Auto Industry

Bust your dream

Is BYD still overvalued after brutal sell-off?

BYD Chairman and President Wang Chuanfu attends a news conference after announcing the company results in Hong Kong

Wang: once China’s richest man

For investors it wasn’t so much a case of “Build Your Dreams” as watch them shatter when BYD’s share price suddenly collapsed on December 18. The Hong Kong-listed group – which manufactures cars and rechargeable batteries – slid 46% in the space of 40 minutes at the beginning of the stock exchange’s afternoon trading session before closing the day down 29%.

Management acted quickly to try and squash rumours surrounding the rout. During a conference call, held after the market close the company – the name of which stands for Build Your Dreams – said there were no discernible reasons for the sudden sell-off.

BYD’s shares rebounded 14% the following day and since then, has gone on to claw back just over half the ground it lost on December 18. But at HK$29.55 per share (yesterday’s close), the company’s share price is still far below the HK$57.8 12-month peak it reached in early September. So what caused the rout?

Domestic commentators initially suggested BYD might be about to report losses because of the situation in Russia. Geely Auto had plunged 22% only two days earlier after announcing a probable 50% fall in its 2014 net income thanks to the collapsing rouble. However, BYD management said Russian sales would contribute less than $1 million of the company’s 2014 revenues.

They also batted away speculation that BYD’s chairman Wang Chuanfu could be under criminal investigation, pointing out that he had only just hosted a shareholder meeting the day before.

Further, BYD denied that Berkshire Hathaway had trimmed its 9.1% stake in the company. Commentators have long been waiting to see if and when Warren Buffett’s investment firm will take profits on the BYD shares it purchased at HK$8 apiece in 2008.

According to several Hong Kong newspapers, the mystery sell-off was related to a Shenzhen tycoon, who had accumulated more than 100 million BYD shares on borrowed money. A margin call, however, forced the diehard BYD fan to unwind the position of his favourable stock, and this was believed to have triggered the share price crash.

Then again, why have investors remained on the sidelines in the weeks since?

This has been attributed to BYD’s high valuation (73 times consensus 2014 price-to-earnings estimates according to Bloomberg data) and questions over policies on electric vehicles. In early December, Century Weekly reported the government might abandon its support for electric buses in favour of dual-powered trolley buses.

This would hit BYD hard since its flagship electric vehicle (EV) has long been its K9 electric bus. But BYD management told investors that sales remain strong and that the company’s EV battery plant is running at full capacity. Indeed, bottlenecks at the plant have been causing delays of three to four months in the delivery of BYD’s Qin plug-in sedan car, which has seen sales surge from 1,187 in the first 11 months of 2013 to 15,360 during the same period in 2014.

And the company’s optimism appears to have been well founded. At the end of December, the Chinese government announced that it would be extending its EV vehicle subsidies for a new period ending 2020. Subsidies will decline, but only in 2017 by 10% and then by a further 10% in 2019.

China is the world’s largest EV producer and consumer, but is running far behind the government’s target of getting 500,000 EVs on the road by 2015 and five million by 2020. According to Bloomberg, the country has so far only hit 12% of this target, with 53,000 EVs sold in the first 11 months of 2014 following a total of 17,000 in 2013.

The key issue is a lack of charging facilities. This may start to change in 2015 as the country begins to roll out its national EV charging network plan this month. China Merchants Securities analyst Wang Liusheng also tells the Securities Daily that 2015 should also mark a tipping point for BYD’s EV business.

He expects BYD’s EV sales to reach 60,000 units over the course of the year. If this is achieved, EV sales will finally account for half of BYD’s annual vehicle production revenues.

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