Tesla Woes Bolster Appeal of Top China EV Maker BYD: Tech Watch

(Bloomberg) — BYD Co. is rapidly closing in on Tesla Inc. as the world’s biggest seller of pure electric vehicles, with surging profits underscoring its sales clout despite intensifying competition at home.

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Shares of the Hong Kong-listed Chinese electric-vehicle firm are up 1.7% this month, outperforming Tesla’s 17% plunge and declines in other peers as well. While shares of Elon Musk’s firm are still up by more than double the rise in BYD this year, signs are pointing to further gains for the latter.

Traders have snapped up bullish options on BYD, while analysts have raised their earnings projections for the Chinese company to a record high since its preliminary quarterly report this month. BYD posted all-time high sales despite intensifying competition and a broader slowdown in sales of China’s new-energy cars. The company will report its third-quarter earnings after Monday’s close.

BYD Shares Jump on China EV Maker’s Record Quarterly Profit

Musk cast a pall over the global EV sector with a grim outlook earlier this month, saying rising interest rates in the US have hurt its sales. Tesla’s results are also suffering from the months-long price war that it had initiated in an attempt to fuel demand. Analysts have been lowering their earnings-per-share estimates for the US maker at the same time the outlook for BYD has been rising.

“BYD still looks like the safest bet versus Tesla in the short term given its discipline in terms of balancing volume growth with profitability,” said Kevin Net, head of Asian equities at Tocqueville Finance. “It also has growing exposure to hybrids, which have been gaining market share in China and contribute to higher margins.”

Tesla’s Slowing Growth Is Sending a Warning to All EV Makers

BYD sold a record total of 822,094 vehicles in the latest quarter, including hybrids, helping to cement its lead as China’s best-selling car brand. What particularly surprised industry observers is that BYD seems to be making more money per vehicle, despite price competition.

Profit per car, excluding the impact of the company’s electronics unit, rose as much as 46% versus the previous quarter, according to JPMorgan Chase & Co. estimates. The analysts believe BYD can maintain its profitability into next year thanks to more sales of high-end vehicles as well as continued overseas expansion.

Tesla, EV Investors Face a Reckoning as Demand Starts to Crack

BYD is expected to start deliveries of its high-end Yangwang U8 and Fang Cheng Bao BAO 5 in the fourth quarter, according to pundits at HSBC Holdings PLC. Outside of China, BYD claims high shares in countries including Brazil, though tax and political considerations have kept it from entering the US passenger-car market.

The improving profit outlook has helped make BYD’s stock more attractive, driving its forward earnings multiple down to about 18 times, compared with over 50 times for Tesla. Recent options data also look positive, as the volatility skew has shifted toward the more bullish side compared with a month ago.

While BYD has been backed by Warren Buffett, Berkshire Hathaway Inc.’s selling of shares since last year may have weighed down its share price. Other headwinds for the shares include the European Union’s anti-subsidies probe into EVs made in China.

“There is definitely a heavy China discount on the stock, but I don’t see it getting worse,” said Taylor Ogan, chief executive officer of hedge fund Snow Bull Capital, which owns shares in both BYD and Tesla. “Investors will have to wake up to BYD next year when its two high-end brands begin deliveries, and it exports noticeably into new markets,” he added.

Tech Chart of the Day

Alphabet Inc. shares fell 9.9% last week, shedding about $180 billion in market value, as the Google parent reported a smaller than expected profit in cloud computing. Investors have scrutinized cloud businesses at Alphabet, Amazon.com Inc. and Microsoft Corp. as big tech firms ramp up AI offerings to entice customers. All three stocks edged higher on on Monday.