BYDDF - BYD Company Limited

[merkhet]

http://autonews.gasgoo.com/china-news/byd-f3e-all-electric-car-dies-in-infancy-101206.shtml

 

It looks like BYD is not going to put the F3e into production, which people are going to say kills their electric vehicle initiative.  I don't want to seem like a Pollyanna here, but I'm loving how (1) the confiscation of facilities, (2) the sensationalist 99% 3Q net income drop and (3) this recent piece of news are providing individuals with better and better entry points into the company.

 

(The below writeup is a bit dated since it was from mid-November, but I think the reasoning is still good at this lower price.)

 

~~~

 

BYD Company Limited (“BYD” or the “company”) is a joint stock company listed on the Hong Kong Stock Exchange (SEHK:1211) and the American pink sheets (BYDDF.PK).

 

Brief Description

 

BYD, along with its subsidiaries, is engaged in the research, development, manufacture and sale of (1) rechargeable batteries, (2) handset components and assembly service, and (3) automobiles and related products.

 

The company entered the rechargeable batteries market in 1995 to compete against Japanese rechargeable batteries and, within ten years, became responsible for over half the rechargeable batteries market. The company then used its position in the rechargeable batteries market to create a leading position in the handset components and assembly service market. The company has recently, through a 2003 purchase of a defunct Chinese automaker, begun to build its automobile division, and, by 2008, had the best selling sedan in China. Most recently, BYD has partnered with the Los Angeles Department of Water and Power to develop a grid-scale battery project for renewable energy storage.

 

Investment Thesis

 

I feel a little bit like I’ve wandered into uncharted territory. (Well, uncharted for me anyway.) Most of my investments come in the form of a quantitatively undervalued company. It’s easy to show a discount to net asset value or a discount to previous years’ earning power. BYD, on the other hand, does not easily succumb to quantitative analysis. Instead, in order to see the value inherent in BYD, you have to rely on Charlie Munger’s Lollapalooza Effect or Phil Fisher’s Fifteen Points.

 

*The Lollapalooza Effect (“LE”)

 

Charlie’s Lollapalooza Effect describes a situation where multiple factors greatly reinforce and amplify one another. In these situations, the factors are not simply additive in their combination; they are often multiplicative or exponential. It’s much like reaching critical mass or a tipping point, where the combination of factors provide for an explosive result. In this case, the culmination of the five LE factors below provides BYD with a very good chance for not only dominating the Chinese internal combustion engine (ICE) car market, but the global electric vehicle market and renewable energy storage market as well.

 

(1) Low-Cost Operator

 

The first LE factor is that BYD is, by far, the low-cost operator in all its divisions.

 

When starting the rechargeable battery business, the CEO, Wang Chuanfu, decided to substitute migrant workers for the expensive automated robotic arms used on the Japanese assembly lines. Since the automated arms cost about $100,000 a piece and depreciated at a rate of $20,000 a year, Wang Chuanfu calculated that migrant workers would be more cost-effective given China’s low-cost labor environment. Additionally, BYD’s location in China helps the company recruit engineers from China’s best schools for the low price of about $600 to $700 a month -- though this amount is slightly understated given that BYD provides subsidized housing in company-owned apartment complexes and low-cost meals in BYD canteens.

 

And, of course, let’s not forget that BYD does not have to deal with unionized labor. (If you take a look at the margin breakdown by segment in BYD’s annual and interim reports, you can see that BYD’s automobile segment makes profit before taxes of roughly 15%. That’s astounding when compared to other automakers.)

 

The benefits of being a low-cost operator can be seen when comparing the final value proposition presented to automobile consumers.

 

The most visible plug-in hybrids right now are the Toyota Plug-In Prius and the Chevy Volt. The retail price for the Toyota Plug-In Prius is roughly $35,000 to $40,000 when it enters production at the end of 2011 or the beginning of 2012. The Chevy Volt started production this year and retails for $41,000. BYD’s plug-in hybrid, the F3DM, went into production at the end of 2008 (commercial sales started in March 2010) and retails for $22,000. That’s a pretty big difference.

