The Chinese EV manufacturer BYD sells more electric cars than anyone other than Tesla. This year it may well sell more pure EVs than its U.S. rival and also sells hybrid vehicles. BYD was founded in 1995, originally as a battery maker before it expanded into cell phone assembly and solar cell manufacturing.

Founded by Wang Chuanfu, who was once the richest man in China and still chairs the company and is its largest shareholder with about 19% of the company, the Shenzhen-based company is worth about $110 billion. Despite share price gains of almost 350% over the past 5 years, BYD is worth a fraction of Tesla, whose current market cap sits just shy of $650 billion.

At the end of January the company, which is listed on both the Shanghai and Hong Kong stock exchanges announced it expects 2022 sales of 1.86 million cars, for a net profit of 16-17 billion yuan ($2.37-$2.52 billion). That more than five times the 3 billion yuan it booked in 2021.

While its sales of pure EVs still trail Tesla by about 400,000 units globally, BYD’s sales of its best selling Qin and Han sedans increased by 82.6% and 132.2%, respectively, in 2022, according to the China Passenger Car Association. The industry body reports sales of Tesla’s those of Tesla’s Model 3 fell by 17.5% over the same period. In December, BYD sold significantly more plug-in vehicles than Tesla with 228,508 to 173,615.

Source: CleanTechnica

Tesla is still more profitable than BYD, banking net revenues of $3.7 billion on $24.3 billion in revenue. However, the American company is worth 491% more than its up-and-coming Chinese rival despite its profit last year only being 48% more profitable. And it wouldn’t be a big surprise if BYD overtakes Tesla on revenue and profit figures at some point over the next few years.

With Hong Kong-listed shares relatively accessible to UK-based investors through many major stock brokers, is BYD worth considering based on how much better value the company’s stock looks compared to Tesla’s?

BYD is probably the most important car manufacturer you’ve never heard of

Despite its rapid growth to become the world’s second biggest seller of EVs, and likely soon to be the biggest, most people in the UK won’t have heard of BYD. However, they soon will be more familiar with a marque that last year sold so many EVs it became China’s third largest car manufacturer.

BYD made a series of announcements on new markets at the end of 2022 and will start selling its electric and hybrid vehicles in, among others, Japan, Mexico, Sweden and the UK. The company already started selling vehicles in European countries including Norway, the Netherlands, Belgium and Denmark last year.

The first model to be launched in the UK will be the company’s Atto 3 SUV, which will shortly be available via Pendragon, Arnold Clark, Lookers and LSH dealerships. The company is reputedly targeting another year of runaway sales growth with unofficial reports suggesting management believe 4 million vehicles to be ambitious but possible. That would more than double 2022 sales.

Most of BYD’s vehicles cost less than $30,000 in China compared to a starting price of over $37,000 for Tesla’s Model 3. However, last year the Chinese company released a high-end line of EVs that, according to The Washington Post

“bear resemblance to Land Rover’s Defenders or Mercedes-Benz Group AG’s G-Wagons, move like Lamborghinis, and could cost over a 1 million yuan ($147,721).”

BYD will almost certainly quickly become a well-known brand in the UK and Europe over the next few years as moves to blow Tesla and traditional automakers away on global EV sales numbers.

What’s the secret to BYD’s rapid growth?

A recent article in The Economist compares the rise of BYD to that of Toyota (the Chinese company is the Japanese giant’s EV partner in China but also now seen as a serious future rival by the world’s biggest seller of cars) several decades ago. Toyota also started out making other products, automatic looms, before pivoting into auto manufacturing.

Both also had to approach things differently in an effort to catch up with much larger international rivals. The Toyota Way, also known as the kaizen lean manufacturing system, that introduced Kanban as a project management methodology became a textbook standard for efficiency. The pace of growth from a standing start also has clear parallels:

“In a six-year stretch from 1955 until 1961, Toyota’s exports grew more than 40-fold and it has not looked back since. BYD says it took 13 years to manufacture its first million NEVs. It took a year to get to the second million. Six months later it reached 3 million.”

Taylor Ogan, whose investment firm, Snow Bull Capital, has a stake in BYD, is hugely impressed by the level of automation in its manufacturing processes, which makes it extremely cost efficient. He comments,

“the only humans you see in these factories are doing end-of-the-line inspections or fixing the robots. BYD has redefined auto manufacturing like Toyota did.”

