BYD Auto Co. Ltd. Equity Research Nov 2024 PDF Free Download
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Nov 2024
Equity
Research
BYD Auto Co. Ltd.
Authors:
Rio Tanael, Analyst
Janise Yip, Analyst
Robert Zeleny, Analyst
Vicky Zhou, Analyst
Advisor:
Harry Yeung, Head of Equities
Nico Ling, Deputy Head of Equities
BYD Auto
1211.HK
Table of Contents
Table of Contents......................................................................................................................2
Investment Summary...............................................................................................................3
Stock Information.................................................................................................................3
Summary of Catalysts.......................................................................................................... 3
Company Overview..................................................................................................................4
Company Background..........................................................................................................4
Products and Strategy...........................................................................................................4
Senior Management..............................................................................................................5
Shareholder Composition.....................................................................................................6
Industry Analysis......................................................................................................................7
Market Overview and Growth Forecasts............................................................................. 7
Catalysts for Market Growth................................................................................................8
Porter's 5 Forces Analysis of the EV Industry..................................................................... 9
Investment Catalysts.............................................................................................................. 10
Hard Catalysts.................................................................................................................... 10
Soft Catalysts......................................................................................................................12
Financial Analysis.................................................................................................................. 13
Q3 Earnings: BYD Surpasses Tesla in Quarterly Revenues for First Time.......................13
Cost Control and Hefty Exports Leads to Margin Stability Amidst Price Cuts.................13
Competitor Analysis: BYD’s Overseas Push to Power its BEV Sales.............................. 14
Valuation................................................................................................................................. 16
DCF Model.........................................................................................................................16
Risk Assessment and Mitigations..........................................................................................18
Disclaimer............................................................................................................................... 20
No Investment Advice........................................................................................................20
Investment Risks................................................................................................................ 20
Analysts’ Certification....................................................................................................... 20
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BYD Auto
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Investment Summary
Stock Information
Exhibit 1: 1211.HK Share Price, 5 Years (Source: BBG)
Recommendation: Buy BYD (12 months)
Summary of Catalysts
Global Expansion
With 73% of revenues from China, BYD’s expansion into new markets offers significant
growth potential, particularly as EV sales in China are expected to plateau over the next
decade. In overseas markets, BYD charges up to 2-3 times its domestic prices, which could
enhance margins as international demand grows. Further, BYD is constructing factories in
Indonesia, Turkey, Hungary, Brazil among others, transitioning from an export-heavy
approach to localized production, which can help bypass tariffs and maintain competitive
margins.
New Product Launches
BYD plans monthly model launches in 2024 under its DMi 5.0 PHEV model, featuring high
thermal efficiency, low fuel consumption, and an extensive range, showcasing BYD’s
technical leadership. Further, BYD also controls key aspects of the EV supply chain in-house,
from mining lithium to producing ion phosphate batteries, which helps reduce costs and
improve margins compared to competitors.
Strong Demand For Plug-In Hybrids
BYD is benefiting from the growing appetite for plug-in hybrids as PHEV sales jump 73%
y.o.y. August 2024 saw the sixth consecutive month that BYD sold a record number of
PHEVs. Further, in August, Beijing increased subsidies for old vehicles traded in for plug-in
hybrids and EVs to 15,000 yuan, likely to further increase the sales.
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Recommendation
BUY
Stock Price
$287.20 (04/11/24)
Target Price
$350.19
Target Price Upside
21.9%
52-Week Range
$167.80 - $320.80
Market Cap
$924.18 billion
BYD Auto
1211.HK
Company Overview
Company Background
Founded in February 1995 in the People’s Republic of China and headquartered in Shenzhen,
BYD has emerged as a leading manufacturer and marketer of automobiles and batteries on an
international scale. The company operates over 30 industrial parks worldwide, including
locations in the United States, Brazil, and Japan. In 2008, renowned investor Warren Buffett
acquired a 10% stake in BYD, although he began to reduce his holdings in 2022. In July
2024, his holdings towards BYD had dropped to 4.94%. As of the end of 2023, BYD
employs approximately 704,000 people and operates in over 70 countries, having sold a total
of 3,024,417 vehicles throughout the year.
