The Biggest Electric Vehicle Company in the World

If there’s a company out there that’s “the next Tesla,” it probably speaks Chinese. That’s what we concluded following our due diligence trip to mainland China during which we attempt to understand companies like NIO and Xpeng. In the past decade, China has gone from copying the leader to establishing their own global automotive leadership position, particularly for electric vehicles. Last year alone, China’s electric vehicle sales absolutely soared with BYD Company (1211.HK) now overtaking Tesla as the world’s largest producer of electric vehicles by number of vehicles produced.

Six of the top 15 electric vehicle producers are Chinese, and five of them saw triple-digit growth in 2022. Atop the leaderboard now sits BYD, a company that many investors became familiar with when Warren Buffett decided to invest in them back in 2017, something we covered in our piece titled Why Warren Buffett is Buying Snowflake Stock. Here’s what we said:

American investors will be pleased to hear that the Oracle of Omaha himself bought 10% of BYD about 9 years ago for $230 million on the thesis that “BYD has a shot at becoming the world’s largest automaker, primarily by selling electric cars.“ Buffet originally wanted 25% of the company but they wouldn’t give up that much which Buffet saw as a “good sign.“

Credit: Nanalyze

Cracking open BYD’s Interim 2022 Report (the latest and most accessible information to be found) and we see that Buffett still holds around 7.73% of BYD. But before we go further down the BYD rabbit hole, we need to ask a more important question. Why do we want exposure to electric vehicles?

Investing in Electric Vehicles

Green technology advocates mourning the demise of gas-powered vehicles need to visit some of the 171 countries in the world that aren’t developed markets. It will be a very long time before all the vehicles in the world are displaced with electric vehicles. We start to get excited when the frugal Chinese consumer talks about how cheap electric vehicles are when considering total cost of ownership. Indeed, the electric vehicle may be cheaper to operate – even without subsidies – in a country with some of the cheapest electricity in the world. Those fortunate enough to have a garage to park an electric car in to charge overnight may enjoy those TCO savings, but electric vehicles are still a developed market luxury.

Ultimately, investing in electric vehicles is just exposure to the $3 trillion automotive market. Tesla may be an exception if you consider their move into energy storage, home solar, or the self-driving thesis, which is where ARK sees the most value coming from. BYD’s foray into autonomy is a whole different rabbit hole to explore, but we do know they offer (decreasing) exposure to consumer electronics and batteries (more on this in a bit), which is why it’s always important to understand how a company generate revenues.

It all comes down to this. If you want to invest in electric vehicles, you’re always better off betting on the leaders. And this past year, BYD has emerged as a clear leader in electric vehicles with 78% of their revenues coming from mainland China. Consequently, an investment in BYD – as it sits today – is also a big bet on the Chinese consumers’ appetite for electric vehicles.

Investing in China Electric Vehicles

In 2014, Xi Jinping decided that development of electric vehicles was the only way his country could transform “from a big automobile country to an automobile power.” He must have recognized the size of the opportunity in his own backyard. China has more passenger vehicles in the road than any other country with total passenger cars and trucks registered at around 319 million units. As of June 2022, China had the largest stock of highway legal plug-in passenger cars with 10 million units, 46% of the global fleet in use. That puts EV penetration at around 3%. The domestic opportunity alone merits a look, not to mention the global opportunity.

Some might look back at BYD’s +776% return over the past decade as a missed opportunity (the Nasdaq returned “just” +408% over the same timeframe). Others might see the opportunity looking forward as a reason to invest in the company now. We believe BYD’s recent emergence as a global leader in electric vehicles means they’re more appealing now than ever. Perhaps the biggest risk is finding the right metrics to monitor and believing them.

BYD’s filing documents are formatted in a manner that U.S. investors aren’t accustomed to which poses an information problem which needs to be navigated. That’s just one of the problems with investing in Chinese stocks. Skeptics might question the massive jump in BYD’s sales numbers (Great Leap Forward anyone?), and they’d be wise to. We’ve warned about how investing in China is a different animal. From shadow banking to VIE structures, the Chinese equity markets are rife with landmines. Nearly all Chinese tech firms trade abroad using risky VIE structures while BYD trades as an H share. With that key risk removed, we’re able to invest in a company that will benefit from the increased spending power of the Chinese consumer, but that requires a great leap of faith in the financial numbers being reported by BYD.

