Rebounding New-Energy Vehicle Sales Bodes Well for BYD

BYD Company (OTCMKTS: BYDDF) briefly fell below $6 per share earlier this week before rebounding a bit. Since reaching a 3-month peak in late July, the shares have been under some pressure. Let’s take a look at how the company is faring.

In the first half of 2017, BYD had revenue of Rmb43.8 billion, about flat year over year (up 0.2 percent to be exact). Profits of Rmb1.7 billion marked a 23.8 percent decline. The sharp fall in profit is largely due to the decline in government subsidies and fast-growing research & development expenses.

While the reduced subsidies and a stricter list of NEVs that qualify for subsidies hit the Chinese NEV (new-energy vehicle, the Chinese government’s term for electric vehicles) market hard early in the year, by the second quarter sales began to recover as the government had released updated lists of approved NEVs. BYD’s NEV sales fell nearly 20 percent on a year-over-year basis in the first 3 months of 2017, but the second-quarter recovery was so strong that for the first 6 months, NEV sales still increased slightly. NEVs accounted for about 36 percent of overall revenue in the first half.

Management also seems confident that BYD will achieve its 2017 target of 17,000 electric bus orders and delivery of 15,000 units. The electric-bus business, as well as monorails, represent diversification beyond passenger vehicles.

Traditional vehicle sales, which contribute about 16 percent of revenue, are falling—down 14.8 percent year-over-year. Clearly, for BYD’s vehicle business, NEVs are the future growth driver.

Although we like BYD for its electric vehicle capabilities, it also has a sizeable handset business (41 percent of 2017 first-half revenue). It manufactures mobile handset components and assembles mobile phones for mostly domestic brands but also the likes of Motorola and Nokia. Segment revenue grew 10.3 percent in the first half, so for the first half, this segment was the fastest growing part of BYD.

Rechargeable batteries and other products account for the balance (about 7 percent) of BYD’s first-half revenue.

Overall, 2017 so far has been somewhat of a transition year for BYD as it moves beyond the subsidy-dependent phase of the Chinese EV market. As we noted in June when we added BYD to our portfolio, we wanted to wait to see the impact of the subsidy cut before we moved. Once we were satisfied that the decline was likely temporary, we made the move. Looking ahead, we expect NEV sales to continue to rebound in the rest of 2017. The handset business also looks solid as smartphone handsets continue to evolve and makers now strongly demand light-weight metal casing and new 3D glass casings.

We keep our suggested buy-up-to price at $7. Again, we reiterate that this is not a target price. We expect BYD to eventually move well beyond $7 a share.

Stock Talk

Scott Chan

Scott Chan

An update on BYDDF: After we covered the stock on Friday, it is up about 8% today after a state-run Chinese newspaper reported that Beijing is considering a ban on cars that run on fossil fuels. If the move comes to fruition, it would obviously be a big boost to electric-vehicle makers, such as BYD.

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