Products and Strategy
In its early years, BYD distinguished itself by developing cutting-edge technologies for
battery manufacturing. Recognizing the potential for growth in the automotive sector, the
company leveraged its expertise in batteries to venture into electric vehicles (EVs) in 2003.
Despite initial concerns among investors, BYD remained committed to its focus on EVs and
made substantial investments in the sector. To date, BYD operates primarily in two major
segments: Electric Vehicles, which account for 80.27% of its revenue; Mobile Handset
Components and Assembly Services, which contribute 19.69% of its revenue.
1. Electric Vehicles
The company produces two main types of EVs: BEVs, which are fully powered by electricity,
and PHEVs, which combine an internal combustion engine with an electric motor, recharged
by plugging a charging cable into an external electric power source. Last year, BYD produced
a total of 1.6 million battery-only powered cars and 1.4 million hybrid vehicles. Currently,
BYD has 18 models that are still active on the market, and 42 models are discontinued. The
most famous models include the Dynasty Series and the Ocean Series.
Electric Vehicles (EVs) are the core business of BYD today. BYD targets the mid- and mid-
to high-end segment of China's automobile market. In the third quarter of this year, BYD
achieved a remarkable 24.04% year-on-year increase in EV sales, reaching 443,426 units.
This performance allowed BYD to surpass Tesla, the world’s leading EV company, which
experienced a 6.4% year-on-year increase in sales in 2024 Q3, totaling 462,890 units. In the
Chinese market, BYD targeting the mid- and mid- to high-end segment, has led EV sales in
both 2022 and 2023, generating over 100,000 more units sold than Tesla, which holds the
second position. Notably, BYD's dominance is reflected in the 2023 sales rankings, where
five of its models are among the top six best-selling EVs. In 2022, BYD officially announced
its commitment to focus on Battery Electric Vehicles (BEVs) and Plug-in Hybrid Electric
Vehicles (PHEVs).
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2. Mobile Handset Components and Assembly Services
BYD began producing mobile handset components in the 2000s and has since established
itself as a key player in this sector. The company offers a comprehensive range of services,
including design, manufacturing, assembly, testing, and certification of mobile components.
Since 2020, BYD has served as the original equipment manufacturer (OEM) for Apple’s
iPad, showcasing its capability to produce high-quality mobile components. In addition to
Apple, BYD has built a strong customer base that includes major brands such as Samsung,
Huawei, and Nokia. To further specialize in this field, BYD operated a subsidiary called
BYD Electronics in 2002. The company has expanded its global footprint with factories
located in various countries, including China, Hungary, and India, enabling it to meet the
growing demand for mobile handset components worldwide.
Overall, given the strong growth potential in the EV market, BYD will continue to focus on
its development in electric vehicles while also expanding its mobile handset components
assembly services.
Senior Management
Wang Chuan-fu
President, CEO, and
Chairman
Zhou Ya-lin
Chief Financial Officer
Lu Xiang-yang
Vice Chairman
Wang Chuan-fu possesses
extensive expertise in
technology, holding a
master’s degree and serving
as a senior engineer. Prior to
founding BYD in 1995
alongside Lu Xiang-yang,
Mr. Wang held significant
roles, including Vice
Supervisor at the Beijing
Non-Ferrous Research
Institute and General
Manager at Shenzhen Bi Ge
Battery Co. Since 2002, he
has served as the Executive
Director of BYD and has
held directorship positions
in several of the company’s
subsidiaries, further
demonstrating his leadership
and influence within the
organization.
Zhou Ya-lin has been with
BYD since 1999. She has
held various roles within the
company, including
Accountant and Chief
Accountant, before being
appointed CFO of BYD
Company in 2019.
