Falling oil prices, high valuation blamed for BYD rout

December 19, 2014 16:37
BYD is seen as an overvalued stock that lacks strong earnings support. Photo: Bloomberg

Shares of electric-vehicle maker BYD Co. (01211.HK) tanked because of falling oil prices, the Hong Kong Economic Journal reported Friday, citing its investment analysis department.

Crude oil price has plunged to as low as US$55 per barrel from more than US$100 back in June.

Falling oil prices are expected to hit sales of new energy cars as lower fuel costs will encourage potential car buyers to opt for vehicles that run on gasoline or diesel.

Mainland China has seen gasoline prices cut nine times since July 21, or by a total of 1,685 yuan (US$270.75) to 7,295 yuan per metric ton.

The 20 percent drop in gasoline price will definitely reduce the attractiveness of electric cars, the newspaper said.

Shares of BYD, which had been on an upward trajectory since October 2012, started declining in early December.

News that the government may replace its fleet of electric buses with hybrid trolleys has also put pressure on BYD shares.

BYD is an overvalued stock that lacks strong earnings support, the report said, adding that the market has been overly optimistic about the sales outlook for new energy cars on the back of policy support.

Sharp oil price correction, limited cost effectiveness of green energy vehicles, plus price correction of its US counterpart Tesla all triggered the panic sell-off, according to the newspaper.

Since September, Tesla shares have dropped 30 percent to US$200.

HKEJ columnist Yu Choi-hing said: “Just like companies such as Tesla and Amazon whose PE is over 100 times, BYD is selling a dream instead of green cars. And the dream has become unrealistic amid sliding oil prices.”

As of June, BYD’s revenue rose 4 percent to 25.2 billion yuan from a year earlier, while its gross profit increased 14.3 percent to 3.77 billion yuan. However, net profit fell 15.5 percent to 361 million yuan during the period.

Administrative expenses grew 20 percent to 1.18 billion yuan while financing costs jumped 54 percent to 680 million yuan.

Given those figures, BYD has nothing much to support its high valuation, Yu said.

He also noted that its first-half profit of 361 million yuan included 328 million yuan of government subsidy.

Yu's recommendation: If BYD shares rebound, cash out.

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Freelance journalist