Subsidies gas up turnaround at Buffett-backed BYD

A staff member cleans a BYD electric car during the Auto China 2016 in Beijing, China, April 25, 2016. REUTERS/Jason Lee

HONG KONG (Reuters Breakingviews) - Subsidies are speeding up a turnaround at BYD. The electric-vehicle maker reported a stupendous 632 percent increase in first-quarter net profit. It will be tricky to pull off a similar manoeuvre next time, as government grants helped to buoy the bottom line to 750 million yuan ($111 million). But investors nonetheless have cause for cautious celebration.

Clean-car makers cannot depend on policymakers’ generosity in the months and years ahead. Beijing is clearly committed to promoting new energy vehicles, and BYD Chairman Wang Chuanfu predicts rapid reform – he has forecast that every vehicle in China will be electric by 2030. But the country is gradually phasing out subsidies in favour of a quota system, and specifications to qualify for the scheme are ever-more demanding.

Strip out the chunky extraordinary gains, which made up around half the company’s bottom-line growth, and adjusted earnings still expanded by 225 percent. That was, in part, a statistical recovery from an extraordinarily bad 2018. But stronger sales in green vehicles delivered genuine support. A shift to cleaner cars has been a common refrain in automakers’ recent reports, and at industry powwows like the Shanghai Auto Show. The sector provided a bright spot after the China overall car market contracted for the first time in decades last year: the country’s new-energy vehicle sales grew by around 60 percent despite the downturn. But BYD takes the trend to new extremes. Wang’s marque shifted 73,172 electric-vehicle units in the first quarter, compared with less than 30,000 a year earlier. Management expects half-year net profit as high as 1.65 billion yuan, more than triple the same period last year.

The next test will be whether BYD can build on its head start. Last year Chinese drivers had a choice of more than 100 electric models, more than any other country, according to Nomura. Local startups are already rampant, and foreign giants are determined to get a piece of the action too. For now their share of the local market is modest, but regulations and emissions standards are forcing the likes of Volkswagen and Toyota to double down on the new technology.

Grants won’t fuel fast and furious growth for much longer. But BYD investors – including Warren Buffett, who has held a minority stake since 2008 – could still enjoy this ride.


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