Additionally, she has served
as the CFO of BYD
Electronic (International)
Limited, a subsidiary of
BYD, since 2016. Beyond
her financial responsibilities,
Zhou is actively involved in
corporate social
responsibility as a
supervisor for the BYD
Charity Foundation and
BYD Toyota Electric
Vehicle Technology Co.,
Ltd.
Lv Xiang-yang is the
co-founder of BYD. Before
establishing BYD with his
cousin Mr. Wang, he worked
at a local branch of the
People’s Bank of China. He
has served as the Vice
Chairman of BYD since
2008. In addition to his role
at BYD, he runs his own
investment company,
Youngy Investment Holding
Group. One of his notable
investments was facilitating
BYD's acquisition of 70% of
the world’s second-largest
lithium mine in Sichuan.
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Shareholder Composition
Exhibit 2: % Breakdown of BYD’s Shareholder Composition (Source: CapitalIQ)
Shares Outstanding:
2.909B
Institutional Ownership:
18.23%
Insider Ownership:
30.13%
Corporations:
7.21%
Float percentage of TSO:
44.43%
More than ¼ of the company’s shares are held by insiders, with Wang Chuan-fu, the primary
shareholder, owning 17.71% of the total shares, followed by Lu Xiang-yang with 8.31%. In
contrast, institutional investors—including asset managers and hedge funds—hold only
18.23% of the shares, indicating a relatively modest institutional presence compared to
individual ownership. This significant insider ownership structure grants the management
team considerable voting power, enabling them to make key decisions that influence the
firm's strategic direction. Additionally, this concentrated ownership is likely to contribute to
greater stock price stability and reduced volatility. With a substantial stake in the company,
management has a strong incentive to enhance overall performance, aligning their interests
with those of shareholders and fostering a commitment to long-term value creation.
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Industry Analysis
Market Overview and Growth Forecasts
The global electric vehicle market size is projected to grow from USD 671.47 billion in 2024
to USD 1,891.08 billion by 2032, exhibiting a CAGR of 13.8% during the forecast period.1
The electric vehicle market in the U.S. is projected to grow significantly, reaching an
estimated value of USD 233.70 billion by 2032, driven by favorable government subsidies
and policies.
Also, the global electric vehicle market has exhibited a remarkable evolution across different
segments, with the adoption of battery electric vehicles (BEVs) and plug-in hybrid electric
vehicles (PHEVs) gaining significant traction. In 2018, BEVs comprised 1.4 million vehicles
globally, marking the beginning of a transformative trend.
The pivotal year of 2021 witnessed a remarkable surge, as the number of BEVs on the road
skyrocketed to 4.7 million, indicating a substantial shift towards electrified transportation.
The momentum continued into 2022, with 7.4 million BEVs contributing to reduced
environmental impact and increased sustainable mobility solutions.
Looking ahead, the trajectory of BEV adoption is expected to maintain its upward trend with
projected numbers of 9.6 million in 2025. As the technology and infrastructure continue to
improve, the number of BEVs is anticipated to reach 10.7 million by 2026 and expand to 13.5
million in 2028.
Exhibit 3: Global Electric Vehicles Market Size by Segment 2018-2028E (Source: Market.us Scoop)
1Fortune Business Insights. (2023, June). Electric Vehicle Market Share, Trends & Growth Analysis 2026.
Fortunebusinessinsights.com.
https://www.fortunebusinessinsights.com/industry-reports/electric-vehicle-market-101678
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Catalysts for Market Growth
Government Policies and Incentives
Government policies and incentives are driving rapid growth in the electric vehicle (EV)
market. Governments worldwide are offering a range of favorable subsidies and policies,
such as reduced selling prices, waived registration fees, and free charging infrastructure, to
encourage EV sales and adoption. Simultaneously, stringent vehicle emission regulations are
promoting EV development. For instance, the European Union mandates a 15% reduction in
CO2 emissions for light and medium commercial vehicles by 2025, while India requires
automakers to produce BS-VI standard vehicles from April 1, 2020. Furthermore,
governments are making substantial infrastructure investments, exemplified by the U.S. plan
to spend $287 billion on new highways and EV charging stations over the next five years.
