BYD May Continue Cutting Prices, Profitability And Growth Prospects Still Excellent

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BYD May Continue Cutting Prices, Profitability And Growth Prospects Still Excellent

seekingalpha05-05

BYDDF remains a Buy, due to its ability to scale its production capacity and to reduce its ASPs, while reporting growing profit margins on a YoY basis.Its focus on hybrids and full EVs is highly ...

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Still Excellent\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-05 21:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4689557-byd-may-continue-cutting-prices-profitability-and-growth-prospects-still-excellent><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>BYDDF remains a Buy, due to its ability to scale its production capacity and to reduce its ASPs, while reporting growing profit margins on a YoY basis.Its focus on hybrids and full EVs is highly ...</p>\n\n<a href=\"https://seekingalpha.com/article/4689557-byd-may-continue-cutting-prices-profitability-and-growth-prospects-still-excellent\">Source 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$20.99K EV in Mexico by early 2024, with its cheapest EV, Seagull, retailing for $9.7K in China.As a result of its robust long-term investment thesis, we believe that BYDDF remains a Buy at every dips, especially since the automaker has offered a promising FY2024 delivery target of 3.6M vehicles.   TimAbramowitz We previously covered BYD Company Limited (OTCPK:BYDDF) in January 2024, discussing how it had performed against Tesla (TSLA) in FY2023, with the Chinese based automaker emerging as the king of EVs based on the FQ4'23 production/ sales number. The management had also demonstrated why it might be able to maintain its competitive edge, thanks to its expanding footprint in Latin America, the EU, and Asia. As a result of these developments, we had maintained our Buy rating, with us upgrading our long-term price target with the lifting market sentiments and thawing geopolitical tensions likely to trigger the upward rerating in its P/E valuations ahead. In this article, we shall discuss why we are maintaining our Buy rating for BYDDF, with the stock trading sideways as TSLA declines by -25%, due to the former's ability to scale its production capacity and to reduce its ASPs, while reporting expanding profit margins in FY2023. Combined with the management's growing global ambitions to premiumize its branding and offerings, we believe that the Chinese automaker remains well poised to be a long-term winner, with the stock also trading below our fair value estimates. The Long-Term BYDDF Investment Thesis Remains Robust, Thanks To Its Improved Manufacturing Scale For one short moment in time, BYDDF had claimed the title of EV king, given that it delivered 526.4K EVs (+21.9% QoQ/ +60% YoY) and 416.24K hybrids (+6.5% QoQ/ +17.9% YoY) in Q4'23, compared to TSLA at 484.5K vehicles (+11.3% QoQ/ +19.5% YoY). However, by Q1'24, the market trend had clearly shifted towards hybrids instead, with BYDDF's EV deliveries declining tremendously to 300.11K vehicles (-42.9% QoQ/ +13.4% YoY) and Hybrids accelerating to 324.28K vehicles (-22% QoQ/ +14.4% YoY), with Hybrids' delivery exceeding EVs for the first time on a quarterly basis (data here). This is compared to TSLA at 386.81K vehicles (-20.1% QoQ/ -8.5% YoY). It was also apparent that TSLA's drastic price cuts had not worked as intended, as it tremendously impacted its automotive gross profit margins to 15.6% (-1 points QoQ/ -2.6 YoY) and overall operating margins to 5.4% (-2.8 points QoQ/ -6 YoY) in FQ1'24, with FY2023 numbers of 19.4% (-9 points YoY) and 9.1% (-7.6 points YoY), respectively. While BYDDF did not breakdown its automotive gross profit margins, its overall operating margins of 4.6% in FQ1'24 (+0.2 YoY), and gross margins of 19.8% (+3 points YoY)/ operating margins of 5.4% in FY2023 (+0.4 points YoY), portrayed relatively stable profit margins instead. These numbers further demonstrate that BYDDF can afford to grow its market share through drastic price cuts, especially due to the notable improvements in its balance sheet to a net cash position of 96.18B Yuan (+44.1% YoY), or the equivalent of $13.32B based on the exchange rate at the time of writing. BYDDF Remains Well Poised For Growth Through Hybrids And Expanded Offerings Across Affordable To Premium Models Moving forward, the same shift in consumer behavior from EVs to hybrids has also been reported by Ford (F) in Q1'24, a legacy automaker based in the US, with more consumers increasingly opting for hybrid models over EVs. Part of the consumer shift may be attributed to the end of the first wave of EV adopters, with mass-market adoption delayed by the higher battery costs, elevated borrowing costs, and range anxiety. Propulsion System Design Share Carscoops & S&P Global Mobility With hybrid models being able to bridge the gap between ICE and full EV models, we concur with the market research that hybrid vehicles sales may grow at an accelerated pace compared to EVs