Breakingviews

By Katrina Hamlin

3 Min Read

HONG KONG(Reuters Breakingviews) - BYD has a lot of spare parts. The Chinese automaker's $3.8 billion share sale last month tapped a craze for electric vehicles. Yet even after a 500% rally over the past year, its Hong Kong stock looks cheap next to peers. Separating electric vehicles from traditional motors, face masks, handsets and other businesses could be one way to narrow the gap.

Battery-powered cars are in the fast lane. Tesla shares have nearly quintupled while those of Chinese rival Nio have shot up by more than 1,400% over the past 12 months. The mania has extended to BYD's shares in Hong Kong and Shenzhen, albeit at a more modest pace. The enterprise now trades at around 22 times forecast 2021 EBITDA, a premium to traditional automakers but well below Tesla's 83 times.

The more mature marque may not be as racy as newer upstarts, but BYD's electric-vehicle division boasts some impressive power. Unlike any other rival, it produces its own batteries and semiconductors used to manage power, the two most expensive components. Besides a cost advantage, vertical integration has given the company a competitive one, especially when essentials like chips are in desperately short supply. BYD has ranked among the top five electric vehicle brands globally by market share over the past four years, according to Bernstein analysts. New designs have been well received too: sales grew more than 50% year-on-year in the second half of 2020.

Moreover, the Berkshire Hathaway-backed company boasts something many upstarts lack: sustainable earnings. In contrast to unprofitable Nio, or Faraday Future, which has yet to generate any revenue, BYD is expected to ring in some 13.2 billion yuan ($2 billion) in EBITDA from electric vehicles and auto batteries in the year to March 2021, Daiwa analysts forecast. Exact comparisons are elusive, but applying the hefty 63 times average multiple at which rivals including Tesla, Beijing-backed BAIC's Bluepark New Energy Technology and battery-maker Contemporary Amperex Technology trade implies a valuation of around $130 billion for BYD's comparable business.

Even accounting for debt, that's more than the company's entire $112 billion market capitalisation, which is weighed down by lower-valued businesses spanning mobile phones to medical face masks. There's also a conglomerate discount to consider. BYD is already planning to list its chipmaking arm in Shanghai. A similar spinoff for electric vehicles could turbocharge the valuation.

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