Source: Beast Finance Author: Beast Finance
Tesla (TSLA) CEO Elon Musk said Tesla's closest competitor may be a Chinese electric car company. Beast Finance believes that BYD (0211) supported by Warren Buffett may be the competitor that Musk mentioned.
BYD surpasses Tesla to become the world's largest electric car seller
BYD's sales have surpassed Tesla in 2022 and become the world's largest electric car manufacturer (including plug-in hybrid vehicles) by 2022. The delivery volume was 1.87 million, compared with Tesla's 1.3 million. Bold Beast Finance predicts that BYD may also surpass Tesla in terms of pure electric vehicles this year.
Although BYD currently has three business units, the electric vehicle business is seen as its biggest growth driver, and there is still a lot of room for growth. The electric vehicle business is BYD's largest business unit, accounting for more than half of its revenue and nearly half of its profits.
BYD Annual Report 2021
There is still room for further growth in China's EV market.
BYD Auto generates the vast majority of its sales in China (international sales are estimated to account for less than 2% of BYD's sales), but there is still plenty of room for growth in its domestic market. Electric car sales in the Chinese market -- the world's largest, accounting for about two-thirds of global EV sales -- jumped 93.4 percent year-on-year to 689 last year, thanks to cheap electricity and government policies encouraging EV purchases. million vehicles.
However, the sales of traditional cars have far exceeded the sales of electric vehicles. Electric vehicles accounted for only about 25% of the annual sales of 28.7 million vehicles, far exceeding the government's planned goal of reaching 20% by 2025. With the development of the electric vehicle industry, the Chinese government aims to make electric vehicles account for 40% of the country's new car sales by 2030, which leaves ample room for further growth of electric vehicles. By then, sales of conventional vehicles may decline, while the share of EVs in China's total vehicle fleet may gradually increase.
In 2021, the total number of new energy vehicles in China will be close to 8 million, which means that by the end of 2022, the total number of new energy vehicles in China will reach 15 million. That's less than 10% of China's total of 302 million vehicles. BYD also has many competitive advantages in this area and can make good use of this opportunity. As China's leading EV maker, BYD has about 30% market share of EV sales in China and has a strong brand recognition that can clearly compete with global auto brands such as Tesla and Volkswagen.
Additionally, BYD's cost advantage (in part because it is the only EV maker with a vertically integrated business model, with its own lithium mines, semiconductor production, and especially batteries (the most expensive individual component in an EV), As well as a wide range of product offerings, enabling it to enter lower-tier cities in China.
About half of China's EV sales come from first-tier cities, but the government wants EV makers to increase penetration in lower-tier cities and rural areas as well. In terms of models, BYD also has a wide range of models, and its positioning is to meet the electric vehicle needs of low-income and even rural residents (in sharp contrast, Li Auto (LI), Xiaopeng Motors (XPEV), Weilai (NIO) ) and competitors such as Tesla (TSLA), which tend to be priced at the premium end of the market and are unlikely to gain much traction among consumers on a tight budget).
Sets sights on global market
Having dominated the domestic market, BYD is now setting its sights on global expansion. To realize this ambition, BYD is planning to build one or two factories in Europe, is negotiating to buy Ford's production plant in Germany, plans to start production in Thailand in 2024, and plans to build a parts factory in Vietnam.
The company entered Europe late last year, unveiling BYD's new BYD Seal at the 2022 Paris Motor Show. The top 7 countries in the world for electric vehicle sales per capita are all in Europe, so entering the European market is a reasonable choice, because the region has a relatively mature charging infrastructure, and cheap electric vehicle models are conducive to driving electric vehicle sales .
BYD has also set its sights on Asia (except China). This month, BYD opened its first dealership in Japan, selling flagship models at lower prices than Tesla and Nissan.
