BYD’s electric dream is even racier than Tesla’s. The Chinese group is selling nearly $2 billion of new equity to help it make more batteries and design new cars. Like Elon Musk’s company, the Shenzhen group is a bet on a bright electric future and a charismatic founder, with added China hype. Although Warren Buffett is on board, BYD looks an even longer shot that its U.S. rival.
It’s hard to fault the timing of the 10 to 12 billion yuan ($1.6 to $1.9 billion) private placement, nor the venue. BYD’s Shenzhen-listed shares have doubled this year and trade on a fat premium to their Hong Kong-listed counterparts. And the group is planning 9 billion yuan of capital expenditure this year, according to Macquarie.
Supporters reckon BYD should triumph as China, worried about energy independence and pollution, embraces alternative forms of transport. The People’s Republic wants 5 million electric vehicles on the road by 2020. Thus BYD’s dizzying market capitalisation, which at $26 billion is not far off Tesla’s $32 billion, despite negative free cash flow of 24 billion yuan in the last five years, according to Thomson Reuters Eikon.
But success is hardly guaranteed. First, China is lagging its own targets for electric car sales and for rolling out crucial charging infrastructure. Second, it’s not clear how durable BYD’s first-mover advantage will be as global carmakers with bigger brands, sleeker models, and deeper pockets muscle in on green transport. Third, unlike Tesla, which has joined forces with Panasonic, BYD is taking extra risk by relying on proprietary battery technology.
Distant and hard-to-predict rewards mean valuations are all over the place: the most bullish analysts reckon there’s upside from the current share price of HK$54.50. The gloomiest reckon the shares are worth little more than a quarter of that amount, according to Datastream.
Nor is Buffett’s backing much comfort. Sure, his Berkshire Hathaway partner Charlie Munger thinks BYD boss Wang Chuanfu is Thomas Edison and Jack Welch combined. But Berkshire paid HK$8 for its shares in the depths of the financial crisis. Even if BYD halves in value the famous value investor will have more than trebled its money. New investors have to buy into the dream.