Subject: BYD financial statements review
I recently had a good read through the latest BYD quarterly report and keys some of the numbers in Excel.

I sold out a couple of years ago when the price got extreme. Since then earnings have really started to ramp up, so I decided to take a look at the numbers. I certainly know more about what is happening now, having done that, but I am really just beginning to build up a financial picture.

When I was lucky enough to copy Charlie Munger into BYD, before the share price exploded upwards, it was all about the future opportunity. The vertical integration; the thousands of brilliant Chinese engineers; the background in batteries and off course the CEO Charlie believed was the second coming. There wasn’t much to look at in the numbers. But now it is becoming a substantial business the financial statements are worth looking at.

Below are a few notes after crunching through the financial statements. The financial statements are not as easy to follow as a US company but there is plenty of basic information there to provide a back of an envelope type analysis.

Here are my notes on Q3 and YTD 2023:

Revenues and volumes growing rapidly (obviously)

Operating margins down - due to price cuts and increasing costs?

Operating cashflow - small increase maintained YoY, despite margin pressure, appears to be due to large increases in creditors.

Nearly all free cashflow going into expansion capex. A pleasant dynamic if high ROE and long growth runway.

Heavy investment in R&D at $3.5 Billion and increasing as a % of revenue (although that will be partly due to cost pressures). Product development is incredible and relentless.

Interesting to see ROA at 6.7% based on reported P&L profit for the 9 months annualised and ROE 32.1%. What is going on here?

The balance sheet is interesting. Negative working capital due to the large trade creditors balance (which may be related to the expansion capex). Debt is not high at all and they seem to finance themselves from suppliers. Large tangible asset base, with $35 Billion including $5.7 Billion construction in progress.

Big picture, outstanding management with skin in the game (17.6% Wang Chaua-fu); vertically integrated supply chain, providing a cost advantage. They have products that could grow volumes hugely in China and potentially outside China. Will be easier in the non-Western economies. If they continue to make high ROE and grow they should be able to grow earnings significantly higher, from the current Q3 2023 run rate annualised ($5.8 Billion).

Market cap around $78 Billion (according to Apple, but need to check this) would put them on a PE of 13.4x.

Further work and questions:

Certainly a capital intensive business. Would need to look further into the annual report to see if a reasonable recurring maintenance capex number can be established and how that would factor into an earnings multiple compared to the PE based on the reported earnings.

Would need to understand how they can finance the huge asset base with creditors. Wonder if this is largely linked to the huge capital investments in factories. Wonder what happens LT when the capacity is fully built out. At the moment it’s like a OEM but also a massive construction contractor. (I saw an article recently that they built their own huge ship to export around the world. Charlie said last year he was a little frightened at just how fast and ambitious they are.)

I get the sense they are simply putting the competition through a meat grinder, in a growth market and seem to be reasonably priced. The China geopolitical issues are clearly keeping the price low.

I bought some this week and will start following closely again. It has been real joy to own and watch in the past. I kind of hope it does not become a bubble stock again but rather just keeps growing earnings and I can hold for 20 plus years.

Obviously Berkshire has been trimming over recent years but sill holds most of its position.

BYD has been getting a lot of attention over the last few weeks with the headlines about taking the Tesla EV crown. The fact the shares aren’t doing anything tells me the sentiment against China is strong, as BYD the business is really shifting gears now. The product line is incredible both in terms of quality and price. They have come a long way from that first E5, or whatever it was that Buffett, Munger and Gates were pictured with years ago.

I read something recently in Richer, Wiser & Happier (super book that Munger liked and I was late to reading) that long term investors think in destinations. Can you see where this business ends up 30 years from now. I know Charlie Munger thought very long term like this and would have considered the transition to harnessing the unlimited energy from the sun, as a big shift and that BYD would have a good chance of being important in that arena. With the progress BYD has been making, it certainly looks like he was right so far. What I like about this destination perspective, is that it’s looking through the immediate bad weather (China risk, trade barriers, wars, false precision on next quarter volumes and earnings etc).

Anyway, that is enough of a ramble for now. I would be interested in any views on how BYD manages to have a high return on equity without excessive debt. And any views on the current owner earnings run rate? And the growth potential?

One final thing, I read recently that legacy auto makers are in a state of shock at how cheap BYD can make their cars. Vertical integration etc. It looks to me the EU and US are keeping them out using huge tariffs. So much for free markets and open economies. BYD at the current price probably doesn’t need the West and can make plenty in China and the developing world. Any thoughts on how this tariff war plays out? There have been reports that building factories within other countries with less prohibitive tariffs and exporting into other countries is a potential solution. My instinct is that if BYD can make products of high quality and have a significant cost advantage due to deserved skill and work, nothing can stop them from being successful. Would love to hear your thoughts, especially where I am wrong.