Short-Seller Retreat Bodes Well for BYD Shares Ahead of Earnings

(Bloomberg) — Short-sellers are losing conviction on bets against BYD Co. shares, which may continue to outperform other Chinese electric-vehicle stocks if its results next week are as good as expected.

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Short interest in BYD’s Hong Kong-listed shares has dropped to 1.4% as of Aug. 21 from a high of 7.7% earlier this year, according to S&P Global Inc. data. Bearish bets are now near the lowest level since July 2023.

The company sold a record of nearly 1 million electric and hybrid cars in the latest quarter despite cutthroat competition, boosting expectations for an earnings rebound after two quarters of sequential decline. The stakes are high for China’s top EV maker after better-than-expected reports from rivals Geely Automobile Holdings Ltd. and Xiaomi Corp.

“We anticipate BYD’s margins will continue to improve, supported by higher operating leverage,” said Bing Yuan, a fund manager at Edmond de Rothschild Asset Management. The expected launch of new models in the current quarter “should further enhance market share and earnings visibility,” she added.

The company’s shares have gained more than 6% in Hong Kong so far this year, compared with losses in peers from Tesla Inc. to Nio Inc. BYD’s strong revenue growth has helped make its stock more resilient to concerns over diminished demand and the industry’s ruthless price cuts.

The Shenzhen-based company’s sales have gotten a lift from the popularity of its fifth-generation plug-in hybrid drive system, which was introduced in May. The automaker’s aggressive moves to reduce prices across most models in China earlier this year to better compete with foreign gasoline models also boosted its domestic deliveries.

While sales within China are less profitable than exports, higher plant utilization and other economies of scale have protected BYD’s overall margins. Most sell-side analysts estimate its net profit per vehicle has rebounded to around 8,000 yuan ($1,120) after bottoming out at around 6,000 yuan in the first quarter, data compiled by Bloomberg shows.

The contribution of exports to BYD’s monthly sales, meanwhile, has fallen to 8.8% in July from a recent peak of 13.1% in April. Additional European Union tariffs threaten possible further declines for the industry, with Geely warning this week of a potential negative impact on its sales.

If the European downtrend continues, China’s EV makers may need to look elsewhere to bolster lucrative exports.

“Investors could be closely watching any update to BYD’s overseas strategy after the EU imposed higher tariffs,” Joanna Chen, an analyst at Bloomberg Intelligence, wrote in in a note. She added that she expects the company’s results for the June quarter, due Aug. 28, to be “solid”.

The average estimate for BYD’s 12-month forward earnings per share has risen about 11% since late April. While the stock has outperformed peers, it’s still only trading at about 15 times expected earnings, about one-third of its five-year average.

“Expectations were low at beginning of year, but both sell-side and buy-side have raised expectations meaningfully since as the company delivered on results and monthly sales looked fine,” said Xin-Yao Ng, director of investment at abrdn Asia Ltd. “The share price does look cheap relative to the company’s potential.”