China’s electric vehicle leader, BYD, has no speed issues, at least on the revenue side. But cost pressures and a slowing Chinese economy could let its tires swell before long.
The Warren Buffett-backed Chinese automaker reported an impressive 36% year-over-year revenue increase in the latest quarter on Tuesday. The company has benefited from the electric vehicle boom in China.
Sales of new energy vehicles, including plug-in hybrids, nearly tripled in 2021, according to the China Association of Automobile Manufacturers. BYD, the country’s top-selling brand, also sold three times as many new-energy vehicles last year compared to 2020. The company held about a fifth of China’s new-energy car market last quarter, according to Goldman Sachs, compared to 13.4% a year earlier.
BYD’s net profit, however, fell 27% from a year earlier for the three months ended December. This was partly due to lower earnings from its handset components business and some one-time items such as asset impairments and revaluation. But its gross profit margin in the quarter was also 3.7 percentage points lower than a year earlier, according to Goldman Sachs, likely due to higher raw material costs.
That could continue to be a problem this year. Prices for materials, including lithium and nickel, have soared. Russia’s invasion of Ukraine has further aggravated the problem. And chip shortages continue to be an issue that could drive down production, especially with the recent resurgence of Covid-19 in China.
Another uncertainty is whether a slowdown in the Chinese economy will ultimately affect demand. Electric vehicles performed well last year despite a sluggish overall auto market as more buyers ditch gasoline-powered cars. Covid-19 outbreaks, especially as they lead to containment of large cities like Shanghai, can also hurt car sales.
BYD’s share price has fallen 16% this year, after a stellar performance in the previous two years, reflecting those concerns. Other Chinese electric vehicle stocks also fell.
Car sales in China in the first two months of 2022 slowed from record highs at the end of 2021, but remained at high levels. That’s partly because buyers rushed to buy late last year ahead of electric vehicle subsidy cuts. The purchase subsidy will be completely gone after this year.
After moving at breakneck speed over the past two years, China’s EV market may slow down a bit this year, which also looks likely to affect BYD.
BYD has managed to raise prices for its cars twice this year, helping to soften the blow from cost increases. Another saving grace is that higher gasoline prices have boosted the relative appeal of electric vehicles. Company management remained optimistic in its earnings call on Wednesday, targeting sales of at least 1.5 million new-energy cars in China this year, more than double last year’s sales, according to Citi. .
With strong revenue growth, structural tailwinds from the transition to electric vehicles, and a firm grip on its market leadership position, BYD could still outpace its rivals.
Write to Jacky Wong at [email protected]
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Appeared in the March 31, 2022 print edition.