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BYD: At The Crossroads Of Genius & Opportunity

2002

A Shenzhen-based manufacturer of lithium-ion (“li-ion”) and nickel rechargeable batteries, BYD enjoys a huge tailwind due to the booming usage of mobiles, electric and electronic devices. The company already ranks as the third li-ion batteries manufacturer worldwide.

(CNY in millions)

1999200020012002
Revenue4158721,3052,291

2003

Dramatic surge of demand for li-ion batteries driven by mass adoption of mobiles, notebooks and other devices. In order to foster closer relationship with their customers, management consents to give up a slice of their profit margin and focuses on selling “packed batteries” rather than cells.

Leveraging its strong foothold in the battery business, BYD also expands its scope of activities towards the production of mobile handset components — display, plastic housing, tooling, etc.

In addition, the group acquires a 77% stake in Xian Qin Chuan Auto, rebrands the latter into BYD Auto, and proceeds to sell up to 15,400 petrol cars.

(CNY in millions)

Batteries & Handset componentsAutomobile
Revenue3,553510
EBIT96013
Margin27%2.5%
Net assets3,025409

2004

BYD becomes the world’s largest manufacturer of nickel-based batteries, and the second largest manufacturer of li-ion batteries.

In its handset components business, BYD now manufactures keypads, camera lenses, LED displays, flexible printed circuits, etc. and provides customers with a complete, vertically-integrated solution from design to engineering and assembly.

The group also acquires an additional 15% equity interest in BYD Auto — aiming to use the latter as a platform to develop battery-powered vehicles — and sells 14,800 petrol cars.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue5,097939389
EBIT1,106118(48)
Margin21.7%12.5%neg.
Net assets3,523205376

2005

BYD further increases its equity interest in BYD Automobile Company Limited to 99%, then proceeds to launch the F3, its first self-developed sedan. A total of 15,993 cars are sold during the year, among which 4,934 F3s.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue3,9631,906629
EBIT571281(91)
Margin14.4%14.7%neg.
Net assets3,470586285

2006

The F3 turns a hit in China. BYD now sells up to 55,038 vehicles, among which 46,307 F3s.

The handset components business grows larger than the legacy battery business. BYD becomes a true one-stop supplier for global manufacturers, enabling them to cut costs and rationalize their supply chains.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue4,5675,1343,232
EBIT411901116
Margin9%17.5%3.6%
Net assets3,2243,1202,846

2007

BYD Auto sells 85,942 vehicles, among which 84,021 F3s.

Consolidation in the handset industry brought opportunities for suppliers with vertically-integrated manufacturing and service plat- forms. Riding this favorable trend, BYD spins-off a ~35% stake in its mobile components and assembly services business — branded as BYD Electronics before it got listed in Hong-Kong — and raises ~HKD $1bn to fund capacity expansion.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue7,1479,1874,872
EBIT7561,073257
Margin10.5%11.6%5.3%
Net assets2,66610,1265,138

2008

BYD Auto launches new models — the premium F6 and F8 series, as well as the compact F0 — and sells 170,000 vehicles, among which 140,000 F3s. Decline in the legacy rechargeable batteries business is offset by steady growth in the components and assembly services business.

Encouraged by favorable reports from Li Lu and David Sokol, MidAmerican Energy Holdings, a subsidiary of Berkshire Hathaway, acquires a 9.89% equity stake at HKD $8 per share. BYD pops on the map, strengthening confidence of investors and global partners alike.

Absent the Berkshire connection, however, the group would likely have experienced serious trouble to raise capital on markets frozen by the financial crisis.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue6,20711,9338,646
EBIT644683503
Margin10.3%5.7%5.8%
Net assets3,7189,2698,548

2009

BYD launches two new models — the G3 and the S8 — as management foresees huge opportunity in the domestic market, where strong demand and low penetration coexist. Vehicles sales hit 450,000 units, among which 290,000 F3s.

In July, BYD acquires Hunan Midea Coach Manufacturing Company Ltd. to accelerate its capabilities in the development of electric buses.

Meanwhile, the legacy battery business suffers (-31% in sales) from difficult economic conditions worldwide.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue4,32014,63121,010
EBIT5297763,513
Margin12.2%5.3%16.7%
Net assets4,0029,2297,341

2010

BYD sells 500,000 vehicles and enters into a memorandum of understanding with Daimler, pursuant to which both parties will cooperate in China to develop passenger vehicles powered by electric motors.

