Best stock to invest in – BYD Increases Profit Projections On Accellerating EV Sales



Best stock to invest in

by Doug Young

Bottom line: BYD’s EV sales are likely to
see strong growth based on government-supported buying in China
this year, but could slow sharply in 2017 if China’s economic
slowdown accelerates.

Chinese electric vehicle (EV) maker BYD (HKEx:
1211; Shenzhen: 002594; OTC:BYDDY)
shot into the headlines in 2008 when investment guru Warren
Buffett bought 10 percent of the company. But it has struggled to
find a mass audience for its cars since then, at times raising
doubts about its future. That seems to be changing recently, as a
nascent surge in its home China market has quietly begun to charge
up the business, bringing some excitement back to the company.

Now one of BYD’s biggest backers, the man who first introduced
the company to Buffett, is quietly building up his own stake in
BYD, and disclosed that his LL Group recently
bought more shares to boost its stake to 8.24 percent. (HKEx announcement)
That’s up from 6.3 percent of BYD’s H-shares that LL Group,
formerly known as Himalaya Capital, held at the
middle of last year, and is a sign of growing confidence by LL
Group founder Li Lu.

BYD’s EV sales do indeed seem to be gaining some new traction
recently, helping it take the spot as the world’s top EV seller
last year. But the big footnote to that victory was the company’s
heavy reliance on its home China market to win that position.
That’s an important distinction, since EV buying in China is
heavily driven by government-linked customers who are trying to
fulfill Beijing’s ambitious targets for new energy vehicle sales.


Such buying is driven by target-setting rather than real
commercial demand, meaning there’s no guarantee that many of BYD’s
China car sales won’t end up sitting parked in garages rather than
out on the road. What’s more, the company’s recent robust China
sales could easily slow sharply if the nation’s economic slowdown
accelerates, since EV buying would become a lower priority in such
an environment.

BYD’s Hong Kong-listed shares doubled in the first half of last
year, amid a broader Chinese stock market rally. They later gave
back most of the gains as China’s stock markets underwent a big
correction from last June, though they still trade around 20
percent above their year-ago levels.

Booming China Sales

Much of BYD’s stock movement has admittedly been in tandem with
China’s broader stock market, so let’s instead look more closely
at some of the latest company data and other trends that excited
Li Lu enough to boost his stake in the company. The company sold
61,722 plug-in vehicles last year, easily beating out global
leaders Tesla (Nasdaq: TSLA)
and Nissan (Tokyo: 7201), which each sold around
50,000.

The surging sales prompted BYD to recently upgrade its initial
projections for its 2015 profit, saying it now expects the figure
to rise 481 percent from 2014 levels. It had previously projected
435 percent growth. (company announcement) In the revision
announcement, BYD specifically cited “explosive growth” in China
for new energy vehicles in the fourth quarter.

At the same time, BYD founder Wang Chuanfu has made it clear in
recent interviews that he doesn’t plan to try to export his cars
in big numbers anytime soon. That means the company will be
dependent on China for its EV sales for the foreseeable future,
and hints that BYD’s numerous pilot programs around the globe in
both western and developing markets aren’t going anywhere fast.

At the end of the day, it’s quite likely that BYD will do well
for at least the next year, as Chinese buyers continue to purchase
its vehicles at a brisk pace to help Beijing meet its clean energy
vehicle targets. But I do expect the China sales could slow
sharply in 2017 as China’s economy slows more sharply, and it’s
unlikely that BYD will be able to offset that growth by relying on
foreign markets.

Doug Young has lived and worked in China for 20 years, much of
that as a journalist, writing about publicly listed Chinese
companies. He currently lives in Shanghai where, in addition to
his role as editor of Young’s China Business Blog, he teaches
financial journalism at Fudan University, one of China’s top
journalism programs.  He writes daily on his blog,
Young´s
China Business Blog
, commenting on the latest
developments at Chinese companies listed in the US, China and Hong
Kong. He is also author of a new book about the media in China,
The
Party

Line:

How The Media Dictates Public Opinion in Modern China.

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