitivity Table

Consensus analyst estimates; Author’s calculation

Risks

In my view, there have been no major risk updates since the last time I covered BYD stocks. Thus, I would like to underline what I wrote before:

Most notably, BYD is based in China and generates its sales almost exclusively in China. As a result, the current economic challenges in China, including the real estate crisis, zero covid policy and slowing economic growth, will add a transitory headwind to BYD’s near-term outlook. Also, while the CCP is currently acting favorably towards EV companies, this may change in the future – as the tide has quickly turned towards major tech/internet giants. Investors should also consider that competition in the electric vehicle sector is intensifying, as new start-ups (NIO (NIO), XPeng (XPEV), Lucid (LCID), Baidu (BIDU)) and car markets old (Volkswagen (OTCPK: VWAGY), General Motors, Toyota (TM)) are entering the market. As a result, the electric vehicle sector could be less attractive from an economic point of view, despite a rapidly growing market. Finally, since Warren Buffett started selling part of his stake in BYD, investor confidence remains depressed. If Buffett continues to sell, I think BYD’s stock price is likely to come under more downward pressure.

Conclusion

Reflecting on BYD’s massive rise in third-quarter earnings, which was clearly somewhat unexpected given the multi-faceted challenges to the Chinese economy, I am confident in reiterating a “Buy” rating for BYD shares. While BYD’s valuation isn’t cheap based on 2022 numbers, the valuation is definitely attractive given the growth. In the context of EPS upgrades, I now calculate a fair implied stock price of $69.35 (benchmark BYDDY).

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