When Warren Buffett invests in a company no one』s heard of in China, people pay attention. Eleven years later, BYD remains unfamiliar to some. It is now the world』s biggest electric vehicle maker. Chinese EV producers including BYD have relied heavily on national subsidies. Beijing will reduce these by up to two-thirds from this year. Phase out will be complete in 2020. That means BYD profits, buoyed by more than $1bn in grants over the past five years, should take a hit.
First-quarter profit was up 632 per cent to $111m over the year. The number of electric cars sold more than doubled. Its share price did little. As government subsidies fall, its shares could too. China』s EV market is crowded, with more than 400 makers. BYD』s battery business, an IPO is due by 2022, should suffer from weak battery prices.
However, Chinese subsidies will move to cleaner, faster-charging hydrogen fuel cell vehicles which BYD expects to produce. Beijing targets 1m hydrogen vehicles on the road by 2030. Bullish analysts expect over double this. Last year there were just 5,000. Beijing has initially supported research on fuel cells and charging stations. Hydrogen fuel cells are better for bigger, heavier loads over longer distances. It plans with a US partner to make buses fuelled by hydrogen.
Even so, BYD』s share price is below their late 2009 Buffet-fuelled peak, trading at an optimistic 33 times forward earnings, more than triple local peers. Despite Beijing』s hopes for hydrogen, BYD will not soon reap any benefits. Meanwhile, its operating profits, from batteries and EVs, have tracked sideways for several years.
BYD has long-term promise, but some short-term challenges. These include diversifying away from fleet sales while maintaining growth at a similar level as the first quarter. This partly explains why BYD trades about half of Tesla』s forward enterprise to ebitda multiple. Those keen on BYD should approach it with an investment horizon as long as Mr Buffett』s.