BYD hopes to recharge with asset sale

Doug Young

Bottom line: BYD’s latest asset sale, combined with its new auto finance joint venture, are both aimed at boosting its struggling EV business, but it may have to sell off more assets before the market finally starts to gain some momentum.

Struggling electric car maker BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDF)  is starting to look a bit desperate, announcing a major asset sale just days after it received approval for a stalled finance joint venture aimed at boosting its sputtering sales. The approval this week for its auto finance joint venture comes as rival Geely (HKEx: 175) also has just announced its own approval for a similar stalled joint venture with France’s BNP Paribas (Paris: BNP). That indicates Beijing may be starting to worry about a broader slowdown in China’s car market after several years of breakneck growth.

China’s big domestic automakers like Geely and BYD have suffered over the last few years, as they rapidly lost share in their home market to big global rivals like General Motors (NYSE: GM) and Volkswagen (Frankfurt: VOWG). BYD has suffered more than most of its domestic peers, since it also placed big bets on an EV program that has yet to gain much traction despite Beijing’s strong desire to develop the clean energy sector.

Earlier this week BYD announced it had finally won approval from the banking regulator to set up a vehicle financing joint venture that it previously announced nearly a year ago. (previous post) That initiative should help both its traditional and especially its new energy car sales, since EVs are typically quite a bit more expensive than traditional cars and also face a wide degree of skepticism from mainstream consumers that BYD is targeting for the market.

Now BYD, which is backed by billionaire investor Warren Buffett, has just announced it is selling off one of its older electronic component businesses, in what looks like a bid to raise cash to shore up its shaky financial position. Under the deal, BYD will sell its BYD Electronic Components unit to Holitech (Shenzhen: 002217) for up to 2.3 billion yuan ($370 million). In exchange, BYD will get cash and up to 12.3 percent of Holitech, a dubious looking chemical company traded on the Shenzhen stock exchange.

BYD is quite direct in saying the sale is part of an asset disposal as it focuses on its newer core businesses in the traditional and new energy auto sectors, including battery technology. The electronic component business it’s selling was actually one of its more profitable units, generating about 200 million yuan in profits last year. Shareholders seemed to welcome the disposal, with BYD’s Hong Kong-listeed shares rising nearly 5 percent on the news.

Meantime, Geely will follow BYD into the auto finance sector, with word that it’s received approval from the banking regulator for its previously announced joint venture with BNP. (company announcement) Geely says the approval means it can now set up the joint venture, which could become operational within the next 6 months. Geely first announced this joint venture more than a year ago (previous post), and it does seem like the regulator’s approval of both the Geely and BYD joint ventures in the same week is probably not just coincidence.

The fact of the matter is that China’s broader car industry has shown signs of a rapid slowdown in recent months, in tandem with the nation’s broader economic slowdown. National car sales this year are forecast to grow only about 7 percent this year after posting a disappointing similar rate in 2014. Sales had been growing at double-digit rates before that, as China overtook the US to become the world’s biggest car market in 2010.

This latest asset sale by BYD, combined with its new auto financing joint venture, could buy the company some valuable time for its struggling EV initiative. Beijing has been working hard to promote the development of necessary infrastructure like charging stations to make EV ownership more attractive for average consumers, and many of the new projects will come on stream this year and next. It’s possible that development could provide some new life to BYD and its sagging stock. But it’s more likely the sector will continue to struggle in China, like it is in the rest of the world, and BYD may have to sell off more assets to stay afloat.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

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