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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.

I would be interested in any views on how BYD manages to have a high return on equity without excessive debt.

Sounds like you have answered your own question - they don't have debt, but you said they owe money to their suppliers ("Debt is not high at all and they seem to finance themselves from suppliers"), which is better if you can swing it, and would leverage their equity.


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?

I expect there will be plenty of opportunities for them to sell inexpensive EVs to NA and Europe who desperately want more people to buy EVs. It won't happen overnight, but it will happen, our markets aren't THAT closed. And they will probably be happy to build plants in NA and Europe (Mexico, Eastern Europe, for instance) as the volume ramps.

Exciting company, I am sorry to see Berkshire has reduced the stake by 2/3 - I don't really understand why (not wanting to compete against Tesla was mentioned by Munger, but they are obviously doing just so very effectively, even if Tesla is also doing well. I wouldn't bet against BYD, and might buy some - the PE of 13 certainly has a lot of pessimism built in, probably too much!

dtb

Hadn’t realised Berkshire has sold 2/3rds of the position. Thought it was less than that. Will have a look.

Regarding financing the business with creditors other than debt. Yes that seems to be what’s happening on the face of it. But I am intrigued as to how they can do that. Who is giving them this cheap source of finance? Trade creditors? Related party entities? CCP? I suspect its factor construction related. Anyway, just shows you why Buffett recommends us little people just buy an index.

Hong Kong actually has a website you can understand: https://di.hkex.com.hk/di/NSNoticePersonList.aspx?...

"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..."

I recently re-read the Iliad and the Odyssey and was struck by how often the fates of skilled warriors were determined by the Gods. Lightning bolts, storms, monsters - all kinds of crazy things. In this metaphor, the US, Chinese, Russian, EU, Indian, etc. governments are the Gods, and I think they can stop BYD from being successful (in the way you mean) very easily if they want to. Whether that will happen is anyone's guess; the Gods are fickle.

IMHO the long-term antagonism between the US and China is not likely to go away any time soon, at least not from the US perspective. Charlie would explain it in terms of common misjudgments that people make, expressed in politics rather than finance, but basically the same thing. Or call it good, old-fashioned competition. Either way, a strong argument can be made that the current antagonism between the US and China is not just "immediate bad weather," but a condition that will persist indefinitely (30-50 years) unless and until the Gods decide otherwise. India is a wild card with high ambitions and a very different approach than anyone else. This has implications for AAPL and BABA as well, as has been discussed here many times. I don't say you are wrong, but I don't think it is by any means a slam dunk.

abromber

BYD and the other 30+ emerging Chinese EV makers are majorly disrupting domestic Chinese sales. 2023 was a watershed year because Japanese car sales in China dropped quite a bit, displaced by other western and domestic brands due to the favorable EV ownership policies.

BYD's technology has already shocked many people. I can say this because the company I work at is the biggest Mercedes-Benz dealer in the world, and the biggest one in China/Asia (very low-key company). Our CEO told me, back in last year's Shanghai Auto Expo, when the Germans saw the latest BYD's tech, they were shocked.

As that Rob Vinall (a fund guy) noted in his podcast (https://podcasts.apple.com/us/podcast/a-postcard-f...), if the automakers are slipping away in EV space now, it'd going to be extra hard to catch up, as average car model cycle is 6-10 years? or longer? There are those ESG bs targets to deal with too...

BYD is already dominating low-to-mid income space in emerging countries. But those places aren't exactly pushing out EV electrification infrastructure yet, not the top of agenda...

Eventually within China, if you do look at Chinese equities and market lately, is there would be 3-5 big auto makers, probably in 2030's or 2040's. Naturally by market function and also fits greater political agenda too. BYD would definitely be one of survivors, from today's viewpoint.

But long-term the value of EV rests upon its software, even if autonomous driving seems much more difficult than companies say. The in-car software is the value fulcrum. Outside of China, what's going to happen to BYD cars?

Munger in his last big interview through Acquired Podcast, if I remember correctly, was saying they didn't expect BYD to go into auto making at all! BYD started off in mobile phone battery making. I guess over the years they didn't quite tell their fears of BYD, until BYD really showed traction in autos (LOL). They bet on the right dynamite (Wang Chuanfu) behind this BYD scale-up, more lucky than skill in a way.

BYD and the other 30+ emerging Chinese EV makers are majorly disrupting domestic Chinese sales. 2023 was a watershed year because Japanese car sales in China dropped quite a bit, displaced by other western and domestic brands due to the favorable EV ownership policies.

