Dream cars are electric
The mainland vehicle maker BYD is so far struggling to make its dream of leadership in electric cars and buses a reality. Two top analysts put the case for and against
Janet Lewis and Leping Huang
BEAR: JANET LEWIS
BYD, whose initials stand for "Build Your Dreams", has built its dream on becoming China's leader in electric vehicles, the new-energy solution that mainland authorities have chosen to back in hopes of championing a made-in-China answer to both looming shortages of fossil fuels and the environmental challenge posed by a billion-plus people wanting their own set of wheels.
Despite generous subsidies of up to 120,000 yuan (HK$150,000) per vehicle, however, electric vehicles have failed to capture the imaginations of consumers.
Only 11,375 electric vehicles were sold in 2012 out of a car market of close to 20 million. BYD's leading product, the e6, recorded sales of just 1,690, most of which were to a taxi company owned by the Shenzhen government. The short range of most electric vehicles, the high sticker price (the e6 sells for 180,000 yuan after subsidies), a lack of charging stations and an absence of environmental consciousness among Chinese car buyers are likely to continue to weigh negatively on sales for the foreseeable future.
There are green shoots of a recovery emerging, but it remains to be seen whether BYD can make money. To its credit, it has restructured its dealer network, closing a third of its dealers. It has refreshed its product line-up and met modest success with the S6 SUV, now the second best-selling SUV from a domestic Chinese brand. Its new compact cars, L3 and Speed, have also been well received by the market. Two promising vehicles on display at the Shanghai Auto Show in April were the S7 mid-sized SUV and the Sirui mid-sized car. It has become more focused on quality, which was reflected in improved ratings by JD Power's Initial Quality Survey in 2012.
In 2012 BYD would have reported a loss without the 550 million yuan in government subsidies that it received. We expect sales of new vehicle models to help BYD post 18 per cent volume growth in 2013. However, profitability is likely to remain low in this very competitive business. Losses in the solar storage and battery business should narrow, but red ink is likely to persist.
It thus boils down to valuation. Even with profits recovering, BYD's shares are currently trading on a prospective price/earnings ratio of 60 times, versus an average of about 12 for other Chinese automotive brands. On Macquarie forecasts, it is still on 30 times estimated earnings for 2015.
To be more positive, we would have to see major restructuring, such as a divestment of the electronics or solar storage businesses. With no signs of this, we remain bears on the outlook for BYD's share price.
Janet Lewis is a Macquarie analyst covering BYD
BULL: LEPING HUANG
We expect BYD to achieve modest earnings growth in 2013 followed by a 65 per cent surge in 2014. The upbeat outlook is based on signs that its fortunes are on the mend, helped by financial statements that show earnings above break-even since the third quarter of 2010.
First, watch for a big improvement in conventional car sales. BYD has successfully refreshed its portfolio with new models, including two new petrol-powered cars.
The Surui compact car, which lists at a manufacturer's suggested retail price of 66,000 yuan, is targeted at budget-conscious consumers. The Sirui mid-sized car, featuring a turbocharged 1.5 litre engine, hi-tech driver aids, and a manufacturer's suggested retail price of 150,000 yuan, shows that BYD is clearly confident it can make inroads among well-off consumers. The vehicle ranks as BYD's most expensive conventionally-powered model. We also take a favourable view on the prospects for the S7 SUV, a follow-up to the popular mid-sized S6, and which features a powerful 2-litre turbocharged engine. BYD's efforts to consolidate its dealer network have also helped to boost sales, and led to improving market share since last autumn.
We also see signs that BYD's electric vehicle business is gaining traction in China and other export markets amid rising environmental consciousness.
BYD's e6 electric taxis took to Hong Kong streets for the first time last month, part of a batch of 45 vehicles that will be refuelled at charging stations throughout the city. BYD has leased the vehicles to taxi companies as part of a trial, but eventually hopes to ramp up sales. BYD's chairman, Wang Chuanfu, said in March he expected the fleet to grow to 3,000 taxis by the end of 2015. Hopes that electric cars will take off in China are also being helped by the central government's target of getting 500,000 such vehicles on the road by 2015. Meanwhile, BYD announced last month that it will open a factory in California to produce as many as 1,000 plug-in electric buses a year.
Expected sales from these green vehicles will be booked to fiscal 2013 results. We also expect earnings in fiscal 2014 to be helped by the launch of Denza, an electric vehicle being developed jointly with Daimler.
Second, BYD's mobile phone components business is also enjoying a recovery. The turnaround has been helped by improving momentum at Nokia, its largest customer, thanks to the Finnish handset maker's new Lumia-series smartphone.
Most importantly, we think BYD management did not make any major strategic errors during the down-cycle in spite of shareholder pressure to sell parts of its core businesses. Instead, their efforts to restructure these businesses look set to pay off.
Finally, we think risks that BYD could issue 20 per cent new shares in Hong Kong, as reported by Bloomberg in March, could be part of an as yet unannounced strategy to raise funding for a new battery factory to keep up with the expected demand surge for electric vehicles.
Leping Huang is a Nomura analyst