Electric vehicle adoption in Asia is low (particularly in emerging Asian markets such as Southeast Asia and India), largely due to relatively weak charging infrastructure and prices, but in the coming years EV adoption will The rate is expected to increase, partly due to supportive government policies. Indonesia, Southeast Asia's largest economy, aims to sell only electric motorcycles and cars by 2050. Brunei aims to have EVs account for 60 percent of total annual vehicle sales by 2035, while Thailand has introduced subsidies and tax incentives to ensure EVs account for 30 percent of total vehicle production by 2030.
It remains to be seen how successful BYD can be in terms of global expansion, however, their strategy in the price area has advantages. While BYD does have a relatively unknown disadvantage in the global market, when it comes to cost, BYD does have a huge advantage. Chinese EV makers reportedly have a €10,000 cost advantage over European automakers (for a variety of reasons, including lower labor costs, an efficient and mature EV supply chain, including the world's largest lithium chemical production suppliers, accounting for about 60% of global supply, and six of the world's top ten EV battery suppliers are Chinese EV battery companies).
Among these Chinese EV players, BYD may lead in terms of cost, and the company's vertically integrated business model brings a huge cost advantage (except for windshield and tires, they can manufacture almost all other parts on the car themselves ). The EV battery division is probably BYD's greatest strength, as it not only gives them access to industry-leading battery technology at a relatively low cost, but also provides a significant revenue stream, as well as supplying EVs to rival EV brands. Further cost advantage brought by batteries (BYD is the largest EV battery supplier in China after CATL and the third largest in the world).
For example, buyers of BYD's self-developed Blade battery, recognized as one of the safest EV batteries, include Tesla and Toyota. But BYD's product development costs are reportedly 20% to 30% lower than that of established automaker Toyota, the world's largest automaker.
Contrary to perceptions of quality and performance, some of BYD's models have received five-star safety ratings from regulators in Europe and Australia (where Chinese automakers are gaining traction, signaling consumer acceptance of Chinese brands), and BYD's affordable models are close to Western rivals in terms of performance; BYD's new BYD Seal in Europe, for example, is often compared to Tesla's cheapest car, the Tesla Model 3.
Also, the timing of BYD's global expansion plans is opportune; price is one of the main barriers to EV adoption in Asia and Europe, especially as rising interest rates, high inflation and weak economies hit consumer purchasing power. Consumers are expected to become more conscientious this year, likely to purchase more affordable and budget-friendly electric vehicles, and BYD, as one of the most cost-competitive players in the auto industry, is well positioned to meet this demand .
Risks
Competition is a major risk facing BYD. In China's home market, EV subsidy cuts have led to increased competition among automakers, especially Tesla. After Tesla cut prices this year, demand has surged. Unlike Tesla, which enjoys double-digit profit margins and has the ability to absorb cost increases, BYD, already barely breaking even, has instead raised prices, narrowing the price gap with U.S. rivals and potentially losing market share in the process .
The Chinese government says there are too many electric vehicles in the country and encourages consolidation. BYD may encounter larger and more competitive opponents in the future. BYD's margins are already very tight, and even though they are cash flow positive, stronger competition could force them to raise more capital to support their growth ambitions. BYD raised US$3.9 billion through private placements in 2021, and Beast Finance believes that further financing may have a short-term impact on BYD's stock price.
The global EV opportunity has also attracted rivals; from start-ups to legacy automakers, they all have their strengths, and VW is expanding its EV range and appears to be borrowing from BYD's business model and even trying to produce its own batteries . Honda has invested billions of dollars to accelerate their electric vehicle sales. Toyota's efforts in electric vehicles are faltering for now, but the world's largest automaker is busy jumpstarting its EV business and could become a potentially powerful force. With just under 2 million deliveries in 2022, BYD is still far behind auto giant Toyota, which delivered more than 9.5 million vehicles in the same year.
in conclusion
BYD's shares have enjoyed a strong rally over the past few years, gaining more than 22% so far this year. Given that BYD is likely to grow further in the future and has a solid competitive advantage, some may think that the stock has more upside. However, with a P/E of 65 at 65 and a P/BV of 6.5, others may prefer to wait for a better entry point.