Has BYD already peaked?

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Sales of BYD electric vehicles keep hitting fresh records, even surpassing Tesla as the world’s biggest maker in the last quarter. Yet shares of the Chinese EV maker keep falling. Has BYD already peaked?

BYD, China’s best-selling EV brand, has continued to grow sales volume and market share, selling about 1.6mn battery EVs last year. Exports set another record, more than quadrupling last year and selling to over 70 countries.

But its Shenzhen-listed shares are down 45 per cent from its 2022 peak, pushing valuations down to over a decade low. At just 15 times forward earnings, its shares trade at just a fraction of its over 170 times multiple in 2021 and at a steep discount to peers including Tesla. This marks a big shift from the foreign investor frenzy in Chinese EV stocks in 2020, when buying shares of BYD had offered comparable returns to those of Tesla. 

True, there is reason for concern. Price wars are getting serious in its homeground. As Tesla cut prices in China, BYD has had to increase discounts to keep up. The pace of sales growth slowed last year.

A price war is especially detrimental for BYD given its relatively high proportion of smaller cars, like its $11,000 compact EV Seagull model, of its total sales. That means its average selling price of EVs is already lower than peers such as Tesla. 

The problem with the price war on its home turf is that BYD makes more than 90 per cent of its sales in China. BYD, along with other Chinese manufacturers, has yet to replicate its success in other major foreign markets such as the US and Europe. A European Union anti-subsidies investigation into Chinese-made EVs and the risk of tariffs could dent growth prospects here. 

Unexpected competitors pose another risk. Smaller, newer rivals such as XPeng and Li Auto with a head start in software development had already been chipping away at its market share by offering connected and smart features in their EVs. But now, tech giants such as Xiaomi and Huawei are also joining the market, equipped with autonomous driving technology, an area where Beijing is increasing support. 

But while these problems are particularly acute for BYD, they are not restricted to the company. Any EV maker joining the market now faces the urgent task of becoming a high-volume carmaker. Given the high cost of EV parts, growing market share is crucial to getting to break even point. The ability to lower production costs is becoming increasingly important. 

Here, BYD has an edge over its rivals. Founded as a battery maker in 1995, its strength lies in making batteries at scale. In an EV, the battery is by far the most expensive component. 

Its fully-vertically integrated business model, which includes everything from owning lithium mines to in-house chip manufacturing, offers a new take on the auto industry’s “just-in-time” production method. This model ensures not just a stable supply chain, but stable prices.

Now, as it starts building a sodium-ion battery plant in China, that edge over rivals should widen. A battery using sodium, cheaper and more abundant than lithium, would cut the price of the battery cell by around 40 per cent. 

Drawbacks of sodium-ion batteries, which include lower energy density and a shorter life cycle compared with lithium counterparts, mean they are unlikely to completely replace lithium batteries anytime soon. But as public charging networks are built up, long range batteries will become less of a priority, opening up a market for cheaper EVs powered by sodium-ion batteries — one in which BYD would have a first-mover advantage. 

In the short term, BYD is positioned well to take on the challenges it faces as it expands overseas. Gross profit margins have risen 60 per cent to 19 per cent over the past two years. A wider range of price points for its models — from its Seagull to the electric sedan Seal, which it launched in Europe at a starting price of $49,200 — should start attracting a wider audience. A boost at home, where Beijing is supporting the industry after pulling forward its goal to have green cars make up 45 per cent of all new car sales by three years to 2027, will help too.

A slew of Chinese EV maker bankruptcies last year is driving a new era for the industry, in which a handful of companies with stable access to low cost batteries will dominate. For now, Tesla and BYD, among the few sector companies to have successfully made it past break-even point, have the best potential. With EVs making up less than a fifth of global car sales, there is still room to run. 

june.yoon@ft.com