These policies and investments are expected to significantly increase EV market share and
drive continued industry growth in the coming years.
Battery Technology Advancements
The continuous improvement in battery technology is a key factor accelerating the growth of
the electric vehicle (EV) market. As the battery costs have fallen by a dramatic 99% and the
density of top-tier cells has risen fivefold over the past 30 years, EVs are becoming more
practical and appealing to a wider range of consumers. Modern EVs can travel significantly
farther on a single charge, addressing the "range anxiety" that once deterred potential buyers.
Currently, the weighted average range for a new battery electric car is about 350 km, up from
200 km in 2015. Additionally, advancements in fast-charging capabilities, coupled with
batteries designed to accept rapid charging, dramatically reduce charging times. This
combination of extended range and faster charging makes EVs increasingly viable for
long-distance travel and more convenient for daily use. As battery technology continues to
evolve, it's not only enhancing the performance of EVs but also making them more
cost-competitive with traditional vehicles, further driving market expansion.
Exhibit 4: Battery cost and energy density since 1990 (Source: rmi.org)
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Growing Prevalence of Charging Stations
The global electric vehicle charging station market size was valued at USD 16.43 billion in
2023. The market is projected to grow from USD 22.45 billion in 2024 to USD 257.03 billion
by 2032, exhibiting a CAGR of 35.6% during the forecast period.2Many cities and private
businesses are actively working to meet the growing demand for charging infrastructure,
significantly increasing the number of charging ports available each year. This expansion
includes not only traditional charging stations but also the integration of charging facilities in
everyday locations such as grocery stores, shopping malls, airports, and other public spaces.
The proliferation of charging options is making electric vehicles a more accessible and
convenient choice for a wider range of consumers. This growing charging infrastructure,
coupled with advancements in fast-charging technology, is playing a crucial role in
accelerating EV adoption and supporting the overall growth of the electric vehicle market.
Porter's 5 Forces Analysis of the EV Industry
1. Competitive Rivalry
The Competition rivalry in the EV industry is fiercely competitive, with Tesla leading
(48.2%), followed by the traditional manufacturers like General Motors (9.3%), and Ford
(8.6%) in Q3 2024. In emerging markets, companies such as BYD and NIO are vying for
dominance. This intense competition may lead to market volatility but also presents potential
high-return opportunities for investors.
2. Supplier Power
Battery manufacturers such as Panasonic and LG Chem play a crucial role in the supply
chain, influencing the industry's cost structures. Companies such as Tesla and BYD with
strong supplier relationships and vertical integration capabilities may offer more stable
investment opportunities, as they can better control production costs.
3. Buyer Power
As the electric vehicle market expands, consumers are gaining more influence over industry
trends. The increasing variety of EV models across different price points and vehicle types is
empowering buyers to be more selective. This shift in market dynamics is compelling
manufacturers to innovate and adapt their strategies to meet evolving consumer preferences.
For instance, Tesla's direct-to-consumer sales approach has disrupted traditional automotive
retail models, offering a more personalized buying experience. Meanwhile, government
incentives in various countries are altering the financial calculus for potential EV buyers,
making these vehicles more accessible to a broader audience.
4. Threat of Substitution
Hybrid vehicles and other alternative transportation modes pose a threat to pure-play EV
companies due to 2 key factors. Firstly, hybrids offer a practical compromise between
2Electric Vehicle Charging Stations Market Size, Share | Forecast [2027]. (n.d.).
Www.fortunebusinessinsights.com.https://www.fortunebusinessinsights.com/electric-vehicle-ev-charging-statio
ns-market-102058
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environmental benefits and convenience - they don't face the range anxiety and charging
infrastructure limitations that still challenge pure EVs, especially in cold weather regions or
long-distance travel scenarios. Secondly, traditional automakers like Toyota and Honda have
established supply chains and manufacturing expertise in hybrid technology, allowing them to
produce at lower costs and potentially better margins than pure-play EV startups. Also,
investors might consider diversifying into companies offering a range of sustainable
transportation solutions, such as Toyota's Mirai hydrogen fuel cell vehicle, to mitigate risks
associated with this factor.