 

I should point out here that, on the all-electric vehicle front, the Nissan LEAF and BYD’s E6 sell for roughly the same price of $32,000 and will be rolling out at about the same time. BYD’s edge in this part of the market is that the Nissan LEAF has a range of 100 miles whereas the BYD E6 has a range of 186 miles.

 

(2) Vertical Integration

 

The second LE factor is that BYD is vertically integrated.

 

As we all know, vertical integration helps keep costs low and quality high. Since BYD’s rechargeable batteries have never been recalled, in contrast to its Japanese competitors, this makes it very easy for BYD to market the battery technology underlying the automobile and renewable energy business. BYD’s reputation for quality control can also be seen in the fact that every piece of equipment in a BYD automobile, except the windshield and tires, is made by BYD.

 

BYD’s starting point in rechargeable batteries has allowed the company to vertically expand upwards into the hybrid/all-electric automobile and renewable energy markets. This is very similar to what the company did when it expanded into the handset component and assembly service market. Normally, this would be worrisome, since a vertically integrated company has the ability to monopolize markets, and the United States would never stand for that. Of course, BYD is located in China...

 

(3) China’s Central Planning

 

The third LE factor is that BYD benefits from being located in China.

 

Now, this is more than just a low-cost worker argument. Ten years ago, I did not think that I would ever utter the words that China has a friendlier business atmosphere than the United States, but for batteries, hybrid/electric cars and clean energy, it’s true. Although China no longer has a strict planned economy, the country is still able to exert some direction and influence through its series of Five-Year Plans. In fact, the country’s twelfth five-year plan decrees that China will have 5 million electric cars traveling on the nation’s roads by 2020. (They currently have almost none.) Notably, this is on the back of China’s enormous growth in its consumer car market. Additionally, China has been pouring money into clean energy technologies whereas, in comparison, the United States is merely trickling money into the sector. (After all, the U.S. Congress can’t even come together and agree to give 9/11 rescue workers health benefits, so how can anyone expect them to fend off the energy lobby?)

 

(4) Leading Technology

 

The fourth LE factor is that BYD has the best technology.

 

BYD has a commanding lead in the rechargeable battery market stemming from its early success of crowding out the Japanese rechargeable battery makers. Very few companies have comparable experience and expertise to go up against BYD in the rechargeable battery market.

 

In the automobile division, the company has leveraged this expertise to partner up with Daimler AG (DAI). Although there are some other companies, Tesla Motors (TSLA) comes to mind, that have also been able to leverage their technology to partner up with big automakers, it seems to me that there’s a fundamental difference. Tesla Motors is a high-cost operator partnering up with Toyota in hopes that the latter can help the former bring costs under control. BYD is already a low-cost operator partnering up with Daimler AG to bring Daimler’s design expertise to the table.

 

In the renewable energy storage division, the company has leveraged the exact same battery technology to partner up with KB Homes and the China Southern Power Grid. This is key. The lithium-ion ferrous phosphate battery packs will be the same type used in plug-in vehicles that BYD expects to roll out in Los Angeles in the near future. In other words, with every incremental improvement in BYD’s battery technology, three separate divisions of the company stand to benefit. (The rechargeable battery division, the automobile division and the renewable energy storage pack division.)

 

(5) The CEO

 

The fifth LE factor is BYD’s CEO.

 

Charlie Munger calls Wang Chuanfu a “combination of Thomas Edison and Jack Welch - something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.” Additionally, Wang Chuanfu’s frugality is the stuff of legends. The CEO is worth somewhere between $4 billion and $5 billion, but he only pays himself about $265,000 a year and lives in a BYD-owned apartment complex with the other engineers. His only indulgences are a Mercedes and Lexus that he took apart to see how their engines worked. It’s been reported that the last time the BYD team went to Detroit, they shared a townhouse to save on hotel costs. Finally, when Warren Buffett asked how BYD planned to keep its lead, Wang Chuanfu replied “We’ll never, never rest.”

