Can BYD’s share price race ahead?

Chinese electric vehicle (EV) manufacturer BYD Company’s [1211.HK] share price has driven strong returns in the last 12 months, but does a recent share price reversal mean that the brakes are now on?

BYD’s share price sat at HK$38.65 on 3 April last year before rocketing 620.3% to HK$278.40 on 25 January 2021. The Hong-Kong listed stock has since dropped 36.1% to close at HK$177.50 on 7 April.

The recent annual results of the Shenzhen-based company, which makes hybrids, internal combustion and battery-electric vehicles, gave investors’ reasons for optimism and pessimism over its future direction.

BYD, which counts Warren Buffett’s Berkshire Hathaway [BRK] as a key shareholder, said that net income climbed 162% to CNY4.2bn in 2020, Bloomberg reported at the end of March.

The company’s sales rose 22.6% from 2019 to circa €20.3bn, but it only produced 431,954 vehicles, a decline of 5% from the year-ago period, according to Electrive.com. Demand for its electric cars dropped 17.4% to 189,689 units during the coronavirus pandemic.

However, consumer appetite has steadily recovered, with 28,841 electric vehicles, including plug-in hybrids, sold in December — up 120.2% on December 2019.

BYD’s Han luxury sedan

The recent uptick in deliveries has been helped by China’s relatively quick economic bounce back from the pandemic.

BYD also saw strong sales of its new Han luxury Sedan model, with 40,556 units sold between July and the end of the year, according to Bloomberg.

International sales of its commercial EV buses have also done well, with 9,125 units being delivered to countries including Colombia, Japan, Holland and the UK in 2020, as governments and corporations look to meet looming climate change targets.

More than a third (39%) of the company’s total revenue came from outside Greater China, compared with 16% a year ago, according to CNBC. But analysts were less than enthused by BYD’s forecast that net profits for the first quarter would be between CNY200m and CNY300m.

The company blamed the decreased profit guidance on seasonal weaknesses in car sales and rising prices for battery raw materials, such as lithium carbonate, electrolyte and copper.

Despite being the EV market leader in China, lower government subsidies for EVs and continued competition from manufacturers like Tesla [TSLA], Nio [NIO], and XPeng [XPEV] could also prove challenging.

In addition, the recent human rights furore over the persecution of the largely Muslim Uighur population in the Chinese region of Xinjiang could lead to further international consumer boycotts of Chinese made goods and more sanctions from Western governments.

EV market revs up

Analysts at Credit Suisse said that the first quarter guidance only accounted for 3% to 5% of what analysts are expecting for the full year, according to CNBC. The firm lowered its price target to HK$280 from HK$310. Analysts at Nomura also highlighted higher raw material costs but kept its price target of HK$300, the publication noted.

Despite concerns, both those targets are far above BYD’s share price close as of 7 April, which suggests that growth is set to continue revving up.

The upward trend of demand and interest in EVs could continue in the months and years ahead as the green agenda continues to power forward globally and in China, where the government has pledged to become carbon neutral by 2060.

The climate pledges are a major tailwind for BYD’s auto and battery making businesses. Indeed, Goldman Sachs analysts believe that accelerating EV battery adoption will help drive BYD’s share price up by 381% over the next 12 months, according to 24/7 Wall St.

BYD is reportedly hiring engineers to work at its first European battery plant — the location of which is yet to be disclosed.

“The planning of the factory is to prepare for supply to European automotive customers and to prepare for the further expansion of BYD's overseas business,” a BYD spokesperson recently told Reuters.

BYD seems to be on the right track, Howard Smith wrote in The Motley Fool.

“Some investors may not want to be overly aggressive with electric vehicle stocks after the sharp run many of the stocks had in 2020. But for those looking to be in the sector, BYD may be the Chinese EV maker you want to have a stake in,” he says.