In the handset components business, management claims that its vertically-integrated model has created a sustainable price advantage — an assertion backed by impressive results indeed.

(CNY in millions)

Batteries ComponentsAutomobile
Revenue5,19921,20422,733
EBIT2521,6071,743
Margin4.8%7.5%7.6%
Net assets8,1029,41315,519

2011

BYD sells 437,000 vehicles (a 13% decline) and launches three new models: the S6, the G6 and the much-awaited electric E6.

In Shenzhen, 300 E6 operate as taxis while the K9, an electric bus, is tested with great success. Encouraged by the pilot program, the city orders 200 K9. Simultaneously, meaningful efforts are undertaken to expand the electric vehicles business overseas.

In the battery business, operating results get depressed by oversupply in the solar photovoltaic markets. To pave the way for future growth, BYD actively develops lithium ferrous phosphate (“LFP”) batteries, a breakthrough product designed for applications in electric vehicles, energy storage stations, photovoltaic power plants, etc.

In the handset components business, growth comes to a halt for the first time.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue5,70420,59923,968
EBIT(121)1,0351,898
Marginneg.5%7.9%
Net assets10,09911,77118,720

2012

BYD sells 420,000 vehicles. 800 E6 electric taxis and 200 K9 buses are deployed by five municipalities in China; the K9 is also put on trial in several markets abroad. BYD Daimler launches its first electric vehicle, christened Denza.

Inter-segment sales boost the battery business but the photovoltaic industry remains toxic, as global oversupply persists while both the EU and the U.S. implement anti-dumping investigations into the heavily subsidized Chinese solar industry.

The components business, for its part, tanks as a side effect of the global recession.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue6,46717,15522,551
EBIT(160)4381,058
Marginneg.2.5%4.7%
Net assets9,93111,07019,653

2013

BYD Auto sells 470,000 vehicles and launches several new models, including the Qin, an eye-catching, plug-in hybrid sedan with an all-electric range of 70km.

Yet the vast majority of vehicles sold by BYD remain powered by gasoline. Deployment of E6s and K9s stays unchanged despite orders from overseas customers, for instance the Schiphol Airport in Netherlands, or the Long Beach Transportation Agency in California.

Research and development of LFP batteries carries on, with potential applications across all business lines and strong government support.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue5,01819,45925,290
EBIT1011,111825
Margin2%5.7%3.2%
Net assets11,67514,70620,078

2014

BYD sells 373,000 vehicles (a 21% decline vs. 2013). Sales of “new energy” vehicles grew ninefold nevertheless. Satisfactory level of orders for both the Qin and the Denza. 850 E6 taxis and 780 K9 buses have been deployed.

The legacy li-ion and nickel businesses drop, due to fierce competition, oversupply and pressure on prices. The strong growth in the overall battery business is related to inter-segment sales with the auto business.

The development of LFP batteries carries on. In the handset components business, BYD self-developed a plastic-metal hybrid (PMH) technology to design casings that was very well-received by global manufacturers. Management sees “enormous market potential”.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue8,29625,29428,005
EBIT1061,406758
Margin1.2%5.5%2.7%
Net assets10,51412,78032,045

2015

Total vehicles sales reach 380,000 vehicles, among which 320,000 are fuel-powered. But the Qin and the recently launched Tang rank among the best-selling plug-in hybrid cars in China.

BYD’s “new energy vehicles” sales grew threefold. New orders for the K9 buses but no more specific data given on the numbers of K9 and E6 taxis actually deployed.

The battery business keeps growing due to intersegment sales. BYD builds the world’s largest manufacturing base dedicated to LFP batteries.

Strong momentum in the handset components business following the adoption of metal casings by manufacturers — as announced by management the previous year.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue14,03034,51941,144
EBIT9881,2763,691
Margin7%3.7%8.9%
Net assets10,86513,24644,350

2016

BYD sells 326,000 vehicles, among which 96,000 electric cars — a fifth of the total sold in China — and launches Skyrail, a cost-efficient, eco-friendly, high-speed mass transit monorail system.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue18,10840,07757,816
EBIT1,2871,7456,074
Margin7.1%4.3%10.5%
Net assets13,20713,45664,193

2017

BYD sells 355,000 vehicles — which represents a 1.2% domestic market share — among which 110,000 electric cars. Neat pattern of slower growth in sales of electric vehicles (from +800% in 2014 to 14% in +2017), apparently lagging market (+53%).