 

*The Fifteen Points

 

Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

How effective are the company’s research and development efforts in relation to its size?

Does the company have an above-average sales organization?

Does the company have a worthwhile profit margin?

What is the company doing to maintain or improve profit margins?

Does the company have outstanding labor and personnel relations?

Does the company have outstanding executive relations?

Does the company have depth to its management?

How good are the company’s cost analysis and accounting controls?

Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

Does the company have a short-range or long-range outlook in regard to profits?

In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?

Does management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?

Does the company have a management of unquestionable integrity?

A company doesn’t have to pass all of the fifteen points, but a company should pass enough of the points to make an investment worthwhile. A lot of these points have been covered as a result of our exposition of the Lollapalooza Effect factors. The only three issues that I see with BYD concerning Fisher’s Fifteen Points are numbers 4, 7 and 9. I’m not particularly sure whether BYD’s sales organization is above-average, and it’s hard to tell whether sales increases are due to secular growth in the underlying industry or something peculiar to BYD.

 

It’s also hard for me to tell whether the company has outstanding labor and personnel relations -- the mere fact that BYD does not have Foxconn-like problems is not enough to come to a conclusion on this matter. Finally, BYD suffers a bit from the key man risk that Wang Chuanfu is the drive behind the company. (Thankfully, he’s only 44 years old, and they’re trying to build a deeper bench.)

 

Valuation

 

As of November 12, 2010, shares in BYD traded at HK$47.40 or US$6.13. Since there are 2,275,100,000 shares outstanding, BYD is currently trading for about HK$107.84 billion or US$13.95 billion. The recent ~25% slide in valuation in the last month has been attributed to problems with building facilities on land slated for agricultural development (the facilities have been confiscated) and a 99% decline in year-over-year profits in 3Q 2010 (largely attributable to an increase in COGS and sales/distribution costs).

 

In 2009, the company made RMB$3.8 billion in earnings (though free cash flow was about RMB$6 billion). On that basis, the company would be trading for a fairly rich valuation of 24x P/E. I expect that, with a revised 2010 automobile guidance of 600,000 units rather than 800,000 units, the company will earn roughly RMB$4 billion in earnings this year for a 23x P/E. (If the free cash flow comes out to around RMB$6 billion again this year, that will drop the P/FCF to between 15x to 16x.)

 

So, how can we determine whether HK$107.39 billion is a fair price to pay for the company?

 

Return on Incremental Equity

 

Well, one thing that we can do is take a look at the return on incremental equity for the company. In other words, we can see how much each retained dollar in the company grows earnings.

 

Since the company’s near-term and intermediate-term growth will most likely be driven by its automobile segment, we can try to screen out the other segments and isolate just the automobile part of the company. After all, the CEO has repeatedly talked about the great economics and economies of scale in their automobile segment, so let’s try to quantify that a little bit. (Sidenote: Bless you BYD CFO for breaking out the assets by segment.)

 

We can see that for the period from 2006 to 2009, the company’s equity for the automobile division increased by RMB$4.5 billion. The company’s net income increased by about RMB$3 billion for the same period for an eye-popping incremental return on equity of roughly 67%. So every dollar that the company sinks back into the automobile division results in value of about $1.67. That’s pretty incredible. (The incremental return on equity for the company as a whole rests at around 21%, which is still pretty good.)

 

Implied Growth Rate - Reverse DCF

 

Now, if we assume that the company can continue to reinvest earnings from the automobile division back into the automobile division, the company should be able to grow overall earnings at something close to a 35% to 45% clip (assuming that the other divisions stay roughly at the same level of earnings) for at least the medium-term. Compared to a reverse DCF of the BYD share price (using earnings and not free cash flow), assuming a long-term 4% growth rate and an 11% discount rate, the current price assumes earnings growth between 20% and 30%.

