Reality Bites BYD

Wall Street Journal, August 3, 2010

BYD's dreams are crashing into a humdrum reality.

The Chinese auto maker, famous both for its plans to market electric cars and for an investment from Warren Buffett, has hit a sticky patch. Sales are stalling, up just 3% on-year in June, according to data from J.D. Power & Associates.

In particular, sales of the F3 model, BYD's most popular car last year, slumped 30%. The compact car segment it is in has become the most competitive part of China's auto market. Accordingly, halfway through the year, BYD's made only 36% of its vehicle-sales target of 800,000 in 2010.

That sales target was a bit ambitious anyway, given that BYD's current annual capacity is far below that level. BYD was hoping to expand its production capability quickly by building a plant in western China, but local officials are querying the legality of its land purchase there, putting the project's future in doubt.

If this roadblock helps temper BYD's bullishness, that may be no bad thing. For sure, China's auto sales market expanded rapidly in 2009 and into early 2010. But it's also becoming more competitive, and sales growth in general is leveling off now as the impact of stimulus policies for the auto sector fades. BYD is an example of an auto maker that "overpromised, and is now under-delivering," says Bill Russo, an auto-industry expert at Synergistics, a consultancy.

That puts BYD's broader aims in doubt too. The company is still working hard to develop electric vehicles, but the day they become a viable mass-market product still looks years away. BYD needs strong sales of its more conventional vehicles in the meantime.

All, of course, isn't lost. If sales per month carry on at June's slower rate, BYD's sales for 2010 will exceed those in 2009 comfortably.

But its shares have undergone a justifiable re-rating, falling by 33% from a high reached in early April. It trades at 18.9 times forecast earnings for the coming 12 months—way below a historic high of 56 times—but still ahead of its peer average of 15.9 times, according to data provider Starmine.

Reality may have a little more biting to do for BYD.

Write to Andrew Peaple at andrew.peaple@dowjones.com

Click here to view the original article at wsj.com

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