22 October 2016
As new-energy vehicles business is a long-term investment, BYD's earnings could be kept in check in the near term. Photo: Bloomberg
As new-energy vehicles business is a long-term investment, BYD's earnings could be kept in check in the near term. Photo: Bloomberg

BYD: What lies ahead?

BYD Auto Co. (01211.HK) saw its shares surge 8.8 percent after resuming trade on Thursday. The stock closed at HK$59.3 amid heavy turnover. Shares worth HK$1.896 billion changed hands, 3.46 times the average seen in the last three months. And the company’s Shenzhen shares also hit daily up-limit before closing at 83.6 yuan.

The Chinese battery and automaker, which is backed by US billionaire Warren Buffet, has announced that it will issue up to 261 million new A-shares on the Shenzhen stock exchange at 57.40 yuan per share.

The share placement will raise 15 billion yuan, of which 6 billon yuan will be invested in Lithium-ion (Li-ion) batteries, 5 billion yuan in new-energy vehicles and 4 billon yuan for working capital and to repay bank loans.

BYD is a major beneficiary of China’s 10-year new-energy car drive. The world’s most populous nation is expected to have 5 million clean-energy vehicles by 2020, representing an annual growth rate of 100 percent between 2014 and 2020.

Last year, BYD sold 20,000 new-energy vehicles, accounting for 27 percent of the market share. And the clean-energy vehicle sales revenue soared 6 times to 7.3 billion yuan, generating up to 27.6 percent of its total vehicle business revenue.

The carmaker plans to sell 70,000 new-energy vehicles this year. It has already sold 8,724 such cars in the first quarter, a staggering 156.9 percent jump from the same period in 2014.

BYD’s plug-in hybrid Qin sedan has posted 165 percent sales growth in the first quarter, making it the most popular new-energy car in the mainland market. The company said it has received 5,000 orders for Qin sedan by March, and that it intends to expand the monthly output capacity to 3,500 in May from the existing 1,800.

China said it will cut subsidies on new-energy vehicles gradually. The government plans to cut the funding on electric cars and hybrid cars by 10 percent in 2017 from the level in 2016. It will then undertake another 10 percent deduction in 2019 from the 2017 level. By then, the industry will rely far less on government subsidies.

BYD also plans to ramp up its electric battery capacity to 8 gwh by the end of this year from 3 gwh in March. The battery capacity of its Qin, Tang, K9 electric vehicles is 13 kwh, 18.4 kWh and 320 kWh respectively. The capacity bottleneck could be tackled by 2016.

Currently, the Li-ion battery used in electric cars costs around 2,000 yuan per kWh in China, which accounts for 40 to 50 percent of the electric vehicle’s total costs. BYD estimates that the battery cost will be halved to 1,000 yuan after its capacity reaches 8 gwh.

The company will also benefit from the nation’s strategy to encourage Chinese companies to tap into overseas markets.

BYD is looking to invest up to US$100 million to establish a plant in Brazil capable of producing up to 4,000 electric buses. Meanwhile, it also won a bid to supply 15 new battery electric transit buses in Malaysia.

However, new-energy vehicles business is a long-term investment, and BYD’s second-quarter profit target is set in the modest range of 279-359 million yuan.

Given the limited earnings growth, the stock price could fluctuate in the near term.

This article appeared in the Hong Kong Economic Journal on June 5. 

Translation by Julie Zhu

[Chinese version中文版]

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Department of Investment Analysis at HKEJ

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