 

Implied Growth Rate - Reverse Graham Valuation Formula

 

If you use Ben Graham’s valuation formula of EPS * (8 + 2 * (growth)) * (4.4 / AAA corporate bond yield), then you can reverse engineer an implied growth rate as well. The average Moody’s AAA yield for the last 10 years is 5.98%, and the EPS for 2009 was HK$2.06. On this basis, the implied growth rate is only about 14%. Since Graham’s formula generally overstates value a little, we can use a modified (7 + 1.5 * (growth)) to get a slightly higher implied growth rate of about 20%.

 

Implied Growth Rate - Greenwald’s NPV/EPV

 

If we use Greenwald’s NPV/EPV calculation, we get a nice little formula of (1 - (growth / return on capital)) / (1 - (growth / cost of capital)) for the multiple we should pay on EPV. Since EPV is just the steady-state EPS * (1 / return on capital), we can calculate the EPV to be roughly HK$20.65 per share. This assumes that there’s no growth on the HK$2.06 of EPS and that the cost of capital is roughly 10%. Since the return on invested capital is about 25%, we can see that the implied growth rate is roughly 7.4%. (Notably, Greenwald’s formula suffers slightly from an inability to deal with companies that can achieve growth rates exceeding their cost of capital. Or, stated another way, Greenwald’s formula overstates value the more growth rates approach the cost of capital.)

 

Valuation Conclusion

 

It’s always hard to value a growth company. Assets are easy to value, and the resulting valuation is fairly reliable. Historical earnings are also easy to value, and the resulting valuation is still pretty reliable (though less reliable than asset valuations). On growth companies, though, we wander into slightly dangerous territory. The best we can do here is take a view on the implied growth rates and see whether they are reasonable.

 

The company is probably not wildly undervalued, but I would posit that the company is at least fairly valued to moderately undervalued at prevailing prices. Notably, the analysis thus far has neglected to price in any recovery in the two non-automobile divisions or attribute any value from the nascent renewable energy storage pack business, which can be thought of as free options.

 

Additionally, I’d add that the growth in the automobile industry has thus far been based primarily off sales of ICE vehicles. Even though the qualitative analysis has focused on BYD’s competitive edge in batteries and hybrid/electric vehicles, we need not rely on that edge for the investment to work out.

 

Risks

 

Growth company volatility.

 

The problem with a lot of growth companies is that when they run into a bit of trouble, such as BYD did recently, the market capitulates and the shares will trade much lower than is warranted. Of course, volatility isn’t risk, so the long-term investor need not worry too much about this.

 

The auto industry is terrible.

 

Well, sort of. The barrier to entry is not high for most of the auto industry. ICE cars are very easy to produce. However, the barrier to entry for hybrid and electrical vehicles is not as low. BYD has the most advanced technology in the field, and because of its previous business lines, its economy of scale is huge. These provide a real moat for the company.

 

The technology industry is tough.

 

Well, that’s certainly true. It’s possible that some upstart in California or Mumbai could develop a better battery based on technology that doesn’t infringe BYD’s patents. However, there’s a bit of a first mover advantage here, and I think BYD understands that. Once you start to integrate your product into other people’s developed products (individual household and grid-scale renewable energy storage packs, etc.), the switching costs provide for a nice competitive advantage. Also, let’s not forget that BYD has a head start in battery technology already, so any upstart would have a ways to catch up.

[prevalou]

some questions about BYD:

1) Is Byd really the low cost operator in all its divisions? What about chinese competitors? How can we measure this?

2) with salaries increases in China, what about the threat of mechanization?

3) If vertical integration allows to keep costs low and quality high, why everybody don't do that?

4) China central planning: what if the chinese government chooses another company/standard for the developpment of electric vehicles?

5) Is really Byd technology better for vehicle batteries? What about the other players (Renault, Bollore, japanese companies, etc.? )

[merkhet]

some questions about BYD:

1) Is Byd really the low cost operator in all its divisions? What about chinese competitors? How can we measure this?

