The electric vehicle (EV) market is jam-packed with competitors ranging from younger entrants such as Tesla, Rivian, or Polestar to legacy automakers like Ford looking in new directions. One of the biggest end markets for EVs is China. And while Nio may be one of the most recognizable names among Chinese EV manufacturers, investors may want to learn about one of its peers: BYD (BYDDY 4.08%).
BYD recently published its financial results for the first half of 2023, and the company did not disappoint. Still, there are a number of factors that investors should analyze before making an investment in this EV company. In addition to the fiercely competitive landscape, the state of the Chinese economy will be another key variable in the equation whose solution answers the question of whether BYD represents a good buy right now.
The EV market in China is booming
When it comes to economic matters, it's easy for investors to become fixated on their own country and its specific challenges. In the United States, the Federal Reserve has engaged in a series of meaningful interest rate hikes in its effort to fight inflation, which surged to a peak above 9% last year. While the now-higher cost of borrowing has impacted areas such as home affordability, inflation has cooled to below 4%, and the Fed remains steadfast about bringing it back down to a target rate of around 2%.
But even for domestic investors, keeping a finger on the pulses of major economies such as China or India is generally a good idea. Many of the world's largest enterprises have massive operations outside of the U.S., and understanding what is going on from a macroeconomic perspective on a global scale can help you make more informed investment decisions.
One of the most used barometers of economic health is gross domestic product (GDP). When looking at quarterly GDP growth, investors can see that China's economy has been in a funk for quite some time. As the chart below shows, China's GDP growth has been considerably weaker in the COVID-19 era. In fact, its latest growth rate of 6.3% during Q2 2023 was below its levels from 10 years ago. Moreover, the International Monetary Fund is estimating China will have 5.2% real GDP growth for all of 2023, signaling the country's economic weakness may not quite be over yet.
China Real GDP YoY data by YCharts.
Investors may be wondering how this dynamic plays into the automobile market, and specifically, the market for EVs.
The operation speaks for itself
While combing through BYD's latest quarterly report, I stumbled upon an interesting statistic. Per the filing, "According to the China Association of Automobile Manufacturers, the sales volume of new energy vehicles in the first half of 2023 reached 3.747 million units, representing a year-on-year growth of 44.1%, and its market share increased significantly from 21.6% in the first half of 2022 to 28.3%."
At first glance, that sounds really encouraging. Despite challenging economic conditions, consumers are still buying EVs, and propelling China's position higher in the broader market.
For the first six months of 2023, BYD's revenue increased 28.6% year over year. In addition, the company expanded its gross margin from roughly 5.3% in the prior-year period to 7.8%. That margin expansion flowed straight to BYD's bottom line, where it helped propel a 139% growth in profit.
This financial profile is downright staggering. Even in the face of an economy where growth was slowing, BYD benefited handsomely from some of the secular tailwinds cited in the China Association of Automobile Manufacturers report. Moreover, the company's revenue growth far outpaced its growth in costs, allowing it to expand its margins and increase profits. This cash flow should provide BYD with the flexibility to continue investing aggressively in new technology, as well as to strengthen its relationships outside of China as the company begins seeking growth overseas.
Image Source: Getty Images
Should you buy the stock?
BYDDF PS Ratio data by YCharts.
The chart above compares the price-to-sales ratio of BYD to that of other major EV manufacturers in China, including Tesla, Nio, and Li Auto. The obvious takeaway is that despite the company's impressive performance and position in Chinese EVs, BYD stock does not command the same premium as its peers.
BYDDF PE Ratio data by YCharts.
The second chart shows perhaps an even more dramatic disparity. BYD's price-to-earnings ratio is down by nearly 47% from the high it touched earlier this year. That was the biggest drop among this set of competitors. BYD's current P/E ratio stands at 28.
From my perspective, BYD is an undervalued stock with a lot of growth potential. Its biggest risks are that the Chinese economy could deteriorate further and that Tesla could potentially draw meaningful market share away from domestic players. But with that said, the valuation multiples suggest that now could be a great time to buy this stock and hold it for the long term.
