BYD Market Cap?

[anders]

anders, wasnt the drop in margin caused by both? and wasnt the reason for their aggressive increased sales & distribution efforts in 2010 because, in short, they miscalculated 2010 sales trend projections by a country mile?

i agree tho that byd is a worthwhilelong term speculation at these prices

 

Well.. yes.. but, total revenue increased 18% yoy.. I wrote 'the biggest cause' ..Sure they did not deliver the forecast which is always painful for the stock.. In my mind, you need to create revenue before the costs and, by selling first and buying after the company can let revenues control the cost level that is acceptable for the company.. So raising the sales target to maybe 700'000 vehicles doesn't necessarily mean that Wang Chuan-Fu thought: "well we have a target on 700'000 and therefore we will increase the cost with 77% to meet that target".. but rather longterm we need to expand the business and therefore we need to increase our sales and distribution channels. Sure the gross margin was hurt by the forecast but the profit margin decline I believe was due to other factors.  :) 

 

[anders]

Can you clarify the valuation that you derive above..."13 on profit and 8.8 for the business itself". thx.

 

BYD @28.6 is in HKD so converted the price to RMB to meet the figures in their report.. and, it's for 2011.. the multiples are for 2011, based on revenues of approx 52B RMB with profit margin 8%.. (which might be optimistic)..  ::)

When I speak about the business itself I mean what multiples you are paying for the operating business, excluding the balance sheet.. Take Bunge, you buy the company @ capital funds.. (equity excluding intangibles) so essentially, you get the operating business for free.. if you were a buyout company you would look at enterprise value..

[anders]

Another thing...Why is BYD referred to as a speculation ??  :-\

 

The company does provide cash flow.. it shouldn't be categorized under the greater fool theory..

 

[link01]

anders, wasnt the drop in margin caused by both? and wasnt the reason for their aggressive increased sales & distribution efforts in 2010 because, in short, they miscalculated 2010 sales trend projections by a country mile?

i agree tho that byd is a worthwhilelong term speculation at these prices

 

In my mind, you need to create revenue before the costs and, by selling first and buying after the company can let revenues control the cost level that is acceptable for the company..

 

hmmmm...i dont know about this statement. expenditures for targeted new business lines or for growth/expansion of existing biz always preceed the revenues & margins that follow in its wake.

 

yes,  total revenue increased 18% yoy, but it seems that their aggressivley expanded sales & distribution outlays envisioned much much higher revenue targets for the year than actually came to pass. which is always the risk a co runs, tho maybe not to such a alarming extent? it looks as if the costs of this investement may have its contemplated returns pushed out a few years at the least.

 

btw, i only called this a speculation because, to my mind & ablities at least, byd cash flows over the next several years are more unpredictable than average co. but then again, if past is prologue, it could be eye popping indeed!

[RRJ]

Another thing...Why is BYD referred to as a speculation ??  :-\

 

The company does provide cash flow.. it shouldn't be categorized under the greater fool theory..

 

 

I use that term because I see risks beyond what I normally require for sound investment and want to keep the holding separate in my mind as a more aggressive holding:  (1) political risk (though I believe BYD is by far on right side of the political equation for Beijing, and in fact the Chinese government's policies are far more likely to help them than hurt them, there is still heightened political risk here.  I do note however, that the confiscation due to land zoning violations turned out as I suspected it would -- the government ended up returning the land and factories, rezoned for commercial factory use, with a $9,000,000 fine.  That speaks volumes.); (2) country risk (China could be in bubble territory that could crimp domestic demand for consumer products (but here BYD's low cost structure ameliorates that risk in my mind as well); (3) technology risk -- technology changes.

 

The biggest risk is that you are attempting to pick a winner with a relatively short term track record in a fast-changing industry(ies).  I think given their low cost business model, and focus on building brand is where the moat will be eventually, but that is more risky than buying a business with a well established moat that has been in existence for 20 years already and evidenced by ROE above 25% for that whole period.  Greater risk, potentially greater reward, with some risk of permanent capital loss.  Intelligent speculation at these prices, but still speculation. 

[anders]

# Link01

# RRJ

 

Thanks for great feedback and response.

 

From a helicopter view perspective, according to PRC budget plan, china's total production and sales of new energy vehicles will reach 500 million in 2020 with hybrid vehicle annual sales of more than 50%. 2011-2020 the PRC will grant subsidies to individuals purchasing new energy vehicles of RMB 3000 per kWh for new energy vehicles; the maximum amount for plug-in hybrid automobiles will be RMB 50,000 per unit and RMB 60,000 per unit for pure electric vehicles (BYD E6). Corporate sales of new energy vehicles and key parts of the VAT rate was adjusted to 13%. R&D within this field will be 100% deductible. Moreover, PRC plans to implement mandatory new energy vehicle purchases in all levels of government and public bodies (BYD K9 electric Bus). Talk about tailwind  :D

 

Buying into the company today gives approximately the same multiple levels of MidAmerican's rights issue purchase in September 2008. Regardless of speculation or investment, I believe this one is a keeper and would gladly see the price drop further and, if Munger's consideration of W.Chuan-Fu to be a mixture of T.Edison and J.Welch holds true -- then this story will surely be one of the great ones.

 

 

[RRJ]

Well said.  That about sums it up.  I just keep reminding myself as it trends down and I nibble a bit more that this is a bet on Wang and his vision.  At these prices, the bet is a good one, but it is still a bet on him and his abilities as a manager.  I don't know anyone that's got a stronger record of judging people as Munger - notwithstanding the recent Sokol debacle.  He could be wrong but he's not out in left field judging by Wang's track record. 

 

I do agree though -- the multiple here is very reasonable for a company with a strong track record of understanding the Chinese market as well as foreign markets.  You're getting all the more risky future businesses more or less for free or very little, as the conventional car and handset parts supply businesses come darn close to justifying the current price.  I like those odds.  This is a mispriced horse with a 1 in 2 shot of coming out with a win, place or show, and with odds marked at like 5 to 1. 

 

Wonder if Sokol will buy in personally now that he's not constrained by all those pesky no-trade lists.  He knows the company better than most having been on the board and done Berkshire's diligence.