New orders for the K9 buses from China and overseas. BYD has almost singlehandedly electrified Shenzhen’s fleet of 16,000 buses and is now at work on the full-scale replacement of the city’s taxis and trucks — an outstanding feat about which the group is surprisingly quiet about.

New energy vehicles and Skyrail became management’s strategic focus. The battery business is firing on all cylinders but remains largely driven by inter-segment sales.

(CNY in millions)

BatteriesComponentsAutomobile
Revenue18,12541,59257,815
EBIT1,1523,1413,479
Margin6.3%7.9%6.4%
Net assets15,62114,37177,815

H12018

BYD sells 303,658 vehicles in the first six months of the year, among which 115,515 new energy vehicles — sharp growth is back. In a like manner, sales of electric buses grow fivefold thanks to numerous orders from overseas.

General Observations

Restless expansion

BYD is consistently unprofitable in terms of cash earnings distributable to shareholders (“free cash-flow”), except in 2002, 2009 and 2012.

All profits got reinvested into the three businesses — along with the ¥44.7bn raised over the period — and directed towards expansion of production lines. These investments have been incredibly successful, boosting top line from ¥1.2bn CNY in 2001 to ¥102.6bn CNY in 2017 — a compound annual growth rate of 36%.

In particular, profits from the components business funded expansion of the auto business, where capital expenditures are enormous. High capex levels should be expected in the future, as BYD competes with automakers and battery manufacturers — CATL, Panasonic, etc. — in a race to achieve superior scale.

Masterful turnaround

Facing the same issues than competitors, the legacy battery business (li-ion and nickel) was going under. Management masterfully turned it around, as they recalibrated its purpose to manufacture batteries for the auto business (now 60% of segment sales) and other energy storage applications.

Profits from the handset components business fund expansion of the auto business, in which capex is enormous.

Top contender but competition ramps up

BYD sold more electric vehicles in 2017 (110,000) than Tesla (102,000), BMW (100,000), the Renault-Nissan-Mitsubishi Alliance (91,000) or General Motors (69,000), but all automakers — some with a much richer manufacturing experience than BYD’s, and certainly a more appealing brand image — are heavily investing in their electric offerings.

Integrated supply chain

Besides its peculiar engineering culture, what separates BYD from its peers, however, is its wholly-owned and integrated supply chain, from the lithium mines in Tibet to its extensive manufacturing base for batteries, , where as other automakers will depend on external suppliers for both batteries and raw materials.

After its gigafactory reaches completion next year, the group will boost its capacity to 60GW/h, an output similar with the Tesla-Panasonic’s own gigafactory in Nevada. Such vertically-integrated business model should provide the same kind of cost advantage it did within the handset components business — this is why battery manufacturers are all engaged in a brutal race to reach scale.

Core competency

BYD’s core competency has always revolved around batteries. They’ve built upon this know-how an impressive, diversified portfolio of “new energy” products such as passenger vehicles, public transportation buses and monorails, stationery storage systems for residential, commercial and grid-scale applications, etc.

Should one these ventures fail, others will make up for it. If the auto venture fails, BYD could become a battery supplier to other automakers.

State support

BYD’s spectacular growth has been achieved with the aggressive backing of government’s policies — by means of cheap finance, subsidies, restrictions on foreign rivals, etc. — as China seeks to become a clean energy superpower.

Cities are following suit nationwide, with Beijing announcing plans to convert its fleet of 70,000 taxis to electric vehicles over the coming years, and the city of Taiyuan converting its entire fleet of over 8,000 taxis to fully electric BYD E6 vehicles. Shenzhen itself has committed to fully electrifying its taxi fleet this year.

Reliant on subsidies

BYD said it expects net profit for the first half of 2018 to fall by between 71% and 82% compared to the previous year on the removal of subsidies. If subsidies ever get cut for good, production of electric vehicles may prove uneconomic.

To some extent, China’s approach to sponsor mass production of batteries echoes the strategy it followed on solar power a decade ago, which indeed drove down the costs at the manufacturer level, but at the expense of the global industry, still uneconomic to this day.

