BYD’s Popularity Grows as Tesla Struggles
BYD Co., China’s leading electric-vehicle manufacturer, is experiencing increased expectations due to its record-breaking profits, even as Tesla Inc.’s rally slows down due to weaker sales growth.
BYD is fast approaching Tesla as the world’s largest electric car seller. Still, shares of Elon Musk’s company are still up 68% this year, even with the recent pullback, far outstripping the 28% rise in BYD’s Hong Kong-listed stock.
That could be ready to change. Investors have snapped up bullish options on BYD, while analysts have raised earnings per share forecasts for the Chinese company to a record high following its preliminary quarterly report this month. BYD posted all-time high sales despite intensifying competition and a broader slowdown in China’s new energy car sales.
BYD shares jumped to China’s EV maker’s record quarterly profit
Musk cast a gloomy outlook on the global EV sector just a day later, saying rising interest rates in the US have hurt its sales. Tesla’s results were also hurt by a months-long price war it had launched as it tried to fuel demand.
The market reacts to differences between companies. BYD shares are up more than 1% this month, while Tesla is down 17%, leading global peers lower. At the same time, earnings estimates for the Chinese automaker have risen and those of its larger U.S. rival have fallen.
“BYD still looks like the safest bet against Tesla in the short term, given its discipline to balance volume growth with profitability,” said Kevin Net, head of Asia equities at Tocqueville Finance. “It also has growing exposure to hybrids, which have been gaining market share in China and increasing margins.”
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BYD sold a record 822,094 vehicles, including hybrids, in the last quarter, helping to strengthen its lead as China’s best-selling car brand. In particular, industry watchers were struck by the fact that BYD appears to be making more money per vehicle despite the price competition.
Profit per car, excluding the impact of the company’s electronics unit, rose as much as 46% compared to the previous quarter, according to JPMorgan Chase & Co.’s estimates. Analysts believe BYD can maintain profitability next year thanks to increased sales of premium vehicles and continued overseas expansion.
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According to HSBC Holdings PLC experts, BYD is expected to start shipping the high-end Yangwang U8 and Fang Cheng Bao BAO 5 in the fourth quarter. Outside of China, BYD claims to have high shares in countries such as Brazil, although fiscal and political reasons have prevented it from entering the US passenger car market.
The improving earnings outlook has helped make BYD shares more attractive, multiplying its forward earnings to about 18 times compared to Tesla’s more than 50 times. Recent options data also looks positive, as the volatility skew has shifted towards the rising side compared to a month ago.
Although Warren Buffett has backed BYD, a selloff in Berkshire Hathaway Inc.’s stock since last year may have weighed on its share price. Other headwinds for shares include the European Union’s investigation into subsidies for electric cars made in China.
“There’s certainly a big discount for Chinese stocks, but I don’t see it getting any worse,” said Taylor Ogan, managing director of hedge fund Snow Bull Capital, which owns shares in both BYD and Tesla. “Investors need to wake up to BYD next year when its two top brands begin deliveries and it expands significantly into new markets,” he added.
