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Q2 2022 hedge fund letters, conferences and more
What’s interesting about BYD is that Warren Buffett owns 20% of its outstanding H-shares
Highlights:
- EV rollout on track with massive gov’t support.
- Smartphone segment continues to be a reliable revenue driver.
- Climbing up the value chain to stop margin erosion.
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Massive outperformance compared to index
- Despite the gov’t lockdown to combat the pandemic and supply chain disruptions from the Russian war, BYD managed to keep its goals on track.
- This is mainly attributable to strong gov’t support.
- Subsidies for producers.
- Purchase tax exemptions for buyers.
- Support for construction of charging infrastructure.
Why is EV so important for China?
- China is heavily dependent on oil imports.
- Oil consumption in 2021 stood at 15m barrels per day compared to only 4m production.
- Mass adoption of electric vehicles could help to reduce oil imports in the long run.
- China wants to lead the technology race and dominate the EV industry.
Quick fact about Warren Buffett’s investment in BYD
- Warren Buffett first invested in BYD back in 2008, purchasing 225m shares worth US$230m.
- His stake is now worth US$7.7bn.
- This is equivalent to a return of approximately 3,200%.
It was his friend Charlie Munger who convinced Buffett
- Munger has long been known to have a bullish outlook on China.
- He believed that BYD is well positioned to lead China’s EV transformation.
- Munger had previously praised Wang Chuanfu, the founder of BYD, for being a combination of Thomas Edison and Jack Welch.
Revenue breakdown 2021
EV rollout on track with massive gov’t support
- China trails behind large developed markets in terms of EV penetration.
- Lately, the Chinese gov’t considered extending its purchase tax exemption for EV buyers.
- The supportive policy is expected to lead to a convergence with the West of the EV penetration rate.
The underpinnings of demand for EV in China
- The Chinese gov’t ambitious target lays the foundation for strong revenue growth.
- In 2021, EVs accounted for 13% of new cars sold in China.
- By 2030, China plans to ramp this number up to 40%.
- This means that the regulatory environment is helping BYD to realize its growth potential.
Smartphone segment continues to be a reliable revenue driver
- Nowadays, BYD is most known for its vehicles.
- However, its mobile phone handset assembly segment doesn’t trail far behind.
- Major clients of BYD include Huawei, Apple, Samsung, Xiaomi, and Vivo.
- As of 1H22, these brands collectively made up 80% of the global smartphone market.
Emerging markets could constitute new engine of growth
- Emerging markets like China and India have lower smartphone penetration rates than saturated developed markets
- This means that there is still room to grow
- By partnering with dominant smartphone players in India and China, this segment could continue to deliver double-digit growth
Climbing up the value chain to stop margin erosion
- BYD has surpassed Tesla in the number of new EV sold in 1H22.
- However, its margin trails behind Tesla.
- BYD intends to turnaround the negative trend by introducing more premium models that can be sold at a higher average selling price.
- Examples of BYD’s premium models include: BYD Han, BYD Tang and BYD Qin.
Consensus is bullish
- Most analysts have BUY or Strong BUY recommendations.
- Analysts predict company to maintain double-digit revenue growth.
- This is in line with our forecast due to support for new energy vehicles from the Chinese gov’t.
P&L – BYD
- Massive EV rollout in China and capturing upside in the smartphone business in emerging markets drives strong revenue growth.
Balance sheet – BYD
- BYD has high level of working capital requirements, accounting for close to 50% of its total assets.
- BYD’s cash generation ability has been improving since 2020, making its financing less reliant on external debt.
Ratios – BYD
- In the past, BYD improved its efficiency and I expect the trend to continue.
- BYD is not highly levered, and the company became a net cash in 2021.
Stock Picking Checklist
Can this company be a ten bagger?
Free cash flow – BYD
- Increasing CAPEX is necessary to lay the foundation for massive growth.
Value estimate – BYD
- My forecast is similar to the consensus, as I expect the gross margin to expand.
- In the long run, I expect competition to rise.
- Therefore, I choose a terminal growth rate of 3%.
Key risk is rising competition
- Increasing number of players in domestic market puts growth at risk.
- Sudden changes in gov’t regulation that could be less favorable.
- Failure to keep up with technological changes.
Conclusion
- China’s ambition to lead EV race unlocks massive growth potential.
- Strong smartphone segment delivers secured revenue.
- Margin expansion could constitute catalyst for the share price.
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Article by Andrew Stotz, Become a Better Investor.