BYD's technology has already shocked many people. I can say this because the company I work at is the biggest Mercedes-Benz dealer in the world, and the biggest one for MB in China/Asia (very low-key company). Our CEO told me, back in last year's Shanghai Auto Expo, when the Germans saw the latest BYD's tech, they were genuinely shocked.

As Rob Vinall (a fund guy) noted in his podcast (https://podcasts.apple.com/us/podcast/a-postcard-f...), if the legacy big automakers are slipping away in EV space now, it'd going to be extra hard to catch up, as average car model cycle is 6-10 years? or longer? There are those ESG bs targets to deal with too...

BYD is already dominating low-to-mid income space in some emerging countries. But those places aren't exactly pushing out EV electrification infrastructure yet, not the top of agenda.

Eventually within China, if you do look at Chinese equities and market lately, is there would be 3-5 big auto makers, probably happening in 2030's or 2040's. Naturally by market function and also fits greater political agenda too. BYD would definitely be one of survivors, from today's viewpoint.

But long-term the value of EV rests upon its software, even if autonomous driving seems much more difficult than companies say. The in-car software is the value fulcrum. Outside of China, what's going to happen to BYD cars?

Buffett has slowed down unloading lately.

Munger in his last big interview through Acquired Podcast, if I remember correctly, was saying they didn't expect BYD to go into auto making at all! BYD started off in mobile phone battery making. I guess over the years they didn't quite tell their concerns of BYD, until BYD really showed traction in autos (LOL). They bet on the right dynamite (Wang Chuanfu) behind this BYD scale-up, more lucky than skill in a way.

I expect the business will do well.
But the chances that minority shareholders share that future in a decent way are too low--it's entirely uninvestable due to jurisdiction. So on to the next ticker.

A brief comment on the business itself--
I imagine they will have little cost advantage if they try to put production in rich-ish countries, so I think most of it will stay close to home and/or such expansion will not be at high rates of return.

Jim

Two solid points both negative which is appreciated. Food for thought.

Yes, running a factory with western workers might be a little different. They better have a lot of automation and accept less from workers.

Un-investable jurisdiction. I struggle with accepting this and probably have a bias working against me. I know you are probably right. But I find it hard to accept Munger is wrong about China. Chinese companies are cheap and strong. I also like having some assets outside of the West - uncorrelated risk.

My small position size is comforting.

Thinking about having almost everything invested in US, which I imagine is typical for many and what has happened since 1924. The US has been an incredible system for capitalist. Very far from optimal but compared to most other parts of the world.

When you consider that clip of Buffett, showing a journalist, his news cutting he keeps on his wall, just outside his office, of the wild events that rocked financial markets over the last 100 years. 90% drawdown from 29 to 32; two world wars; JFK; oil crisis and brutal 73/74; 87; 98 Asian crisis; dot com bust; 07/08 GFC; 2020 pandemic. Good and bad things are going to happen over the next 20 to 50 years is a certainty.

Where we are now:
2 trillion of crypto vapour; extreme gov deficits at a time of high employment;
high multiples, high profit margins;
unhappy people;
major superpower tensions
and risks I’m not even aware of that could cause all kinds of things.

I don’t see a lot of harm owning a small amount in China. Never bet against America but in an uncertain world, some insurance is maybe not a bad thing.

Deep dive presentation on Chinese EV competition. 75 min long (seemed much longer😃) but chock full of info for those seriously interested in BYD. Some commentary from Tesla investors but not biased IMO.

https://www.youtube.com/watch?v=GpzxiDome14

OT Alert

I think this is a risk factor for BYD. (Robots) One of BYD's competitive advantages is their low-cost high-output workforce. They'll need to automate fast or lose that advantage. This video explains where humanoid robots are in their development stage as well as the market they're chasing:

https://www.youtube.com/watch?v=RCAoEcAyUuo

TLDR: Everything is getting automated.

Incredible moves in BYD this past year. I must revisit the latest annual report. I saw some news about solid state batteries progress in the lab and autonomous driving imminent. I guess that has got the market excited.

I have always thought autonomous driving was a long way of and wouldn’t happen while other cars were driven be humans. But I am likely biased against autonomous because it’s Elon’s big thing at Tesla. (His personality and track record of selling the sizzle and not the sausage has already been a real turn off and he just gets more hideous with each passing year, from my personal perspective.)

But now we have BYD talking autonomous. I trust BYD and have observed that they usually deliver on what they say. Maybe I could see autonomous having a role after all. I suppose it’s already partially here already on most modern vehicles to some extent (lane control, speed and distance from vehicle in front). Maybe I can envisage advanced autonomous driving, with a human watching over it.

It would be interesting if BYD have indeed made a leap forward, ahead of competitors and use the technology to help sell more cars.

What are your thoughts on BYD currently?

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