BYD - Build Your Dreams
Build Your Dreams
Management
Team
Business
Model
Products
& Innovations
Distribution
Manufacturing
Valuation
Company Profile
BYD Company Limited (the ‘Company’) is a joint stock limited
liability company registered in the People’s republic of China (the ‘PRC’). It is
primarily engaged in automobile business (EVs and ICEs), mobile phones
components and assembly services, rechargeable batteries, photovoltaics (solar)
business as well as urban rail transportation business segment.
BYD was founded in Shenzhen in 1995 by Mr. Chuanfu Wang. Since
2002, the company’s H shares have been listed on The Stock Exchange of Hong
Kong Limited. In 2008, MidAmerican Energy Holdings which is a subsidiary of
Warren Buffett’s Berkshire Hathaway Inc acquired around 10% share of BYD.
Warrant had originally requested to purchase 20% of BYD. Mr. Wang rejected the
proposal in order to keep the control of BYD. BYD is the second Chinese company
which was invested by Warrant after PetroChina.
In the earlier years, BYD was more disputable for its
similar design with certain automobile giants. BYD did conduct a strategy
called learning from the best and lowering the cost.
Principal Subsidiaries
source: BYD Company Limited Annual Report 2021
Note: Huizhou Electronic and Xi'an Electronic are wholly owned by BYD Int'I
Management Team
Mr. Wang Chuan-fu is the founder of BYD. BYD and Mr. Wang
are always mentioned together. He is the key person and the center of BYD. BYD
operates in a very changeable industry sector. In my opinion, the quick and wise determination
of the groups strategies requires a powerful captain who can steer the ship to
adapt its way fast.
In 2003, Mr. Wang had already sensed the ceiling the battery
business. He began to plan the manufacture of electric vehicles. BYD had been
laughed by Elon Musk in 2011 when Warren Buffett backed BYD up. Recently, Musk
has praised BYD in public several times. In the past decade, many local
automobile manufacturers are left behind. On the contrary, BYD gradually grows
to be the second largest EV manufacturer worldwide attributed to Mr. Wangs long-term
vision and perseverance.
Business Model
The revenue of BYD is driven by three major business sectors
1. Automobile: From March 2022, BYD claim it will manufacture only new energy vehicles – hybrid and EVs. Figure 1 displays the sales volume by vehicle types from January to July in 2022. EVs and Plug-hybrid takes approximately half of the total revenue respectively.
Figure 1 Sale Volume by vehicle types, January – July 2022
For the automobile business, BYD has gone
through OEM (original equipment manufacturer) and ODM (original design
manufacturer) period and now it has finally transcended to OBM (original brand
manufacture).
In smart phones and other smart terminals
area, BYD offers clients the development of new materials, product design and
development, components and machines manufacturing as well as supply chain
management. This industry sector is quite competitive with extremely low gross
profit.
In 2021, the total revenue is as high as 216 billion RMB.
Automobile and iT-handset components and assembly business makes up more than
90% of its revenue (Figure 1).
Figure 2 Distribution of total revenue 2021
However, the contributions of automobile and IT sectors to the gross profit are not equally weighted in 2021 (Figure 3). The gross profit for IT sector is as low as 7.6% compared with 17.4% for automobile sector. The automobile business accounts for 70% of the total gross profit and hence the valuation of the enterprise leans heavily on the automobile business.
Figure 3 Distribution of gross profit by business
sectors, 2021
The
business of BYD is far beyond Chinese market. The revenue from outside China
made up for 30% of the total revenue in 2021 (Figure 4). However, the gross profit from
the outside China was only 7% compared with 16% from Chinese marked.
Figure 4 Revenue by regions, 2017-2021
Products
In this article, I focus only on automobiles. Batteries will
be covered in detail when I start my battery section next year.
Automobiles
Compared with the new EV manufacturer, NIO, Xpeng and Tesla,
BYD has a much broader composites of cars which mainly target the lower to
middle ends. Table
1
presents the available BYD car types. In April this year, BYD announced to
cease producing ICE. It becomes the first automobile manufacture in the world
stopping ICEs.
Table 1 The composites of BYD Cars
Both DM-i (Dual Mode intelligent) and DM-p (Dual Mode powerful)
are both plug-in hybrid powertrains. DM-p cars performance better than DM-I
cars but more expensive than DM-i.
BYD provides a much broader collection of vehicles compared with NIO, Xpeng and Tesla, which will very likely lead to higher market share since its products cover lower-end to middle-end. During the first 7 months in 2022, BYD has sold 68t more vehicles than the whole year of 2021.
Table 2 Sales volume 2018 - 2022
Innovations
In a quite long period, BYD mainly learnt from competitors
and strived to reduce the costs. In the recent years, the eagle is finally
full-fledged. It is the time for him to fly high. BYD has changed its strategy
to leverage its own technology especially for batteries.
The most attractive innovations of BYD are:
1. Blade Batteries
Shortly, compared with NCA/NMC batteries, blade battery based
on LFP is much safer and cheaper. I will provide a concrete comparison next
year when I start to write battery industry.
Beside super safety, the blade battery is super endurance and super strength. The recent launched model Seal has hence integrated the blade batteries as part of the vehicles which allows more space. The batteries replace the bottom of the vehicle.
BYD implements its ‘using two legs to walk’ strategy which refers
to two pipelines for cars – Plug-in hybrid and EV. Focus on plug-in hybrid
vehicles is an important strategy due to insufficient battery technology and
lack of charging infrastructure. BYD has invested huge in the development of
plug-in hybrid technology.
3. e-Platform 3.0 technology
e-Platform 3.0 was launched in 2021. It combines 4 advantages of intelligence,
efficiency, safety and aesthetics which aims to improve the intelligent driving
experience.