Over 50% of Chinese respondents were considering battery-electric vehicles as their next car in 2021, the highest proportion in the world, and two times the global average. That’s from an article by MIT that talks about how the Chinese government has been a key driver of domestic EV growth by offering “generous government subsidies, tax breaks, procurement contracts, and other policy incentives.” Any deviation away from that focus could impact firms like BYD that enjoy these perks.

Investing in BYD

Buffett must feel vindicated as BYD emerged last year as the biggest EV company in the world, especially when you consider the below diagram, which shows how EVs went from 52% of total revenues to 73% of total revenues in just one year.

Human nature means everyone will tend to look backwards in time and reflect on the missed opportunity. One could argue that prior to last year, this was a “skate to where the puck will be” opportunity, and only now are investors receiving the electric vehicle exposure they were looking for. BYD’s plans to push into the European market – manufacturing there to avoid import tariffs – means that the potential for this $100 billion company is only starting to be realized. At a simple valuation ratio of less than two, it’s hard to argue they’re overpriced. Having to purchase shares on the Hong Kong Exchange means many retail investors won’t find the company accessible, though opening an Interactive Brokers account quickly solves that impediment.

Our exposure to China largely involves some funds we’re holding domiciled in Hong Kong, and we’ve completely steered clear of investing in VIE structures following our exit of Ali Baba at quite the fortuitous time. With BYD trading as an H share, and emerging as a leader in electric vehicle sales that’s only getting started on selling internationally, it’s tempting to open a position here after perhaps one more deep-dive. With minimal penetration domestically, BYD’s leadership position will allow them to dominate the hundreds of local competitors. When firms go bankrupt trying to compete, BYD can step in and pick up their assets at a discount. It remains to be seen if they can compete at a global level without relying on the CCP for support.

Perhaps the biggest problem would be the information gap that accompanies investing in a foreign firm. For example, BYD is expected to become a leader in lithium battery production, something we covered in our piece on The 8 Biggest Lithium Battery Stocks of 2028. The current financial reports don’t break these numbers out, so we’re not privy to the progress being made here. Perhaps its all for internal use only? After all, 40% of the cost of an electric vehicle is the battery. Contrast this to Tesla which clearly spells out how much revenue they’re realizing from energy storage, or anything else their dabbling in besides electric cars. Speaking of which, plenty of people are trying to find “the next Tesla,” so let’s talk about that.

BYD vs Tesla

Back in 2017, Tesla was just a $50 billion company with $7 billion in revenues while BYD was a $16 billion company which brought in twice the revenues Tesla realized. Here’s how these firms compare today. (Market cap and revenues in billions, SVR = simple valuation ratio.)

BYD may be selling more vehicles, but Tesla is the largest pure-play manufacturer of vehicles by both market cap and revenues, especially if we take BYD’s total revenues (seen above) and subtract the approximate $14.6 billion in mobile handset revenues. But Tesla is more profitable, and that points to Elon Musk’s biggest stated advantage – manufacturing. Perhaps the Chinese are learning more about that advantage given Tesla’s biggest factory now sits on the Mainland.

If you’re going to invest in electric vehicles, you’re better off avoiding any companies trying to play catch up with BYD in China, or with Tesla in the United States. You’ll be best served judging BYD on its own merits, something that probably requires a follow up article because we’re now reaching our word limit and it’s Friday afternoon. Time to remedy our Thirsty Thursday hangovers with a beer or seven.

Conclusion

An investment in BYD means exposure to Chinese electric vehicles being sold to Chinese consumers, though international expansion is in the cards. Looking past the meteoric rise of BYD’s shares over the past five years and there’s an opportunity for much more growth to follow should they continue dominating domestically and start dominating abroad. The problem is that holding a stock like this requires a great leap of faith in the numbers being reported, not to mention all the extra work that goes into digging up the necessary information. We may pose the question to our audience, in particular, our paying subscribers. Do you think BYD is worth pursuing based on what we’ve talked about today?