Warren Buffett has done it again… Buffett’s Berkshire Hathaway (BRK.A, BRK.B) put $232 million into the Chinese battery and electric vehicle company BYD (BYDDY) in 2008. That stake is now worth a cool $7.7 billion, making it one of Berkshire’s most lucrative investments.

Meanwhile, Elon Musk has heaped scorn on electric vehicle company BYD. Back in 2011, he said “Have you seen their car? I don’t think they have a great product.”

But today, it is Buffett and BYD that are having the last laugh.

BYD Surpasses Tesla

BYD is now number one in the electric vehicle (EV) sector, having sold 641,350 new vehicles in the first half of this year compared to Tesla’s 564,743.

Sales at BYD are also growing at a faster pace than at Tesla. In the first six months of 2022, BYD sold 486,771 more cars than it did in the first half of 2021, representing an increase of 315%! Tesla sold 178,693 more vehicles in the first half of this year compared to last, a 46% year-on-year bump.

However, to be fair, the companies’ sales don’t represent an apples-to-apples comparison. Many of BYD’s electric vehicle sales are plug-in hybrids and use gasoline engines to supplement battery power. Tesla, on the other hand, exclusively sells fully electric cars. However, the Chinese government counts both types of vehicles as “zero-emission.”

BYD has also overtaken South Korea’s LG as the world’s second-biggest producer of EV batteries, behind only China’s Contemporary Amperex Technology, known as CATL.

What Comes Next for the Electric Vehicle and Battery Maker?

I expect more of the same from BYD.

The company has withstood the production disruptions caused by China’s COVID lockdowns better than its rivals because it can ride on its internal supply chain. BYD, which started making EVs in the early 2000s, has its production base in southern China’s Guangdong province. COVID lockdowns in this region were less severe than the Shanghai region, where Tesla has its gigafactory.

The BYD supply chain is vertically integrated, meaning compared to its rivals, BYD produces more parts (batteries, etc.) in-house and is less dependent on outside suppliers.

And the company’s supply chain success may help turn its competitors into potential customers. The company has embarked on a capital spending spree to build more battery plants and is in talks to sell some components… even to rivals like Tesla.

BYD’s major obstacle is not Tesla. Instead, it’s the popularity of its vehicles. The company is currently trying to beef up output to fulfill its order backlog. During an earnings call in March, the company said it was sitting on undelivered orders to the tune of 400,000 vehicles.

However, additional production capacity is coming online by year-end. This will support faster sales growth of popular models like the Qin (an entry-level EV) and the Song, which dominates the list of top 10 SUVs in China, beating Tesla’s Model Y.

BYD has a number of different models, including a $34,000 extended-range model. Its pricing is much lower as well than its global rivals like Tesla, with a starting price of $15,000, after subsidies, for its Dolphin model.

Should You Invest in BYD?

Going forward, BYD does face the same problem as Tesla: profitability. Its operating margins fell below 2% last year. For Tesla during the same period, the margins were 12%.

BYD management knows that ultra-low pricing strategies are not sustainable, so the company has raised the prices of its cars and batteries this year to be closer in line with its global peers.

That has helped its stock price. There’s been quite a stark difference between the stock performance of BYD and Tesla in 2022. BYD’s stock price has risen nearly 25% since the start of this year. In that same timeframe, Tesla’s stock price has dropped 42%.

However, the shares are expensive, trading at 99 times forward earnings, an 80% premium to Tesla.

Like Tesla, BYD will have to grow quickly to justify its valuation. The key test for the company will be whether it can attract similar demand, as in China, in overseas markets.

The U.S. market will likely be closed to BYD, so its potential is likely greatest in southeast Asia. There is tremendous demand there for small, low-cost electric vehicles. Rapid growth in these markets would justify its valuation.

We will have to see what unfolds. I believe BYD will be successful in its expansion, so I will stick with Warren Buffett and his preferred EV company. Its ADR is a buy anywhere around $80 a share.

— Tony Daltorio

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Source: Investors Alley