BYD’s Export Outlook Key to Next Phase of 66% Peer-Beating Rally

(Bloomberg) -- With the market already anticipating record sales from Chinese automaker BYD Co., a convincing overseas growth story will be needed to spur the next leg of its peer-beating stock rally.

The company has established itself as the leader in China’s electric-vehicle market, the world’s largest, and is poised to post higher quarterly revenue than Tesla Inc. for the first time ever. Profitability will be closely watched when BYD reports earnings on Oct. 30 amid ongoing price wars in the sector.

Market watchers say the company’s sales outside China are key for further gains in the Hong Kong-listed stock, which has surged 66% from a February low. The export outlook is promising but clouded by trade tensions, and BYD is moving to counter this through efforts such as accelerating localized production.

“Export is the next main growth driver for the company and could already be a meaningful contributor from next year,” said Kevin Net, head of Asian equities at Financiere de L Echiquier.

BYD sold more than 1.1 million passenger new energy vehicles in the three months through September, a record quarterly amount, according to data compiled by Bloomberg. Analysts estimate the Shenzhen-based auto and battery maker will post sales of $28.8 billion, an all-time high and exceeding the $25.2 billion reported by Tesla.

Domestic demand has been stronger than expected thanks to Chinese government subsidies promoting replacement of older cars, a trend that could last through the current quarter, according to Bloomberg Intelligence. BYD has also benefited from aggressive price cuts and its upgraded plug-in hybrid technology, market watchers says.

Overseas Story

The outlook abroad is less certain, amid protectionist headwinds and slowing EV adoption. The European Union earlier this month voted to impose tariffs as high as 45% on electric vehicles from China, while EV sales have slowed in some markets on cost concerns and shifting consumer preferences.

It’s now looking challenging for BYD to reach its projected overseas sales target of over 450,000 units this year, based on its total for the first nine months of around 300,000 units, Bloomberg compiled data shows. Meanwhile, the contribution of exports to BYD’s monthly sales has fallen to 7.3% as of September from a recent peak of 13.1% in April.

Still, the company continues to expand exports to new markets, and has shown success in luring consumers with its cheaper models. At the same time, it’s moving to address trade concerns by building plants in 10 other countries on three continents.

Despite recent challenges, “we expect BYD to enjoy further growth in overseas markets over the next few years,” Nomura Holdings Inc. analyst Joel Ying wrote in a report. “Its overseas plans may further underpin mid/long-term growth ahead.”

BYD is setting up production bases in the key regions of Asean and Latin America, Morgan Stanley analysts including Tim Hsiao wrote in a note this month. He noted Brazil, Thailand and Israel are the top overseas sales markets for the company “thanks to growing popularity of EVs and relatively benign trade policies with China.”

Traders have reduced bearish bets on BYD even as the stock has climbed, with short interest down to 0.8% this week from a high of 7.7% earlier this year, according to S&P Global Inc. data. In the options world, the cost of hedging against declines in the shares has slipped.

“If you run a buy-and-hold strategy, BYD is the blue-chip auto stock to own in China,” said Shuyan Feng, deputy general manager for investment management at Huatai Asset Management (Hong Kong).