4. Large-scale photovoltaic modules with half-sheet module technology
210mm large-size half-sheet modules was
mass produced in 2021. With the innovative technology, it greatly improves the power
of the components.
5. DiLink 4.0（5G）
It is an operating system. The 5G network
makes internet connection for the OS much more smoothly.
The technology can efficiently control the
current of battery pack aiming to achieve the usage of battery above 99.9%.
The vehicles of BYD are good for price. They are economical and definitely beneficial for families. In the EV area, BYD is still a follower. BYD is a good car manufacturer while Tesla, NIO and Xpeng are dreamers.
Distribution
BYD adopts two distribution channels, direct sales and
dealership. The revenue generated from dealership channel increased from 26% in
2020 to 38% in 2021. For sales
outside China, BYD normally chooses to work together with the local dealers.
For 2021, the dealership channel achieved 17% gross profit in comparison with
direct sale, only 10,6%.
Manufacturing
Currently, BYD owns 8 factories across China. Table 2
displays the status of BYS’s eight factories in China. It is highly likely that
the annual capacity of BYD can reach 300,000 units. The number could be higher
when longer working hours are applied.
Table 2 BYD factories
BYD has also conducted a lot of activities abroad. Chinese
car market is large but it should not be the limit for BYD. The globalization
strategy has been entrenched in BYD for a very long time. The battery business
has already been worldwide. The automobile business has gone through a tough
period and now BYD presents itself with good cars with good price. It is time
for BYD new energy vehicles to march into the global market and push the carbon zero project forward.
Valuation
BYD
consists of three major business units: automobile, IT and batteries. I conduct
only DCF to the automobile business due to its high growth characteristics. The
other two units will carry out relative valuation method.
Assumption
I have conducted two scenarios – base and better since BYD
automobile business is within the high growth area. The base scenario is the
extremely highly likely scenario while the better scenario is speculations from
the market with my adjustment. The better scenario is also a likely scenario
but needs to be closely monitored. Table 3
exhibits the baseline with a 3 million units sales target in 2026 while the
better scenario with a 3 million unit target in 2025. With the full production
from the eight factories, the two targets are very possible.
Table 3 Sales volume anticipation
BYD’s life cycle is divided into 3
stages:
Stage 2: 2027 -2031 slow down period
Two
scenarios: baseline: 5% real growth rate; better: 10% real growth
rate
Stage 3: from 2032- plateau with 2% real growth rate
Stage 1: 2022 -2026, 3% inflation
Stage 2: 2027 -2031, 2% inflation
Stage 3: from 2032 -, 1% inflation
The effects of subsides and impairment
are assumed neutralized although the figure of subsides largely exceed the
amount of impairment. Every year, an enormous amount of subsidies has been allocated to BYD as Chinese government
support firmly new energy sector. Last year, the subsides were amounted to
above 2 billion RMB while the impairment and other operations cost little above
1 billion RMB. The large subsides are considered not sustainable.
A summary of the input assumptions:
The predictions of R&D and
SG&A regarding to revenue are higher than the R&D/revenue (3,7%) and
SG&A/revenue (5.5%) for BYD in 2021. It seems most of research is carried
out on automobile and batteries businesses and sales of automobile take more
employees and channels and hence I think it is not appropriate to forecast the
R&D and SG&A based on the enterprise level. I have therefore adjusted
the figures upwards.
Results
WACC = 10.08%
Ø
The terminal value of the automobile business:
RMB 1,213 billion (baseline) / RMB 1,742 billion (better scenario)
Ø
The present value of terminal value for the
automobile business: RMB 464 billion (baseline) /RMB 667 billion (better
scenario)
Ø
The total present value of the automobile
business: RMB 678 billion (baseline) /RMB 1.118 billion (better scenario)
Ø At this round, I don’t’ conduct deep research on batteries which will be covered next year. By adjusting peer’s P/E, I have applied 100 billion and 30 billion to the values of battery and IT units for the owner of the parent respectively out of prudency. The estimates are quite conservative comparing with the recent evaluation from CITIC Securities.
Ø
Weighted average number of used in computing: 2,911
million shares.
Ø
After deduction of debt, the price per share
based on DCF model is 273 RMB and 423 RMB for the baseline and better scenarios
respectively.
BYD was closed at 278 RMB on the 8th September 2022. For the first half year of 2022, the price of BYD was below 250 most of the time. It jumped to 350 in July and has displayed a downward trend since august. The market price of BYD has been under pressure for the same reason as for the other IT/automobile companies due to recession fears, high inflation, interest rate hike and the shortage of supplies. Chinese companies have also been affected by the intensified pollical environment. Furthermore, the first-time reducing holdings of BYD by Buffett sent negative signals to the market. BYD is an excellent automobile, batteries and IT manufacturer and plays a more and more important role in the global EV eco chain. I think BYD will perform well in the long run.
Validation of the results
In order to validate the appropriateness of the model assumptions,
I present the multiples to look at the solution from another perspective.
The third stage (terminal) is assumed as the mature period of the
company and hence its multiples are comparable with the industry level and
other mature companies, e.g., Volkswagen and Ford.
For the terminal period, justified P/E = 16 and justified P/S
=1.6. P is the terminal value of the
equity from the model. E and S refer to earnings and sales at the first year of
the terminal period.
According to statistics from MSCI World Automobiles Index[1] (APR 29, 2022),
fundamentals P/E=15.99 and P/E Fwd=14.31 for MSCI World Automobiles industry.
It seems the P/E from my calculation is close to the industry level which
implies the discount rate is acceptable.
The comparison with Ford and Volkswagen is in the previous post
-NIO.
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