5. Threat of New Entrants
The threat of new entrants in the electric vehicle industry is medium to low, primarily due to
high barriers to entry. Significant capital investments, substantial R&D spending, industry
experience, and economies of scale are essential for efficient manufacturing. The industry's
long path to profitability also deters new entrants, as exemplified by Tesla's Model 3, which
costs $35,000 but struggles to generate profits. UBS estimated that the Model 3 would only
be profitable if priced above $41,000.
Investment Catalysts
Hard Catalysts
1. Global Expansion
With currently 73% of its revenue originating in China, international expansion is arguably
BYD’s biggest upside. Expansion in new markets presents BYD an opportunity to maintain
its growth rates, by limiting concentration risk to the Chinese market, and improve its
margins internationally, with international markets being less competitive than the Chinese.
As of 2023, BEVs are cheaper than internal combustion engine cars in China, which is
currently not the case for many other world geographies. A Reuter’s review of BYD pricing
in five of its biggest export markets showed the company charging 2-3x the domestic price
for its vehicles in select geographies. This pricing premium significantly outweighs the
additional shipping or nearshore manufacturing costs.
Building Factories
BYD has recently completed the construction of two EV plants - Uzbekistan and Thailand -
and is in the process of building five additional plants across Asia, Europe and South
America.
Region
Country
EV Plant
Annual Production
Capacity
Production Date
ASEAN
Indonesia
Constructing
150k
Expected Jan 2026
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Thailand
Yes
150k
Jul 2024
Cambodia
Constructing
20k
N/A
Asia
Other
Uzbekistan
Yes
50k
Jun 2024
Turkey
Constructing
150k
Expected by 2026
Europe
Hungary
Constructing
150k
Expected 2025
Americas
Brazil
Constructing
150k
Late-2024 or Early-2025
Mexico
Negotiating
The construction of these factories mark a shift in BYD’s strategy from being a pure exporter
to increasing localization.
Navigating Tariffs
Expanding production outside of China can allow BYD to bypass the tariff restrictions in
certain regions, such as the EU, that are increasingly being put into place by countries around
the globe without hurting its margins.
2. New Product Launches
BYD is set to launch a new model under its latest DMi 5.0 PHEV range each month by year
end. The technology of this range boasts the world's highest engine thermal efficiency at
46.06, the lowest fuel consumption in depleted battery mode (2.9L/100 km or 80mpg), and
the longest combined range (2100 km). The company which first developed plug-in hybrid
technology in the world continues to pioneer advancements in the NEV space through its
latest developments.
Supply Chain
BYD maintains costs low and a favorable margin profile through largely containing the EV
supply chain in house. From acquiring six lithium carbonate mines in Africa to being the
leading seller of iron phosphate batteries in China, BYD largely manufactures the most
expensive component of EVs - the battery - in house, a significant competitive advantage,
compared to a rival like Tesla which relies on outsourcing.
Exhibit 5: Gross Margins
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Its integrated supply chain allows BYD to make developments at every stage in the
production process with the support of its more than 40,000 engineers.
The latest earnings print, 3Q24, showcases BYD’s developments and cost advantage, with
gross margins improving 3.0% QoQ with the launch of the DM-i 5.0 plug-in hybrid while
product mix slightly deteriorates to more budget NEVs.
The fate of new product launches has played a significant role in BYD’s current stock price
as they fuel the company’s record monthly sales in the past 2Q.
Soft Catalysts
1. Strong Domestic Demand
The China Passenger Car Association posted data in July stating new EV (pure and plug-in
hybrid) sales topped 50% of all new vehicles for the first time, showing strong consumer
demand. BYD’s latest sales report for October confirms this trend, showing record-high sales
of 500,526 units, up from 417,603 in September and 301,095 the previous year.
