BYD Auto (BYDDY) became the world’s largest electric vehicle (EV) producer in 2023, a position it didn’t hold for long. It’s a company that is certainly weighed down by its China-related risk, however, evidence might suggest that this car maker is undervalued and underappreciated, and the stock has recovered from its February lows.
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Personally, I’m taking a neutral view on BYD. The stock might be appear undervalued, but I recently took delivery of a competitor’s SUV. My sentiment on the stock might be colored by my own experience of the brand, as BYD compares poorly on quality and price, in my opinion.
BYD Completes Denza Takeover
Let’s start with a brief introduction. BYD, a Chinese multinational corporation founded in 1995, has become a global leader in EVs, batteries, and electronics, and is potentially the most prominent challenger to Tesla (TSLA) even though I’m not convinced.
Until recently, the company was operating a joint venture with Mercedes-Benz (MBGAF) in China, but this changed on September 14, 2024, when BYD acquired full control, buying the remaining 10% stake in Shenzhen Denza New Energy Automotive — commonly known as Denza.
The joint venture had struggled with poor sales but has seen a significant upturn in recent years, coinciding with BYD increasing its stake to 90% in 2022. Denza’s sales figures reflect this turnaround with 9,978 units sold in 2022, representing a 108.61% increase from 2021.
However, these numbers have picked up further. In 2023, Denza sold 127,840 units, with the D9 becoming the annual MPV sales champion. For January-August 2024, sales reached 79,894 units, with the Denza D9 model alone contributing 71,342 units.
Mercedes’s decision to sell its stake possibly reflects concerns about increasing trade tensions between China and Europe, with the EU considering imposing up to 38.1% tariffs on Chinese electric vehicles. Meanwhile, BYD’s move arguably reflects the company’s confidence in its ability to manage and grow the Denza brand independently — after all, it’s the world’s largest EV producer.
So, is this a big deal? Well, I’d suggest the expansion of BYD’s stake in 2022 and the subsequent revival of the brand represent major successes for the Chinese company. The latest takeover was merely a consolidation of its control.
China Weighs on BYD Stock
As noted, the end of the joint venture is almost certainly linked to the worsening trade relations between Europe, more broadly the West, and China. This is a reason to be cautious, as I am here. BYD, which overtook Tesla as the world’s largest EV seller in 2023, has seen its stock price impacted by broader concerns about China’s economy and potential tariffs and government interventions.
While I’m not particularly bullish on China, I do appreciate that some of these concerns might be overplayed. China remains the world’s largest market for EVs, and the company is currently undergoing a huge expansion effort, bringing production to new countries.
However, there are tangible reasons to be concerned. The United States and Canada have implemented 100% tariffs on BYD’s exports from China, while the European Union has applied a lighter touch, with a 17.4% tariff that, according to research by Dutch bank ING will “give the automaker an advantage in the European market”.
Competition in China and BYD Quality Concerns
Moreover, there are signs of a slowdown in the Chinese auto market, with sales declining year-over-year for two consecutive months in June and July 2024. And while the EV market has generally remained strong, price competition is putting margins under pressure. BYD has handled these pricing pressures better than most in China, with a gross margin that is second to Li Auto (LI) and considerably stronger than Tesla.
However, as alluded to above, I’m personally concerned about the company’s quality issues, which have also been reported elsewhere. This isn’t necessarily a China issue, but Chinese goods don’t tend to have a great reputation. Moreover, having compared BYD’s and Tesla’s products, I found the latter’s offerings ti be substantially cheaper, and seemingly better built.
BYD’s Valuation is Strong
Valuation data supports the notion that China-related concerns weigh on the stock. BYD certainly isn’t expensive when we compare it with Tesla, the company it surpassed in 2023 to become the largest EV producer. The Chinese firm is currently trading at about 18x forward earnings compared to Tesla at ~97x.
However, when we compare BYD with its Chinese peers, it’s a different story. Neither Nio (NIO) nor Xpeng (XPEV) is profit-making, but Li Auto trades at 16.8x which represents a modest discount to BYD’s valuation.
Interestingly, and according to current forecasts, Li is expected to grow earnings faster than BYD. In fact, Li is estimated to be trading at 8.4x estimated earnings three years from now. This suggests that earnings could double for Li over that period. By comparison, BYD’s earnings estimates three years out imply a valuation of 11.4x.
While this article is focused on BYD, it seems a good time to note that Li Auto is my preferred choice. That company trades at a lower valuation while boasting more cash ($13.3 billion) than its much larger peer BYD ($9.7 billion). Li also has stronger margins.
Is BYD Stock a Buy According to Analysts?
Only 1 Wall Street Analyst covers BYDDY. BYD Company ranks as a Buy based on 1 Buy, 0 Hold, and 0 Sell ratings assigned by analysts in the past three months. The one BYD stock price target is $56.45, which reflects -9.8% downside potential.
The Bottom Line on BYD Stock
BYD is unquestionably cheaper than Tesla, although several things, including the Robotaxi, play a role here. The stock’s metrics are broadly attractive and, according to analysts, it’s undervalued by almost 35%. I believe concerns about trade wars and a slowing Chinese car market are overplayed. As such, BYD stock could be a great opportunity for value-hunting investors with an eye on growth. However, as I mentioned before, my personal opinion is cooler due to my first-hand experience comparing the brand to competitors.
