BYD

I try to identify clear winners at an early the stage in the market – the next GOOG, AAPL, AMZN or MSFT. It is like investing in a venture fund. The business has not yet caught the mainstream media and big hedge fund managers’ attention.

BYD is a potential candidate.

Fundamentals:

It is a play on the electric car market.

In general, there are still plenty of skepticism about electric cars but they are quickly breaking into the main stream market. They are probably here to stay.

The concept of battery-powered cars has been around for decades. Concerns about rising oil prices and climate change, as well as tougher fuel efficiency standards, government subsidies and venture funds, have propelled these concepts into reality.

Pike Research expects electric vehicles to grow 106% per year or 3.2 m vehicles for the next 5 years. European researcher Glass’s Information Services is predicting that market share for electric vehicles in the UK, Italy, France, and Germany will be more than 20% each. Electric vehicles will become 25% of the US market.

China will be the largest market for electric vehicles, ultimately capturing 27% of worldwide electric vehicle sales. The reason for the hot market is that its government wants it to be so. The Ministry of Industry and Information Technology is committed to developing up to 5 Chinese companies into competitive makers of all-electric cars or plug-in hybrids by 2020, and allocated as much as 100 billion Yuan ( $15 b US) to this end. In China, what the government wants, the government gets.

BYD is the largest auto manufacturer in China. I like BYD because:

1. The technology of electric cars is not something fraught with challenges. It is actually less complex than regular combustion engines. The key competitive advantage needed is low cost. China has the low-cost structure needed. By 2000, BYD had become one of the world’s largest manufacturers of cell phone batteries. By 2008, BYD F3 became the no. 1 selling car in China, beating Volkswagen and Toyota. BYD has 10,000 good engineers at salaries of <$1000 per month.
2. BYD has the access to the biggest growth market in the world, which is China. BYD is on the way to becoming the biggest auto manufacturer in the world!
3. Having done quite a bit of business in China, I know that the Chinese government will protect their own manufacturers over foreign companies and joint ventures. BYD will be the biggest, for sure.
4. Warren Buffet likes the stock. BRK bought 10% of BYD for $230m in 2008. After a recent visit, there are rumors that he is increasing his share of the company. If Warren Buffet sees value, I believe I do not need to dig deeper into the company. It has probably the business moat we are looking for. It can easily defend against all competitors.
5. BYD has a very sound management team. The CEO is a visionary - highly energetic and smart. Charles Munger of Berkshire commented “ Thus guy, Wang ChuanFu ( the founder ) is a combination of Thomas Edison and Jack Welch – something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.” Wang is now one of the richest men in China. However, he has not let his success change his lifestyle and is still a very humble man. He pays himself a modest $265,000 and lives in a BYD-owned apartment complex with other engineers. His only indulgences are a Mercedes and a Lexus, and they have a practical purpose. He takes apart their engines to see how they work. Wang owns roughly 28% of the shares of the company that is worth about US$2b. He has proven ability to execute as he has brought BYD to its present stage with only $300K capital borrowed from friends and relatives.
6. BYD is not just a car company. It is the biggest battery manufacturer. It supplies to the biggest phone manufacturers like Nokia and APPLE iPhone. Its new generation of lithium-ion ferrous phosphate batteries costs 50% less than standard lithium-ion batteries, and lasts longer. BYD batters are 100% recyclable and non-toxic. The battery is a critical component of the electric car. It is a core competence that leads to a distinctive competitive advantage.


For a review of this company, you can watch interview with Mr Wang on CNN or watch the youtube videos below.








Technical



BYD stocks took a 19% decline after they revised their forecast sales target from 800,000 to 600,000. Also, they have had to revise their claim that the e6 has a range of 249 miles per charge and goes from zero to 60 in 8 seconds and has a top speed of 100 mph, and recharges for 50% of capacity in just 10 minutes. These are jaw-dropping claims in the electric car business. Unfortunately BYD has had to adjust some of these claims downward. Zero-to,-60 mph is now 14s, range is 180 miles and top speed is 85 mph.

The stock has fallen and now broken up and reaching at support. As soon as BYD works out these performance bugs, it will rebound to its previous high point.

BYD certainly has the characteristics of the kind of 10 baggers growth stocks that I am looking for.



Trades


This is a stock listed in Hong Kong. It is NOT the same BYD listed in USA. Fortunately using Interactive Brokers, I can buy HK stocks online. I just need to pay slightly higher commissions and a monthly fee of about $15 for real-time data from the Hong Kong Stock Exchange.

The Hong Kong market is not open yet. Also, for the short-term, the stock seems to be under some selling pressure because of some concerns by analysts on growth and valuation. But this is long-term buy.

Trade:

Buy stock at 56
STO Nov 60 SC for 2.4

Cost: 53.6

PE:SC expires and roll out SC next month. Since this is a long term bullish trade, I will not allow the SC to go ITM

SE: If stock goes below 53.6, consider rolling SC down to 50 or add a put to make it a collar if the downtrend is fast. Continue to manage this stock as posted in Dyanmic Collar and use of put in this blog.

The liquidity for options in the HK stock market is very low. Thus it is important to place limit order and wait for it to be filled.