Subsidies
The Chinese government increased the financial stimulus to encourage consumption of new
cars. From April 2024 to Jan 10, 2025 consumers can trade in their vehicle for a new EV or
plug-in hybrid and receive 20,000 yuan, up from 10,000. This measure alleviates the
concerns of waning EV demand amid China’s economic slowdown. In the period Jan-Jul of
2024 NEV sales rose 33.7% YoY while gas-powered car sales declined 15%.
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Financial Analysis
Q3 Earnings: BYD Surpasses Tesla in Quarterly Revenues for First Time
BYD's Q3 results largely met expectations, reporting a net profit of RMB 9,300 per vehicle,
reflecting an 8.7% quarter-over-quarter growth. Looking ahead to Q4, profitability per
vehicle is projected to exceed RMB 10,000, with anticipated sales ranging from 1.3 to 1.4
million units. The company achieved revenues surpassing CNY 200 billion (approximately
$28.2 billion), marking a 24% increase from the same period last year. In comparison, Tesla
reported revenues of $25.2 billion during the same quarter. Despite BYD's impressive
financial performance, Tesla maintained its lead in vehicle sales, delivering more EVs than
BYD in this timeframe.
To counteract price competition, BYD plans to enhance its product mix and increase exports
of plug-in hybrid electric vehicles (PHEVs) in 2025, aiming for overall earnings growth of
40% year-over-year, with international sales contributing approximately 20-30% of total
earnings.
The surge in revenues is primarily driven by a growing demand for electric vehicles in China,
supported by government incentives like trade-in policies that encourage consumers to
transition from gasoline vehicles to EVs and hybrids. Recent data indicates 1.57 million
applications for a national subsidy of $2,800, available for each older vehicle traded in for a
greener alternative, significantly stimulating the market. Additionally, BYD experienced
record-breaking sales in both September and October, solidifying its position as China’s
top-selling car brand. The company’s strategic focus on expanding its electric vehicle lineup
and enhancing production capabilities has been pivotal to its robust performance.
Cost Control and Hefty Exports Leads to Margin Stability Amidst Price Cuts
BYD's effective cost management and rising sales are expected to support margin stability
and earnings growth for the second half of the year (2H). The net profit per
vehicle—excluding earnings from BYD Electronics—saw a nearly 30% sequential increase,
reaching approximately 8,600 yuan in Q2, nearly matching last year's levels. Although price
reductions and a less favorable product mix led to a lower gross margin, the EBIT margin
improved due to enhanced operating leverage, as R&D and selling expenses are distributed
across a larger vehicle volume.
The order intake for new models appears strong, which could increase BYD's monthly
shipments from 340,000 units to 400,000 units by the fourth quarter (Q4), despite the impact
of higher EU tariffs on some exports.
Additionally, China's increased subsidies aimed at encouraging the replacement of older
vehicles provide an additional boost to demand.
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Further, BYD's impressive scale and extensive vertical integration in its battery operations
may help maintain margin stability amid ongoing price competition in China's new-energy
vehicle (NEV) market. The company has solidified its leadership domestically with a diverse
and well-rounded lineup of battery-electric and plug-in hybrid vehicles, strategically
adjusting prices to outperform less competitive players. Additionally, new overseas factories
are set to launch in 2025-26, which will bolster its global presence and mitigate tariff risks.
The introduction of premium offerings through its Denza, Fangchengbao, and Yangwang
brands is expected to enhance long-term profitability.
Exhibit 6: BYD Passenger NEV Monthly Shipments (Units)
Competitor Analysis: BYD’s Overseas Push to Power its BEV Sales for the Next Decade
BYD's challenge to global automakers is set to escalate as it expands internationally with
affordable battery-electric vehicles (BEVs). The sales lead between BYD and Tesla has been
shifting, indicating a competitive race, particularly with Tesla's upcoming $25,000 model on
the horizon. BYD aims to strengthen its presence in Europe to enhance its global profile.