2) with salaries increases in China, what about the threat of mechanization?

3) If vertical integration allows to keep costs low and quality high, why everybody don't do that?

4) China central planning: what if the chinese government chooses another company/standard for the developpment of electric vehicles?

5) Is really Byd technology better for vehicle batteries? What about the other players (Renault, Bollore, japanese companies, etc.? )

 

Answers below:

 

(1) Unfortunately, the Chinese competitors aren't as forthcoming with their profit margins, but if you dig around a little bit (for cars sold and profits earned), you'll find that SAIC makes around HK$3,000 per vehicle and Chery makes a little less than that.

 

(2) I'm not sure what you mean by mechanization -- do you mean switching to automation?  Even with the salary increases in China, BYD costs have a lot of room before automation will become cheaper than human labor.

 

(3) In most places, there are concerns over abuse of monopoly power for vertically integrated companies.  In China, that's not the case.  If you're wondering why more automobile companies in China aren't vertically integrated, it's because the others don't have the technology in-house.  SAIC works with A123 for their batteries, and I believe Chery just inked a deal with Better Place.

 

(4) It's a possibility, but based on the urgency implied in their recent Five Year Plan to get more electric vehicles on their roads and the Chinese government's large order of K9 buses from BYD, I'm not sure they're interested in changing horses mid-race.  Additionally, I'd point out that electric vehicles are not the end-game for BYD.  The end game is to have a BYD battery powering not only the car but the home and utilities providers as well.  They've already started on that with a California deal signed with KB Homes and utilities deals with Southern China and Los Angeles.  This is why I'm less concerned with the F3e lack of production.  Since they use the same batteries in the K9 and renewable energy storage packs, they'll be in good shape when they do release their Chinese EV in the future.  Besides, I've been to China many times to visit relatives, and in the urban areas, there are no plugs in the garages and not a huge amount of electricity in the non-urban areas.

 

(5) BYD's technology is the best aside from A123's lithium ferrous polymer batteries and possibly this random German startup that I've been hearing about.  The difference here is that BYD's technology is much cheaper than A123 and, likely, the German startup.  A123 just opened up a new Michigan plant for their batteries, and as much as it warms my heart as an American that they're bringing jobs to Michigan, which has been devastated job-wise over the last few years, there's no way that A123 can compete on price.  The German startup has never answered a single question on the price of their battery, so we'll have to wait and see -- my guess though is that they'll require too much capital and time to catch up to BYD.

[kvattiku]

Do you follow a company named Kandi Technologies (Nasdaq:KNDI)? I don't follow it very closely, but think that they have a very good chance in this electric vehicle space in China and probably elsewhere. Not sure if they compete with BYD, but seems like they are definitely not an early stage company.

 

http://seekingalpha.com/article/240506-kandi-technologies-an-intelligent-vehicle-electrification-plan?source=yahoo

 

Another interesting company to follow is ECTY (Ecototality)..they are based in SFO, CA and seems to have lined up big car companies (GM, Nissan etc) and many state/city governments for their charging stations/electric vehicle infrastructure in the US and some other parts of the world.

[merkhet]

 

Do you follow a company named Kandi Technologies (Nasdaq:KNDI)? I don't follow it very closely, but think that they have a very good chance in this electric vehicle space in China and probably elsewhere. Not sure if they compete with BYD, but seems like they are definitely not an early stage company.

 

http://seekingalpha.com/article/240506-kandi-technologies-an-intelligent-vehicle-electrification-plan?source=yahoo

 

Another interesting company to follow is ECTY (Ecototality)..they are based in SFO, CA and seems to have lined up big car companies (GM, Nissan etc) and many state/city governments for their charging stations/electric vehicle infrastructure in the US and some other parts of the world.

 

 

I've taken a look at Kandi before.  The problem I see with Kandi is that they use lead-acid batteries.  They don't hold a very good charge, and they're generally prone to something called thermal runaway (i.e. the batteries sometimes heat up to a point where an autocatalytic cycle takes over and they catch on fire).

