Tesla's predicament boosts China's top EV maker BYD's appeal

Despite intensifying domestic competition, BYD emphasizes sales power due to rapid increases in profits, and is rapidly approaching the world's largest Tesla company by selling pure electric vehicles.

The stock price of the Hong Kong-listed Chinese electric vehicle company BYD rose by about 1% this month, surpassing Tesla's 17% sharp drop and other declines in the same industry. The stock price of Elon Musk's company is more than double the rate of increase of BYD since the beginning of this year, but there are signs that the latter will rise further.

Traders have bought up BYD's bullish options, and analysts have raised BYD's earnings forecasts to record highs since this month's quarterly bulletin. BYD recorded record sales despite increased competition and a drastic slowdown in sales of new energy vehicles in China. The company will announce financial results for the third quarter after closing on Monday.

At the beginning of this month, Mr. Musk showed a grim outlook that rising US interest rates were impacting sales, casting dark clouds over the global EV sector. Tesla's performance has also been affected by price competition that has been carried out over several months to stimulate demand. Analysts are lowering earnings per share forecasts for US manufacturers at the same time as BYD's outlook is rising.

Kevin Nett, head of the Asian Equities Division at Tocqueville Finance, said, “BYD seems like the safest bet against Tesla in the short term when considering its discipline in terms of balancing unit volume growth and profitability. BYD is also expanding its market share in China and increasing its exposure to hybrid vehicles, which are contributing to improved profit margins.”

BYD sold a record high of 822,094 units, including hybrid cars, in the latest quarter, solidifying its lead as the best-selling automobile brand in China. What surprised people involved in the industry in particular was that BYD is increasing profit per unit despite price competition.

According to JPMorgan's forecast, profit per unit, excluding the impact of the company's electronics division, increased 46% compared to the previous quarter. Analysts believe that BYD will be able to maintain profitability next year due to the expansion of sales of high-end cars and the continuation of overseas expansion.

Outside of China, BYD boasts a high market share in countries including Brazil, but entry into the US passenger car market has been postponed due to tax regulations and political considerations.

As profit forecasts have improved, BYD's stock price has become more attractive, and the future profit ratio has dropped to about 18 times over 50 times that of Tesla. The volatility bias in recent option data has also shifted to the bullish side compared to a month ago, and it looks positive.

BYD has received support from Warren Buffett, but there is a possibility that the sale of Berkshire Hathaway shares since last year has become a burden on stock prices. In addition, anti-subsidy investigations into Chinese-made EVs by the European Union (EU) have also been a headwind against stock prices.