Chart Of The Day: BYD Poised For A Near-Term Retracement

Recent developments in the Chinese auto sector have been positive for domestic electric vehicle (EV) manufacturer BYD Co. In early February 2014, the government announced its intention to extend EV subsidies beyond 2015 and increase their size from what was previously stated. Potential EV buyers can enjoy as much as CNY60,000 (US$9770) in subsidies for the purchase of an electric passenger vehicle and up to CNY500,000 (US$81,430) for the purchase of an electric bus.

Although BYD's share price enjoyed a surge in February, which was likely on the back of the EV subsidy extension announcement, its stock has been on an uptrend since April 2013. In our opinion, this can be attributed to the recent news and developments, which have been favourable to the firm. Some of these include the announcement by Daimler and BYD to introduce their Denza electric car in April 2014, the firm's plan to enter the US market by 2015, and the dropping of labour related charges against BYD in the US.

However, we caution that the automaker's share price looks overdone in the short term and poised for a pull back. The firm's earnings have not kept pace with the run-up in the stock (trailing 12 months P/E ratio is at 180x) and total industry sales of EVs still remain low. We believe the carmaker will continue to face subdued demand for its electric cars in the near term due to affordability concerns, consumer perceptions and the lack of charging infrastructure in the country.

Retracement Likely In Short Term
BYD Co - Share Price, HKD

Recent developments in the Chinese auto sector have been positive for domestic electric vehicle (EV) manufacturer BYD Co. In early February 2014, the government announced its intention to extend EV subsidies beyond 2015 and increase their size from what was previously stated. Potential EV buyers can enjoy as much as CNY60,000 (US$9770) in subsidies for the purchase of an electric passenger vehicle and up to CNY500,000 (US$81,430) for the purchase of an electric bus.

Although BYD's share price enjoyed a surge in February, which was likely on the back of the EV subsidy extension announcement, its stock has been on an uptrend since April 2013. In our opinion, this can be attributed to the recent news and developments, which have been favourable to the firm. Some of these include the announcement by Daimler and BYD to introduce their Denza electric car in April 2014, the firm's plan to enter the US market by 2015, and the dropping of labour related charges against BYD in the US.

Retracement Likely In Short Term
BYD Co - Share Price, HKD

However, we caution that the automaker's share price looks overdone in the short term and poised for a pull back. The firm's earnings have not kept pace with the run-up in the stock (trailing 12 months P/E ratio is at 180x) and total industry sales of EVs still remain low. We believe the carmaker will continue to face subdued demand for its electric cars in the near term due to affordability concerns, consumer perceptions and the lack of charging infrastructure in the country.

While we see the firm gaining better traction in its push to target Chinese cities to purchase its electric buses for public transportation, in part due to strong support from the central government, sales will occur in stages over the 2014-2015 period. The lack of earnings visibility in the short term make current valuations look stretched and support our view of a near term retracement in the automaker's share price.

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Related sectors of this article: Autos, Commercial Vehicles, Production - Autos, Passenger Vehicles, Companies - Autos, Alternative Fuel
Geography: China, Hong Kong
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