Can China’s BYD Co Maintain its Growth Estimates?

Shares of China’s BYD Co (BYDDY), China’s dominant auto brand, plunged to an 8-month low last Friday and sank -12% in November on concerns over its ability to meet sales targets amid a difficult macro outlook, along with the impact of price cuts to stave off competition.  There are also questions over whether BYD’s cars can compete with the intelligent, connected offerings from rivals, putting the company’s growth estimates into doubt.

Some analysts are concerned that BYD Co could lose market share not only to already established electric vehicle (EV) makers but also to new entrants, including Huawei Technologies. Edmond de Rothschild Asset Management said, “The growth profile of BYD is being questioned as the arrival of Huawei Technologies in the EV segment will definitely shorten the time-to-market” for new Chinese products, and BYD is “more vulnerable” given its lagging tech.

In October, BYD Co outperformed other EV makers and was closing in on Tesla (TSLA) as the world’s biggest seller of pure electric vehicles.  BYD posted all-time high sales in Q3 despite intensifying competition and a slowdown in sales in China.  However, the market turned bearish for BYD last month as the company increased discounts in an effort to continue driving sales.  While BYD’s sales reached a record in November, they were basically flat from October, spurring doubts about whether the company will reach its sales goals of three million units this year and four million in 2024.

Other headwinds facing BYD Co include the liquidation of shares by longtime backer Berkshire Hathaway and a European Union anti-subsidies probe into Chinese EVs. The increased negativity over BYD’s outlook has prompted investors to boost their short positions in the stock. According to IHS Markit data, short interest of BYD shares has risen to over 4% of the free float over the last three weeks.  UOB Kay Hian Holdings Ltd, the only broker with a sell rating on BYD, said peaking retail sales are a major reason for investor caution, along with price cuts, rising inventories, and increasing competition.

A positive factor for BYD Co is that the recent decline in its share price has helped drive the forward earnings multiple down to its lowest in 12 years, which could spark the buying of its shares by bargain hunters.  Also, BYD remains the leader in auto sales in China, having overtaken Volkswagen AG this year.  BYD’s lineup of affordable electric and hybrid vehicles at multiple pricing levels compared to its peers gives it broad appeal.  However, Morgan Stanley Asia warns that BYD Co faces the risk that an ongoing price war with Tesla “may keep consumers from purchasing as they continue to expect ever cheaper cars.”

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.