 

I'll have to take a look at ECTY.  I'm not sure that the charging stations are necessarily a good business, but perhaps ECTY has figured out a better way to do it.

[RRJ]

Thanks for the writeup and analysis, Merkhet.  I would add a few points (I'm long BYD):

 

1) They also are starting appliance and notepad computer businesses.  This risks distraction / spreading too thin, but overall I think this is them grabbing low-hanging and profitable fruit, since their in-house capabilities are so strong already in these things.  They already build notepads for their internal use, so they can so easily just task workers to make these and sell them at a pretty impressive $300 per unit and make a nice profit.  China's new middle class wants the basics -- appliances, basic computing services, and all at a low price.  BYD is very well positioned to give that to them, and that's a very large and profitable market for a vertically integrated, low cost manufacturer.

 

2) Country risk in China is there, but perhaps slightly less in BYD due to the Sokol influence on the board, and industry favorability and desire by Chinese government to have worldwide industry leaders (this might make them much less willing to interfere with the company in a way that would scare international investors in BYD).  They have shown a more long-term focus and more integrity than other Chinese companies as well, at least so far.  This could change in an instant of course, but I don't see any red flags about stealing or taking advantage of shareholders or bad accounting so far. 

 

3) Just how quickly they move is kind of astounding.  Been following them about a year and a half.  They do more in a month than most companies do in 6 months.  This tends to make me feel like they can be so nimble that they'll find a way to make money and just trial and error and quick changing of industry works in their favor rather than against. 

 

No matter what though, you can't forget that this is an intelligent speculation play, and not a tradaitional value investment.  This is Phil Fisher territoty without the ability to do as much diligence as Fisher would have insisted on to invest in Motorola for instance.  Hard to do scuttlebutt from half a world away. 

 

 

 

 

 

[prevalou]

Thank you for your answer. Still I don't get Byd technological davantage, maybe it is a cost advantage. I thought Byd was more an imitator than an innovator.

[merkhet]

 

No matter what though, you can't forget that this is an intelligent speculation play, and not a tradaitional value investment.  This is Phil Fisher territoty without the ability to do as much diligence as Fisher would have insisted on to invest in Motorola for instance.  Hard to do scuttlebutt from half a world away. 

 

 

Especially since scuttlebutt may be illegal soon, lol.  While it's certainly not a traditional value investment, I don't know that I'd categorize it as intelligent speculation.  It's definitely a "growth" play though.

 

 

Thank you for your answer. Still I don't get Byd technological davantage, maybe it is a cost advantage. I thought Byd was more an imitator than an innovator.

 

 

BYD's battery technology is based on lithium iron phosphate. Their competitors are generally either also using lithium iron phosphate (A123) or lithium manganese dioxide (Nissan LEAF) or lithium cobalt oxide or lithium nickel (Tesla).

 

Focusing on Tesla, it seems that the lithium cobalt and lithium nickel batteries have cycle charges of about 500 cycles before they are "dead". This is compared to lithium iron phosphate, which has a cycle charge of about 2000 cycles. Also, the cobalt batteries have a thermal runaway at around 200 degrees C (i.e. if it gets that hot, it essentially catches fire.)

 

Focusing on LEAF, the lithium manganese dioxide batteries get about 1000 cycles before dying out. (Again compared to about 2000 cycles for lithium iron phosphate.) The thermal runaway here is about 280 degrees C. Additionally, if you'll look at the application used in the LEAF, the range of the lithium manganese dioxide battery used is a little more than half the range of the lithium iron phosphate battery used in the BYD e6 -- though that doesn't control for possible changes in the size of the LMS battery in the LEAF vs. size of the LFP battery in the e6.

 

BYD has definitely been an imitator in the automobile division, but they are innovators in battery technology.

