As the two largest economies collide in their quest to expand their political and economic powers, the United States and China are on an opposite schedule regarding the wind direction of their economies. While the United States has struggled to lower its inflation rate due to increased demand and productivity boosted by post-COVID economic stimulus and low-interest rates, China has been somewhat 'asleep' during the past two years. Now that the latest economic data points to China suffering from a 0.1% inflation rate, the government is beginning to boost these lackluster demand levels.
In the latest round of Chinese stimulus measures, the government aims to target a few sectors simultaneously. Companies like Alibaba Group (NYSE: BABA) surged on the news on June first, ending Thursday's session with a nearly 9% rally. Other names like BYD (OTCMKTS: BYDDF) also experienced renewed investor optimism by advancing almost 6.5% to the end of the week. However, some investors may need to realize just how big of an impact these measures could have on the Chinese vehicle market, where BYD has been dominating as of late.
The Value Play
Warren Buffett, the most notable value investor, saw a clear investment in BYD when he first invested $230 million in 2008. His stake is now worth approximately $8 billion dollars to deliver a mind-boggling rate of return. Recently, profits at BYD have tripled as the company took north of 30% of the overall market share in the Chinese electric vehicle market, showcasing just the type of business 'moat' Buffett looks for. Remember that BYD is still, at its very core, a car manufacturer and thus should be analyzed as one rather than apply value metrics deserving of a technology company.
Comparing BYD to other, more significant, established car manufacturers worldwide will give investors a sense of what Buffett may have seen in BYD. Ford Motor (NYSE: F) could be the best benchmark car maker to compare BYD with financial and stock price performance. Sporting a 4.2% net income margin may be nothing to celebrate. However, this becomes important when investors realize BYD carries a nearly four times higher margin than Ford's 1.75%. Since operations are virtually the same, as far as the manufacturing process goes, it would be helpful to compare the gross margins generated by the two entities now, as it can hint at some pricing power and material sourcing ability. Ford's 10.7% gross margin is suitable for a dominating car company, though still far from BYD's 17.7%.
Ford stock has outperformed BYD stock by 10% over the past twelve months. However, the valuation multiples slapped on the two tell a deeper story. BYD carries a 34.7x price-to-earnings multiple, while Ford stock is assigned a 17.2x multiple. Even though Ford stock outperformed BYD, the latter seems more expensive, but some would still present a different opinion.
Comparing the two valuation metrics, as far as the P/E ratio goes, gives investors a significant clue to figure out the value play. Ford stock has historically sold for 6.0x to 13.0x P/E ratios, making today's 17.2x a seemingly higher range than usual. On the other hand, BYD has typically traded between 90.0x and 250.0x of its earnings, commanding significantly higher valuation metrics that can be attributed to the company's underlying growth potential. Investors willing to pay a higher premium for the company's current - and future - underlying earnings is also a significant vote of confidence.
The Chinese Ministry of Finance has laid out its consumption stimulus plan; investors should be aware of what this means specifically for the vehicle industry in that nation. To spike consumption trends once more, the Ministry has ordered local operators not to expand their curbs on vehicle sales, adding that those currently operating under curbs in place are to increase car ownership quotas gradually. While the details of these measures have not been released, it could be assumed that the typical arsenal will be deployed; tactics such as lowering the sales tax or providing tax credits on these vehicles could stimulate demand.
It is estimated that 50% of the global electric vehicle market belongs to Tesla (NASDAQ: TSLA). In contrast, the remaining half of the market is taken by Chinese brands, presumably a battle ground between BYD and luxury electric vehicle maker NIO (NYSE: NIO). Despite highly competitive forces in the scene, investors can lean on the fact that BYD will be sharing a sizable share of a growing pie, which is why investors and analysts place such high valuation multiples on the stock.