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It’s not Tesla in BYD’s sights – it’s the whole car industry

In contrast to Tesla, which racked up years of losses before turning profitable in 2019, it has hardly ever posted negative operating income – and in the September quarter came within a whisker of the reinvigorated US company’s $US1.76 billion ($2.6 billion) result.

By owning its own battery supply chain and focusing on cheaper, less zippy cells that use abundant iron and phosphate instead of scarce cobalt and nickel, it’s managed to lift margins even as materials costs rose.

That translates into industry-beating financial performance. Most Chinese car companies post uninspiring single-digit returns on equity, giving shareholders little reason to prefer their stock to investment-grade corporate bonds that yield 5.8 per cent.

BYD, on the other hand, is spitting out profits that have led to the best returns on equity among major car makers worldwide.

Returns on invested capital, a metric that encompasses how successful the company is at generating profits from its asset base, are also the best among volume car makers worldwide, and have risen consistently for the past 18 months to overtake Tesla.

You might expect this performance would induce the sort of shareholder euphoria that has caused Elon Musk’s company to be valued at a 64-times forward price-earnings ratio. Far from it: while BYD’s 13.5 ratio is a premium to the 7.95-times P/E ratio on the Hang Seng Index, it’s priced at a discount to India’s Tata Motors and the 19.7-times multiple of the S&P 500, and not far above mainstream automakers such as Toyota and Ford.

After a $US12 billion selloff during November, BYD is as cheap as it has been going back to the start of 2010, despite 31 out of 32 analysts putting a Buy rating on the stock.

The most substantive argument against BYD right now is that it has grown too far, too fast. Despite overtaking Honda, Toyota and Volkswagen to snatch the crown as China’s best-selling car marque over the past few years, its vehicles aren’t exactly rushing off dealership lots: there were 1.91 cars sitting in inventory for every one that was sold in November, a number that’s grown from 1.04 a year earlier even as prices have fallen about 6.2 per cent.

This is high even by the standards of a Chinese industry that’s plagued with oversupply, and suggests flagging consumer appetite for vehicles that most reviewers seem to find more stolid than compelling.

That’s a small negative when placed against the wealth of positive metrics BYD can now boast – and if you think boring cars don’t have a future, it’s worth remembering that the best-selling four-wheeler in history is the Toyota Corolla, or that this entire industry was kicked off by a vehicle that, famously, was usually only available in black.

BYD is already setting its horizons well beyond China, with one in 10 of its cars sold overseas during December, compared to one in 40 in July 2022. The EV maker announced a new assembly factory last month in Hungary, and others are reportedly under consideration in Mexico. Such investments would mirror Japanese and South Korean car makers, who got around protectionist tariffs since the 1980s by building production lines in key destination markets.

If its current trajectory is anything to go by, BYD’s relatively little-known status outside China is about to change drastically. In years to come, we’ll look back on 2024 as the year it joined the ranks of Tesla, Hyundai, Toyota, Volkswagen and Ford as formerly obscure car brands that went on to bestride the world.

Bloomberg Opinion



This article was originally published by a www.afr.com . Read the Original article here. .

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