Betting the farm

Overall, the bet heavily relies upon a man in particular — Wang Chianfu, BYD’s founder and CEO — and a technology — LFP batteries. So far, Mr. Chianfu and his teams have been incredible in anticipating the future — back in the 90’s before the mobile revolution, as well as in the early 2000’s before the electric vehicle revolution — and building up world-class businesses from scratch.

These feats, albeit formidable, do not guarantee that the future will be equally bright.

Comments of Note

From Li Lu, Himalaya Capital, at the 2013 Daily Journal shareholders’ meeting:

It really is a quite unusually talented group of people. Like all other talented people, they have their ups and downs. But in the first 15 years since BYD was founded, it had a 15 years uninterrupted period of compounding at about 75 percent annually. It’s nearly doubled every year for 15 years in a row with very, very little capital.

Of course, that growth was accumulated with all sorts of different problems. And just like they have always done, they have dealt with them. They have put their heads in the sand and solve the problems, one-by-one, slowly but surely. They’re now back on their feet and strong. And the speed at which they really mastered the technology, it’s just unprecedented. I’ve never seen anybody like it. For example, they got into the auto business in 2003, and produced their first car in 2005. And they did this with little capital, and they competed with everybody.

The Chinese auto market is about as open a market as any market in the world. Every auto maker on the whole planet is competing there. They all have much richer capital base, longer history, well recognized brand name and superior technology.Yet this little company was able to really stand on its feet. But more importantly, they have a mastery of the state-of-the-art technology from the traditional auto while really pioneering all the technology of the new cars and electric cars. It is not a normal feat. I cannot find it in any other group in this field.

They have basically, I think correctly, chosen to focus, and going to treat the car effort into public transportation. China has 7 of the 10 worst polluted cities on the whole planet. Public transportation contributes roughly a third of the emission. Electrifying the public transportation with BYD has proved doable, profitable, and actually good and providing enormous social benefit. They’re correctly pushing in that direction, not only in China, but all over the world.

Li Lu, in Graham & Doddsville Newsletter, 2017:

The story of BYD is relatively simple. This guy [Wang Chuanfu, BYD’s founder and CEO] who is a really terrific engineer, started the business from just a $300,000 loan with no additional money until the IPO. He created a company with $8 billion in revenue and 170,000 employees and tens of thousands of engineers. He solved a whole bunch of different problems. So the record is impressive. They also happen to be in the right industry and the right environment, and they get the right support from the government.

Their engineering culture consistently demonstrates its ability to tackle big, difficult problems. It works. They play in a big field with open-ended possibilities and have a reasonable chance of being successful. As I said, nothing is a sure thing, but this strikes me as having as good of a chance as any. This investment is not easy to understand because it is changing so fast, at such a large scale. At the time we invested, we had quite a bit of a margin of safety.

Charlie Munger, at the 2018 Daily Journal shareholders’ meeting:

BYD has developed into a huge company. Now it’s got 250,000 employees more or less. It has a huge electric car business, a small gasoline car business, a huge battery business, a huge new lithium mine coming into production near Tibet. So we have an interesting venture capital type business, and BYD has gone into a business they were never in before, which is monorails. And they are selling monorails like you can’t believe. Boom-diddy, boom-diddy, boom to whole cities in China. And some even in other countries. And they’re also selling those big electric buses, and so on.

This guy [Wang Chuanfu] is a combination of Thomas Edison and Jack Welch — something like Edison in solving technical problems, and something like Welch in getting done what needs do. I have never seen anything like it.

Charlie Munger, at the 2017 Daily Journal shareholders’ meeting:

I got into BYD as it got pounded so hard, it was a Graham-type stock. A Graham stock in a start-up company.

Actionable Advice

Company impossible to value with precision. Buy like Munger and Li Lu: with a margin of safety, as a Graham stock if (when) trouble hits China and its economy.

Growth Record

(Segment revenue, CNY in millions)

BatteriesComponentsAutomobile
1999415--
2000872--
20011,305--
20022,291--
20033,553-510
20045,097939389
20053,9631,906629
20064,5675,1343,232
20077,1479,1874,872
20086,20711,9338,646
20094,32014,63121,010
20105,19921,20422,733
20115,70420,59923,068
20126,46717,15522,551
20135,01819,45925,290
20148,29625,29428,005
201514,03034,51941,144
201618,10840,07757,816
201718,12541,59257,815
CAGR23.3%33.9%40.2%
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