NEW ENERGY: BYD Backer Boosts Stake as China Sales Surge

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Bottom line: BYD’s EV sales are likely to see strong growth based on government-supported buying in China this year, but could slow sharply in 2017 if China’s economic slowdown accelerates.

Li Lu boosts BYD stake

Chinese electric vehicle (EV) maker BYD (HKEx: 1211; Shenzhen: 002594) shot into the headlines in 2008 when investment guru Warren Buffett bought 10 percent of the company. But it has struggled to find a mass audience for its cars since then, at times raising doubts about its future. That seems to be changing recently, as a nascent surge in its home China market has quietly begun to charge up the business, bringing some excitement back to the company.

Now one of BYD’s biggest backers, the man who first introduced the company to Buffett, is quietly building up his own stake in BYD, and disclosed that his LL Group recently bought more shares to boost its stake to 8.24 percent. (HKEx announcement) That’s up from 6.3 percent of BYD’s H-shares that LL Group, formerly known as Himalaya Capital, held at the middle of last year, and is a sign of growing confidence by LL Group founder Li Lu.

BYD’s EV sales do indeed seem to be gaining some new traction recently, helping it take the spot as the world’s top EV seller last year. But the big footnote to that victory was the company’s heavy reliance on its home China market to win that position. That’s an important distinction, since EV buying in China is heavily driven by government-linked customers who are trying to fulfill Beijing’s ambitious targets for new energy vehicle sales.

Such buying is driven by target-setting rather than real commercial demand, meaning there’s no guarantee that many of BYD’s China car sales won’t end up sitting parked in garages rather than out on the road. What’s more, the company’s recent robust China sales could easily slow sharply if the nation’s economic slowdown accelerates, since EV buying would become a lower priority in such an environment.

BYD’s Hong Kong-listed shares doubled in the first half of last year, amid a broader Chinese stock market rally. They later gave back most of the gains as China’s stock markets underwent a big correction from last June, though they still trade around 20 percent above their year-ago levels.

Booming China Sales

Much of BYD’s stock movement has admittedly been in tandem with China’s broader stock market, so let’s instead look more closely at some of the latest company data and other trends that excited Li Lu enough to boost his stake in the company. The company sold 61,722 plug-in vehicles last year, easily beating out global leaders Tesla (Nasdaq: TSLA) and Nissan (Tokyo: 7201), which each sold around 50,000.

The surging sales prompted BYD to recently upgrade its initial projections for its 2015 profit, saying it now expects the figure to rise 481 percent from 2014 levels. It had previously projected 435 percent growth. (company announcement) In the revision announcement, BYD specifically cited “explosive growth” in China for new energy vehicles in the fourth quarter.

At the same time, BYD founder Wang Chuanfu has made it clear in recent interviews that he doesn’t plan to try to export his cars in big numbers anytime soon. That means the company will be dependent on China for its EV sales for the foreseeable future, and hints that BYD’s numerous pilot programs around the globe in both western and developing markets aren’t going anywhere fast.

At the end of the day, it’s quite likely that BYD will do well for at least the next year, as Chinese buyers continue to purchase its vehicles at a brisk pace to help Beijing meet its clean energy vehicle targets. But I do expect the China sales could slow sharply in 2017 as China’s economy slows more sharply, and it’s unlikely that BYD will be able to offset that growth by relying on foreign markets.

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