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Can BYD keep up with Tesla in the EV race?

Tesla had a bad quarter, and BYD had a great one — but analysts and investors appear to be putting the latter’s success down to luck. At the end of last week, the news wasn’t strongly felt on the markets, with Tesla’s share price rising 10% and BYD’s barely moving.

 Warren Buffet-backed BYD [1211.HK] has pulled ahead of Tesla [TSLA] in the race to become the worlds leading electric vehicle (EV) maker by sales.

Both companies reported half-year delivery numbers at the start of July. The Chinese conglomerate reported deliveries of 641,000 for the first six months of this year, triple the amount it delivered in the same period in 2021. Elon Musks company delivered 564,000 units, up 46% year-over-year.

Teslas numbers were weighed down by a particularly weak second quarter, with 254,000 deliveries between March and June, hamstrung by the shutdown at its largest factory in Shanghai. A Financial Times report suggested that BYDs outperformance was a case of “pure luck”.

How did the stocks respond to the news?

Investors also don’t seem to have reacted particularly strongly to the news. The Tesla share price rose roughly 10% in the shortened trading week commencing 5 July to $752.29 at the close on 8 July. The BYD share price rose just a couple of percentage points, closing the week at HK$320.80, 4% below its all-time high of HK$333 set on 28 June.

However, both BYD and Tesla stocks faced fresh headwinds this week. BYD shares tumbled to HK$270 on Tuesday 12 July following the news that a stake close to the size of Berkshire Hathaway’s share of the company appeared in the Hong Kong stock market’s clearing system a day earlier, though BYD has denied the claims that Buffett has reduced his share.

Meanwhile, Tesla stock was hit this week amid the fallout of Elon Musk’s deal to buy Twitter [TWTR]. The stock plunged 6.5% on Monday 11 July as the social media giant threatened to sue Musk for pulling out of the acquisition.

EV makers move into lithium mining

While it remains to be seen whether Tesla will continue to lead in terms of car sales, BYDs battery metal push could make it a more interesting longer-term play on the EV theme.

It was reported at the start of June that the company was exploring purchasing six mines in Africa to secure long-term lithium supply for batteries for 27 million EVs, which would cover demand for the best part of the next decade.

According to a note from Daiwa Capital Markets, the move indicates that BYD is anticipating a prolonged lithium shortage”.

Musk has hinted that Tesla might get in on the lithium game too, tweeting in April that the price of the so-called ‘white gold’ had gone to insane levels” and the company might have to mine and refine directly at scale unless costs improve.

There is no shortage of the element itself, as lithium is almost everywhere on Earth, but [the] pace of extraction [and] refinement is slow,” warned Musk.

The challenge of securing lithium supply chains could mothball as more automakers look to do the same. Seth Goldstein, equity strategist at Morningstar Research Services, told Bloomberg in June that EV makers’ best strategy would be to ink long-term agreements with the likes of Albemarle [ALB], the world’s top lithium producer by output, or Ganfeng Lithium [1772.HK], the top producer by market capitalisation. Tesla signed a three-year deal with the latter at the end of 2021.

Investing in junior miners who have never produced lithium, or new technologies, is relatively more risky and could result in not being able to secure enough lithium,” Goldstein said.

Second wind from China’s car demand plans

In the near term, there is the looming threat of recession. Wedbush analyst Dan Ives described it in a note to clients as an elephant in the room for Tesla” that could cloud demand going forward.

While the softer macro will clearly impact demand around the edges in the coming quarters, we believe Tesla has ample demand capacity to hit,” wrote Ives, as reported Forbes.

Tesla has ample demand capacity” to hit 2 million units in 2023 globally, Ives added. It could quite easily exceed this depending on production at the recently opened gigafactories in Austin and Berlin, as well as production normalising in Shanghai.

Tesla could also get a second wind from Chinese measures to turbocharge domestic car demand. This, according to Reuters, could include an EV tax break, plans to build more charging stations, as well as lowering charging fees. Other Chinese EV makers Li Auto [LI] and Nio [NIO] rallied on the back of the news on 7 July.

Analysts are mixed on Tesla, however, which has 17 ‘buy’ ratings, nine ‘hold’ ratings and eight ‘sell’ ratings, according to MarketBeat. As for BYD, analysts are overwhelmingly bullish, with WSJ data showing it has 22 ‘buy’ ratings, and three ‘hold’ and ‘overweight’ ratings.

 

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