BYD Runs On Government Support

BYD’s EV drive sputters

I gave quite a bit of attention a few days ago to US electric vehicle (EV) sensation Tesla (Nasdaq: TSLA), so it’s only fair that I close out this week by writing about China’s homegrown EV superstar BYD (HKEx: 1211; Shenzhen: 002594), which has just released quarterly results that look quite disappointing. The only things that look slightly encouraging in this latest report are the fact that billionaire investor Warren Buffett continues to hold onto his 10 percent stake in the company, which he bought in 2008, and that BYD remains profitable. But even the profits are due to strong support from Beijing, under its program to encourage clean-energy vehicle development.

If I had to describe BYD’s recent performance in a single thought, I would say that this company is quite good at setting up pilot programs for its EVs but has difficulty translating those programs into big business. Over the last 3 years, BYD has announced a steady string of such pilot programs in a wide range of markets, from Western Europe to the US and Latin America, as well as in its home China market. But with only a few rare exceptions, we have yet to see any of these programs turn into the large orders that BYD will need to make its EV program viable over the longer term.

All that said, let’s look more closely at BYD’s latest quarterly results that show its profit largely evaporated in the first 3 months of the year. The company reported a first-quarter net profit of about 12 million yuan, or just about $2 million, which was down 90 percent from a year earlier. (company announcement) That’s quite a tiny figure for a company whose revenue totaled nearly 12 billion yuan for the quarter, which also was down by a more modest 9 percent.

BYD reported it received 98 million yuan in government grants during the quarter, meaning it almost certainly would have lost money without that support. Obviously we can’t directly subtract this amount from its total profit, but I do think it’s fair to say the company would have reported a loss of 50 million yuan or more without this government assistance.

BYD’s Hong Kong-traded shares fell 2.8 percent before the report came out, though they regained some of that ground in the latest trading session on Friday. The stock has actually rallied quite a bit over the last year and a half, more than tripling since October 2012 on enthusiasm over the EV program. But I suspect this latest disappointing result could force investors to realize the company’s electric dreams aren’t materializing as hoped, and could mark the beginning of a broader sell-off that could see the stock fall by a third or more over the next few months.

BYD is in the difficult position of waiting for its EV business to start bearing fruit, as its older battery and traditional gas-powered car businesses show signs of aging. BYD has previously said it will leave the gas-powered car business altogether by 2015, as it sees the future in electric vehicles. In a bid to shore up its cash position, the company announced a major plan a year ago to raise up to $500 million by issuing new shares. (previous post)

I’ve mostly written enthusiastically about BYD each time it announced a new EV pilot program, as such programs are a necessary first step for customers to test out the technology before placing bigger orders. But the fact that we’re seeing few major orders being placed up to 3 years later probably means that many of these pilot programs weren’t as smooth as BYD had hoped and perhaps the buyers didn’t like the technology. That certainly doesn’t bode well for the company’s future, meaning BYD could be dependent on government assistance to support its bottom line for the rest of this year and quite possibly into 2015.

Bottom line: BYD’s latest results show its EV sales aren’t accelerating as quickly as planned, and it will remain dependent on government subsidies to support its bottom line for the rest of this year.

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