[CR]

Check this out:

 

http://www.engadget.com/2010/10/27/dbm-energys-electric-audi-a2-completes-record-setting-372-mile/

 

Having trouble finding out much information about DBM Energy other than their website (in german), but from speaking to a friend in the industry, the tech is super excellent and "much more advanced than what the japanese or chinese are doing."

[merkhet]

 

Check this out:

 

http://www.engadget.com/2010/10/27/dbm-energys-electric-audi-a2-completes-record-setting-372-mile/

 

Having trouble finding out much information about DBM Energy other than their website (in german), but from speaking to a friend in the industry, the tech is super excellent and "much more advanced than what the japanese or chinese are doing."

 

 

Thanks for the link.  That's actually the German startup that I was talking about -- but I didn't have the link handy. 

 

Did your friend happen to mention the size of the battery used in their test run?  After all, you can certainly bolt on three 120 mile batteries from DBM and achieve that type of range, but of course, you could do the same with three 186 mile batteries from BYD.

[prevalou]

There are other technologies: Bollore lithium métal polymere and other competitors(Renault lithium ion). Difficult to know which will win, the kms on a single charge being function of battery size mainly. Byd battery has a long range but is very heavy.

[merkhet]

Yea, the DBM battery is a lithium metal polymer, like the Bollore.  I know that the LMP batteries used to suffer from low cycles, but DBM claims that their LMP battery is capable of 2000 to 2500 cycles, which is roughly where the BYD battery stands as well.

 

I worry about Renault's lithium ion battery, since the lithium ion technology is also fairly prone to thermal runaway like the lead-acid batteries.

[CR]

Regarding the size of the battery, no, he did not mention it.

 

I am not sure it matters though. The point was that it fit into the Audi A2, a relatively common 4 person car, without much modification, and drove 375 miles. He did mention that the technology is a better and mroe efficient way to achieve higher energy density, so it's likely that the battery was smaller than what you'd expect.

[prevalou]

We don't know if there is trunk space in the A2. Batteries companies tend to boost their performance, to attract public attention.

[CR]

From the article:

 

... "Even with the heater running, the modified A2 with fully usable trunk arrived with spare electricity in the "tank." ...

[CR]

From yesterday's wsj:

 

http://online.wsj.com/article/SB10001424052748704058704576014922703439588.html

 

Take this for what you will:

 

"In a recent telephone interview, she denied that the delay had anything to do with a possible intellectual-property infringement on certain battery technology by BYD.

 

Still, an individual close to BYD said the postponement was in part a result of fear of potential intellectual-property infringement involving lithium powder. The powder is a critical raw material in high-power lithium-ion batteries that help propel all-electric and plug-in electric hybrid cars, such as the Chevy Volt and the Nissan Leaf, as well as BYD's e6 car.

 

The individual said, however, that BYD appears to have resolved the problem by securing a legal way to produce or procure lithium powder."

[merkhet]

I think CR and prevalou might be talking past each other re the battery and trunk space.  On the one hand, there's a fully usable trunk, but on the other hand, it might be modified to be smaller and still be fully usable.  Either way, it's speculation since DBM is playing it pretty close to the chest re price, size and energy density.

 

Thanks for the link CR.  BYD definitely reverse engineers a lot, and they have a dedicated team of legal guys that finds ways around other people's patents and also files for their own patents.  One other data point is that there's no reported delay on the K9 buses, and they use the same battery technology.

 

BYD is a complex story, and I think the electrical vehicle delay is noise right now.  Let's set aside the electric vehicle and clean technology issues for the moment and focus on ICE engines.

 

Toyota sold about 9 million vehicles in 2009 at a net profit margin of about 2-3% -- and they have a market cap of about $120 billion.  BYD sold 450,000 vehicles in 2009 at a net profit margin of around 12% -- and they have a market cap of about $12.5 billion of which about 3/4 or $9 billion is attributable to the automobile division.  If BYD gets to 9 million vehicles and maintains similar margins, the automobile division alone would be worth some multiple of $120 billion.