Last year’s expected profit figures imply a greater gross margin than Tesla, until now the leader on that metric among mass market auto manufacturers.

The U.S. market could be a tipping point for BYD

To date, BYD has not sold any of its electric vehicles in the USA nor has announced any expected timetable to enter the market. But it inevitably will and probably in the not too distant future, despite the obstacles that have slowed the move.

The company says the biggest hindrance is tariffs that date back to Trump’s time on office, but have not since been rolled back by the Biden administration. They are levied on Chinese-made EV components like batteries and would either slash BYD’s strong margins or force it to raise prices, closing the gap with pricier Tesla models.

But a solution is expected to be found sooner or later. Despite political tensions between the USA and China, the former’s big car manufacturers rely on the latter’s market. That means it is not in a position to take a protectionist stance against Chinese companies moving in the opposite direction.

Until now, however, that hasn’t been an issue with little local appetite to ditch U.S. and Europe-made marques for Chinese. BYD entering the market would be expected to change that and EVs cheaper than Teslas would surely increase the pace of the USA’s electrification.

Does BYD look like a potentially sound investment at its current valuation?

All of the above makes it sound like a valuation that is currently almost six times lower than Tesla’s should be a snip. In all likelihood, BYD’s revenues and profitability will outstrip Tesla’s either this year or next. Probably this if the Chinese company gets anywhere near its ambitious 4 million vehicles target this year without margins being too heavily compromised by the cost of the scale up.

However, this week Warren Buffet’s Berkshire Hathaway, one of BYD’s biggest shareholders and a long time fan of the company, announced via a filing to the Hong Kong Stock Exchange the sale of 4.235 million shares. The move reduced Berkshire’s ownership of the company from 12.26% to 11.87%.

As recently as 2021, Berkshire Hathaway owned 21% of BYD and has been gradually selling of its stock since. If Buffet is reducing his exposure to the company does that suggest potential new investors should be wary?

Not necessarily. Buffet acquired Berkshire’s stake in BYD in 2008 when it paid a total of $230 million at $1.02 a share. Those shares now cost around $26-$27. Berkshire Hathaway could well simply have been selling off some of the stock because its huge increase in value since it was acquired hugely increased its weighting as part of total assets. Taking profit from a hugely successful investment while maintaining a stable portfolio weighting is a perfectly normal investment approach that by no means necessarily infers a loss of faith in BYD’s future prospects.

Tesla’s net income margin is, at 10.26% much higher than BYD’s current 1.43% but that will change because the latter won’t always have to invest such huge sums in its scale up as it has over the past couple of years. A large part of the discrepancy in valuation between the two companies is of course simply due to the fact Tesla is listed on Wall Street and is part of its major indices such as the Nasdaq and S&P500.

Far vaster sums of global capital flow into index tracker funds following the major U.S. indices compared to the Hang Seng, which pushes up the valuations of Wall Street listed companies compared to international competitors. Chinese company valuations are also inevitably assessed by international capital markets as entailing higher geopolitical risk than peers in the West.

There’s some justification to that stance. Chinese authorities only recently pulled back from a period of reigning in large tech companies it saw as a growing threat to its complete grip on the giant nation. That was expressed in a seemingly random approach to penalising tech subsectors and companies that had attracted the ire of the Communist Party, such as suspending the issue of any new mobile games licenses for several months.

However, there’s been a change of direction since last year with tech sector growth again seen as a necessary component to reviving China’s recently stalling economic growth. BYD may not seem an obvious target to have its wings clipped by China’s rulers but there is always a risk that could change if the political winds do.

Growing Chinese belligerence in pushing its claims to Taiwan and disputed islands in the South China Sea and Pacific are also a potential future geopolitical flash point that could drive a wedge between Chinese and Western markets. However, that’s a risk that applies just as much to Tesla as it does BYD.

All-in-all, BYD does look like an interesting stock at its current valuation in the context of its recent and expected growth. If and when it does enter the U.S. market, a new Wall Street listing would also be a possible development. But even on the Hong Kong Stock Exchange and factoring in the China risk discount, the valuation gap to Tesla looks big. And that could be an opportunity.