Bottom line: BYD’s new order from Shenzhen shows its continued reliance on state support for new energy vehicle sales, while its new monorail product could become a cash cow in 1-2 years if the technology works well.
Futuristic transport company BYD (HKEx: 1211; 002594) is in a couple of headlines as the new work week begins, seeking to show its potential and justify why people like billionaire investor Warren Buffet should buy and hold its shares. One headline has the company announcing a major new contract for its core electric vehicles from its hometown government of Shenzhen. The other has the company formally launching its newest business helping cities build monorails.
I’ll admit I wasn’t even aware of the company’s monorail plan, which apparently is aimed at providing cheaper mass transit alternates for big cities to traditional subways and light rail. The idea certainly sounds interesting, though we would probably require a more seasoned urban transport expert to talk about the pros and cons of such systems. Still, it does show the company is trying to innovate and stay ahead of the curve.
All of this comes against a bigger backdrop that has BYD’s new energy vehicle business, hyped as the company’s future, going nowhere in the first part of this year. The company recently reported first-half results that showed its new energy vehicle sales actually fell in the first half of the year in terms of actual vehicles sold, while revenue was roughly flat. That’s largely due to shifting policies in its home China market, which is its main source of sales, and shows just how dependent the company is on state support.
This latest story from BYD’s hometown of Shenzhen continues to drive home the state-support theme, and how it doesn’t look like BYD will escape its dependence on government largess anytime soon. According to an announcement from the company, BYD has won an order from Shenzhen for 432 new energy vehicles worth 561 million yuan ($85 million). (company announcement)
The announcement does say this was a competitive bidding process, but it does seem like the deck was probably stacked in favor of BYD as the hometown favorite. The fact of the matter is that this isn’t the first time BYD has won such a contract from its hometown government, and shows how reliant it is on such support. That’s not to say the company doesn’t make quality products, but more that electric vehicles just don’t seem to have a major audience in China, or anywhere else in the world just yet.
China’s new energy vehicle sales got off to a miserable start this year, the result of big policy shifts as Beijing tried to stamp out previous incentives that had led to massive fraud by both consumers and manufacturers eager to get government handouts designed to promote the sector. Sources have told me the situation is improving as the new policies get articulated, and that sales could show strong growth at the end of the year. That could help to power some strong short-term sales growth for the next year, though it’s quite possible things could cool after that in the absence of true market-fueled demand.
Next Big Thing?
Next let’s close out this post with a quick look at the new monorail business that BYD is rolling out as another next-generation product to differentiate itself from the rest of China’s crowded field of car makers. That story is rather straightforward, and has BYD formally launching its first monorail in the smaller Chinese city of Yinchuan in the relatively poor interior city of Yinchuan. (English article)
BYD says the monorail systems cost about one-fifth as much as traditional subways and take about a third of the time to build. It adds that it plans to build 20 such systems in China in the year ahead, and has found at least one foreign customer in the Philippines.
Based on this initial report, it does appear that these systems have found an initial audience in mid-sized Chinese cities that perhaps can’t afford and don’t really need a full-blown subway system but still want to offer alternatives to simple buses. There are quite a few cities that fit that description in China, and also quite a few in other developing markets and even the west.
Of course as with everything else, the key to the success of this product will lie in actual quality and reliability. If this initial system works well and doesn’t break down frequently and require big maintenance costs, it’s quite possible it could become a cash cow for BYD. But given its newness to the sector, I suspect this new system will have quite a lot of teething problems and will require at least one or two years until the technology could start to take off, if ever.