 

Of course, no one is saying that it's worth that amount right this second, but if you put some estimate of where you think BYD's plain old ICE car output will be in five years, discount it back and slap an appropriate multiple on it, I think you get a much higher intrinsic value per share than the current share price.  And on top of that, you get a free option on EV and clean energy technologies.  (Again, it gets a little more complicated than that, if you want to talk about EV substitution for ICE, but we're just trying to get an approximate understanding of the value right now.)

[rijk]

there's a fair amount of doubt about DBM's A2 record...

regards

rijk

 

 

http://notrickszone.com/2010/12/11/record-setting-electric-car-refuses-independent-testing-was-it-a-hoax/

 

[rmitz]

I have heard that BYD has done reverse engineering which has helped it get in the game - would this be legal in the U.S?

 

It depends on how the reverse engineering is done, and what stuff has been patented vs kept as a trade secret, etc.  For example, the original IBM PC BIOS was reverse engineered in a "clean room" fashion--one team looked at existing chips and made an excruciatingly detailed spec from it, and another team re-implemented the chip based on that spec.  As long as no one on the latter team looked in detail at the original, it was kosher.

[beerbaron]

I have heard that BYD has done reverse engineering which has helped it get in the game - would this be legal in the U.S?

 

It depends on how the reverse engineering is done, and what stuff has been patented vs kept as a trade secret, etc.  For example, the original IBM PC BIOS was reverse engineered in a "clean room" fashion--one team looked at existing chips and made an excruciatingly detailed spec from it, and another team re-implemented the chip based on that spec.  As long as no one on the latter team looked in detail at the original, it was kosher.

 

China has it's own IP system, it's called Intellectual Bribing in my opinion. It's close to a joke, so there are no issues with BYD selling in China itself. As for the US... cross licensing is always an option.

 

BeerBaron

[ericd1]

New 52 week low - Time to buy?  No recent news. Is Mr Market providing an opportunity?

 

- long BYDDF

[RRJ]

I thought so, and bought a bit more.  The news relates to Beijing, and potentially other Chinese cities, limiting the number of new car licenses in an effort to lessen traffic congestion.  This has killed the stock of the Chinese domestic auto manufacturers, particilarly BYD and Geely.

 

Rough estimate of current P/E is 13.  This is potentially quite low for a company that has been growing much faster than that historically.  BYD is not just a car company, and in fact has been preparing for this type of shift for over a year.  The new product lines have not yet begun to show up as revenue drivers, but should shortly.  Speculative bet as alwasy, but I think justifiable based on their history of being able to enter new product lines and quickly grab market share.  They've done it at least twice before and are a low cost provider.

 

New product lines they have announced are appliances, notepad computers.  They are also more focused on electric buses with solar panel roofs, which will be emphasized under Beijing's new plans.  They are also solidifying their dealer networks and arrangements after some stumbling last year with too-fast growth.  They are still vertically integrating auto manufacturing capability, and building foreign plants and distribution centers to focus on selling their conventional cars overseas.  In short, this is much more than just a Chinese domestic car company, and the current news is not taking this into account.  I think BYD is building one of the few Chinese companies that will live up to Western standards of reporting and governance.  Somewhat risky still, but much less so at this price. 

[merkhet]

The stock is down 10% in the last five days on little to no news.  I'm inclined to think that this is due to people trying to sell for a tax loss in preparation for a possibly soft 4Q.

 

None of the competitive advantages or secular tailwinds of Chinese automobile and energy demand growth have been altered since I initially posted the idea.

[CONeal]

Hope someone can share some insight.  A few years ago BYD spun off BYD Electronics.  While it looks like the Electronics division is still within BYD.  What exactly did they spin off and how much of a stake does BYD still have in the Electronics division, if any?

[merkhet]

BYD Electronics was spun off in late 2007, and BYD Company holds about 2/3 of the company.  The BYD Electronics company is the handset assembly business.