Buffett-Backed China Carmaker Gets More Analyst Love Than Tesla

(Bloomberg) -- A 14 percent slide in Hong Kong-traded shares of BYD Co. this year has not shaken analyst confidence in the Warren Buffett-backed Chinese electric carmaker.

Long-term growth prospects for China’s new-energy vehicle market are overshadowing concerns about tighter government subsidies and increasing foreign competition that have wiped out more than $3 billion from BYD’s market value this year.

A majority of the 27 analysts who cover the company remain bullish, with 18 recommending buy, rising from 15 at the end of last year, data compiled by Bloomberg show. BYD’s recommendation consensus -- a Bloomberg gauge of analyst confidence in a stock on a scale of 1 to 5 -- stands at 3.96, above the 3.13 for global EV producer Tesla Inc.

BYD’s “near-term earnings are under pressure from the adjustments of subsidies,’’ said Kelvin Lau, a Hong Kong-based analyst with Daiwa Securities. But its new models in the pipeline will qualify for higher amounts under the government’s revised subsidies, and thus BYD will see a recovery in the second half, he said.

The Chinese government has been cutting subsidies for new-energy vehicles to encourage competition, with a goal of phasing out the incentives by 2020. BYD last month predicted a drop of as much as 92 percent in first-quarter earnings, citing decreased government handouts for new-energy vehicles. Government grants made up 23 percent of BYD’s pretax profit in 2017, a jump from 11 percent in 2016, according to Bloomberg Intelligence.

Yet China remains hugely committed to electric vehicle development. To cut roadside pollution and reduce reliance on oil imports, President Xi Jinping’s administration is implementing NEV production quotas, targeting a seven-fold increase in NEV sales, and considering a ban on gas guzzlers.

The nation is also increasing subsidies for longer range electric cars, benefiting leading home-grown makers like BYD that have taken the lead in developing such models. BYD’s new and redesigned SUVs could help lower the risk of government subsidy cuts for EVs in China, Bloomberg Intelligence said in a report this month.

Earnings per share at BYD, the only major Chinese EV maker that also produces battery cells, are expected to rise 32 percent this year, above an average of 29 percent for Hong Kong and mainland-listed Chinese automakers, according to data compiled by Bloomberg. Its sales are expected to gain 24 percent, higher than the approximately 17 percent increase forecast for the group.

BYD can also make money by selling credits from new-energy vehicle production after 2020, said Ka Leong Lo, a Hong Kong-based analyst with Maybank Kim Eng Securities, as the government rolls out a mandatory dual credit system that will require most automakers to either produce enough NEVs themselves or buy credits from those with a surplus.

As a rare, listed Chinese company focused on new-energy vehicles, BYD’s stock enjoys scarcity value. The Hong Kong-listed shares trade at more than 21 times earnings forecast for this year, more than double the average P/E for Hong Kong-listed Chinese carmakers, based on data compiled by Bloomberg.

Still, the company’s growth isn’t without threat. BYD faces increasing competition as China liberalizes the auto market for foreign investors, including global EV leaders Tesla and Nissan.

BYD’s 12-month consensus target price has slipped about 7 percent to HK$72.65 from a five-year high of more than HK$78 in February. Based on the stock’s current price, that indicates a return potential of 25 percent.

--With assistance from Shin Pei and Matt Turner

To contact Bloomberg News staff for this story: Yan Zhang in Beijing at yzhang1044@bloomberg.net.

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Charlie Zhu, Lena Lee

©2018 Bloomberg L.P.

With assistance from Yan Zhang