BYD expects its BEV sales to rise to 1.9 million units in 2024 and reach 3 million by 2027,
up from 1.57 million last year. Although projections for this year have been slightly adjusted
downward to 2 million due to fierce domestic competition and cautious exports to Europe,
new factories in Thailand and Brazil—with 150,000-unit annual capacity—are set to
commence production in the second half of the year. Additionally, the Dolphin and Seagull
models are anticipated to boost sales with their affordability.
In the first quarter, Tesla shipped 386,810 BEVs, surpassing BYD's 300,114, reflecting a slow
start for BYD due to inventory buildup. While Tesla maintains a broader global reach, BYD
is expected to leverage its domestic market advantage while expanding internationally. The
competition will intensify as Tesla introduces more affordable models.
BYD's entry-level models, including the Dolphin and Seagull hatchbacks, are positioned to
drive overseas sales, targeting the small- to compact-BEV segment that many manufacturers
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are hesitant to enter due to high battery costs. The Seagull starts at just over $20,000,
significantly undercutting competitors like Volkswagen's ID.3 and Kia's Niro.
BYD may increase its focus on the European market, where its sales are currently limited but
have substantial growth potential. Despite facing potential tariff challenges and competition
from established brands like Volkswagen, BYD's reputation for battery expertise and cost
efficiency could facilitate market penetration. The company has opened over 250 retail stores
in Europe and plans for a Hungarian factory to mitigate tariffs and enhance local production.
Tesla's production capacity is projected to exceed 5 million vehicles by 2030, highlighting
ongoing competition in the BEV market.
Exhibit 7: Percentage of China vs Overseas Sales 2020-2027 E
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Valuation
DCF Model
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Revenue growth rates are taken from the guidance provided by BYD. Historically over the
past 10 years, BYD’s forecasted revenues have swayed +- 0.5% from the actual revenues.
COGS is forecasted using the past 3 years average of COGS as a % of Revenue. Historically,
this COGS as a % of Revenue has been hovering at around 80%.
Regarding Capital Expenditure, BYD has been aggressively expanding, especially into new
markets such as Europe. Capital Expenditures growth rates have not been consistent as the
company is affected heavily by the macro dynamics, thus we use another approach which is
CapEx as a % of revenue which has hovered around 20% historically.
The cost of equity is determined by taking the country equity risk premium of China as most
of its business activities are located in China so far. We used the risk-free rate of 10-year
China Government Bonds. The cost of equity is calculated to be 11.8%. Only 6.1% of the
company’s capital is debt, so after tax cost of debt is quite negligible. Further, we adopted a
more conservative approach of forecasting the terminal growth rate by taking the long-term
China GDP growth rate (2024-2034) which is forecasted to be at 1.58%. We believe this
adjustment better accounts for potential market uncertainties, ongoing EV price wars, and a
large possibility of slower-than-expected growth in the long term.
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Risk Assessment and Mitigations
1 a) Risk of tariffs
The European Commission agreed to levy tariffs of up to 35.3% on top of the existing 10%
duties on China-made EVs beginning November to counteract the allegedly anticompetitive
subsidies by the Chinese government. This would make BYD’s exports less competitive,
increasing the end price for European consumers. Given the EU has legislation in place to
phase out diesel- and gas-powered cars by 2035, tariffs may result in BYD being unable to
fully take advantage of the attractive European market.
Within the US market, Donald Trump is threatening automakers around the world, including
the domestic ones, from nearshoring production to Mexico with 2000% tariffs if elected in an
effort to protect the domestic auto industry. The likelihood of such a high trade barrier is
questionable, however, it is likely that increased protectionist measures would be put in place,
if elected, putting BYD’s ability to penetrate the US market into jeopardy.