through 2026. And this is why we believe that BYDDF's focus on both hybrids and full EVs are highly strategic, since it allows the automaker to tap into the ebb and flow of the automotive trends, as it similarly expands its partnerships/ manufacturing plants globally. BYDDF's Well-Diversified Vehicle Offerings BYDDF While previously targeting the mass market models with the best-selling Yuan Plus retailing at an average of 119.8K Yuan ($16.64K) in domestic markets, BYDDF is already looking to launch its first electric pick up truck (likely to rival F's F-150 series/ TSLA's Cybertruck) and electric supercar in 2024 (likely to rival TSLA's Roadster/ Lotus Evija). This builds upon its off-road models launched in 2023, further underscoring the management's global strategy to premiumize its branding and offerings, with the vertically integrated supply chain also ensuring its sustained profitability thus far. With BYDDF already scouting locations for its Mexico manufacturing plant with an expected annual capacity of 150K vehicles, we may see the automaker report massive wins in the US market by the second half of the decade indeed. This is especially since the Chinese-based automaker already introduced the affordable $20.99K EV in Mexico by early 2024,with the former's low cost EV, Seagull, retailing for 69.8K Yuan in China ($9.7K), well ahead of TSLA's uncertain mass-market launch. The Consensus Forward Estimates (in $) Tikr Terminal As a result of these developments, we can understand why the consensus has expected BYDDF to record an excellent top/ bottom line growth at a CAGR of +20.4%/ +21.5% through FY2026. This builds upon the historical growth at +28.5%/ +28% between FY2016 and FY2023, respectively, implying its ability to sustainably scale its global presence/ manufacturing plants and growing its sales while remaining profitable. These numbers are not overly aggressive as well, since BYDDF has demonstrated excellent manufacturing scale and ability to pass off savings to its consumers, further underscoring why sales/ deliveries have been robust thus far.  So, Is BYDDF Stock A Buy, Sell, or Hold?  BYDDF 3Y Stock Price Trading View For now, BYDDF continues to trade sideways between its previous trading ranges of between $24s and $30s, as the wider market also pulls back as we enter the Q1'24 earnings season. BYDDF Valuations Seeking Alpha Based on the FWD EV/ EBIT valuations of 13.83x and FWD P/E of 19.54x, raised from the previous article's P/E of 16.26x, BYDDF is not expensive at all, especially when compared to TSLA at 68.72x/ 71.41x and the sector median at 13.52x/ 14.95x, respectively, due to the former's growing EV/ hybrid capabilities and the expanding profit margins. Even when compared to Li Auto (LI) at 8.67x/ 14.29x, a fellow Chinese automaker specializing in plug-in hybrids with a projected top/ bottom line CAGR of +36.8%/ +32.4% through FY2026, we believe that BYDDF's valuations appear to be relatively reasonable. Based on the LTM adj EPS of $1.45 and the FWD P/E valuations of 19.54x, BYDDF seems to be trading near to our estimated fair value of $28.30. Based on the consensus FY2026 adj EPS estimates of $2.42 (expanding at a CAGR of +21.5%), we believe that there is an excellent upside potential of +60% to our base-case long-term price target of $47.20 as well. With BYDDF's execution remaining promising, we maintain our optimism that it may still be re-rated closer to its pre-pandemic P/E mean of 37x, once market sentiments surrounding the Chinese ADS lifts, offering interested investors with the bull-case long-term price target of ~$89. As a result of its robust long-term investment thesis, we believe that BYDDF remains a Buy at every dips, especially since the automaker has offered a promising delivery target of 3.6M vehicles in 2024 (+19.2% YoY) while aiming to sell 1M vehicles internationally by 2025 as the domestic market matures. Things To Note Before Adding BYDDF It goes without saying, that those whom add BYDDF must also be comfortable with the geopolitical issues related to Chinese ADS, with some also calling for the ban on the sale of Chinese-made EVs in the US and Mexico barred from offering federal/ state incentives to Chinese automakers. At the same time, readers must pay attention to the domestic automotive market development, with further market consolidation bound to occur as similarly observed in the US with Fisker Inc. (OTC:FSRN). This is especially since an EV supply glut has been reported in the EU, with some \"Chinese EVs (supposedly) sitting in European ports for up to 18 months,\" further highlighting that things may get much worse before getting better. Even so, we believe that BYDDF will continue to execute well, attributed to its improving manufacturing scale and ability to reduce ASPs profitably, with the well-diversified offerings across commercial and passengers models (sedan, SUV, supercar, pick-up truck, off-road, etc) likely to attract different consumer base globally.  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.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}