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Despite BYD’s Recent Downturn, Its Future Is Electric

On Monday, October 29, Chinese battery, solar panel and vehicle manufacturer BYD (BYDDF.PK) reported a 94 percent decline in third-quarter profit compared to Q3 of 2011. Further, BYD forecast that the company’s annual earnings might fall by as much as 98 percent on the back of continued weakness in Chinese demand for cars and reduced European buying that was hurting its handset battery and solar businesses. Despite this substantial decline in quarterly profit, BYD appears to be a strong long-term investment that is poised to benefit from years of future growth within most of its businesses, both in China and internationally.

BYD’s Q3 net profit came in at 4.6 million yuan or $734,000, a 94% decline from Q3 of 2011, while revenue declined 11% to 10.53 billion yuan or $1.68 billion. The company also sustained a similar decline last quarter. Demand weaknesses in China, and increased Chinese competition in the vehicle market have been problematic for BYD this year. Similarly, European economic weakness reduced demand for solar energy cells. Additionally, a territorial conflict with Japan may have resulted in reduced ordering of BYD batteries and various other components by Japanese manufacturers.

Another issue for BYD this year has been a fatal accident involving an e6 taxi in Shenzhen, China, which instigated concerns that the vehicle’s battery may be a fire hazard. A subsequent Chinese government investigation indicated that the battery is not a fire hazard and did not cause that fire, but consumers may still be wary.

Beyond vehicles, BYD’s lithium-ion battery and handset component businesses have also been under fire during the last several quarters, as demand for batteries and phone parts has declined. The problem is not one of quality or performance regarding BYD’s lithium-ion batteries and components, but rather due to declining market share by many of its customers, causing them to buy less components than they otherwise would.

For example, one of BYD’s largest customers for mobile components, including batteries, is Nokia (NOK), which has seen its product line lose share to smartphones including Apple’s (AAPL) iPhone and the many options running a version of Google’s (GOOG) Android OS. Other major customers of BYD’s mobile components and batteries include Huawei Technologies and ZTE, both of which recently came under scrutiny by the U.S. House Intelligence Committee. Huawei was subsequently left out of the Microsoft (MSFT) Windows Phone 8 device launch. This could cause further weakness in lithium-ion battery demand for BYD from Huawei in the near term.

Issues such as the out of favor status of some of BYD’s mobile phone customers and the fire hazard concerns that hit its electric vehicles are very real, but at least some of these concerns are also very likely to be temporary conditions. While Nokia and Huawei may have current problems, either’s issues could resolve themselves in due time. Alternatively, if these buyers of BYD’s batteries and components cannot get their respective houses in order, other customers will likely emerge and lay claim to BYD’s battery and device component supply chain. Other major customers of BYD’s handset component and assembly business already include Apple, Google’s Motorola, HTC and ZTE, among others, and any of these component customers could expand their relationship with BYD in the coming quarters, especially if their market share increases.


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