1 b) Mitigation for tariffs
To mitigate the risks of tariffs increasing vehicles’ end prices for consumers, BYD plans to
nearshore production to countries like Hungary. Although the plan will not take effect until
the longer term while tariffs come into effect in the near term, it should be favored by the EU,
since BYD would invest substantially into the local economies. Whilst nearshoring would
decrease the additional “costs” imposed through tariffs, it may result in higher cost of goods,
given China currently hosts most of the EV supply chain, potentially making local EU
production more expensive, hurting BYD’s market-leading margins. However, even with
tariffs in place, BYD’s pricing remains competitive with local automakers. Nonetheless, the
future of EU’s tariffs on Chinese EVs and its consequences, however, remain highly
uncertain as European automakers are risking the fate of their own exports to China while
Beijing threatens to counter with their own tariffs and import restrictions, opening up the
possibility for a trade war.
On the US front, the development of a mitigation strategy is quite difficult given the high
level of uncertainty regarding potential protectionist measures following the US presidential
election. BYD can, in theory, take advantage of the current relatively-lower 100% tariffs, and
flood the market before Trump takes office, however, even current conditions are not
particularly great for BYD’s strategy. Instead, BYD should and is focusing its international
expansion to markets where it faces less political resistance.
2 a) Risk of security concerns
President Biden proposed to ban Chinese, North Korean, and Russian software and hardware
that connects to the outside world (eg. Bluetooth and satellite modules, driverless systems),
starting in 2027 and 2029 respectively, citing national security concerns. This announcement
comes after increasing tariffs on Chinese EVs to 100%, aiming to protect the US automotive
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industry. For BYD to penetrate the US market, not only would it have to onshore or nearshore
production to avoid tariffs, but also move/recreate its software in the US – effectively
duplicate its current business in the Americas. White its current US exports are minimal, the
above poses a threat to future growth as the rate at which Chinese EV sales grow is set to
decrease, given EV penetration in the automobile market will plateau, so BYD must expand
in other markets to maintain its current growth rates. A large threat would therefore be other
countries having similar security concerns as the US and also choosing to impose measures to
ban Chinese technology,
2 b) Mitigation of security concerns
Given the above risk is a proposal at the moment, BYD has not made statements on how to
counteract it. Should the proposal become adopted, BYD can choose to appeal in US court
and seek an exemption if it wishes to expand in the US market. BYD can also focus on
building its brand in other geographies where the risk may not become a concern, given the
governments’ current stance on Chinese technologies, seen through the adoption of products
like those of Huawei.
3 a) Country Risk
Given 73% of BYD’s revenue currently comes from the Chinese market, country risk is an
important consideration when evaluating the worthiness of investing in BYD. Asides from
political risk arising mainly from other governments' stances on China’s approach to
subsidizing domestic production, influencing BYD’s exports, given the Chinese political
landscape is stable under the one party system, economic risk is of main concern. The
Chinese economy has shown slowing growth recently, with 4.7% YoY growth in GDP for
2Q24 and a consensus forecasting a 4.8% growth rate for the full year, below the
government’s 5% target. With household savings as a proportion of GDP at an all time high
as China’s population ages and prepares for retirement and the youth unemployment rate
remaining above 17% while the Chinese population declines, concerns arise about the
country’s future growth prospects following the multi-year property sector decline.
Furthermore, the China Passenger Car Association posted data in July stating new EV or
plug-in hybrid sales topped 50% of all new vehicles for the first time. As EV adoption in
China continues, it is inevitable that exponential growth cannot continue and instead will
plateau, putting additional pressure on BYD’s domestic demand.
3 b) Mitigation of country risk
The Chinese government is confident in reaching its 5% growth target for 2024, announcing
a range of fiscal and monetary policies in late September to stimulate economic growth. The
CSI300 showed increased investor confidence in the economy, rising 32.4% from
mid-September to October 8 before cutting back as investors expected additional stimulus to
come. On October 12 the government announced another 2.3bn yuan issue of special bonds,
signaling determination to bring the Chinese economy back on track.
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BYD Auto
1211.HK
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