We see China’s economy as on stronger footing than typically depicted, in both absolute and relative terms. For investors, the general message is that it’s safe to invest in China. Its economy is not going to implode, asserts Stephen Leeb, global expert and editor of Real World Investing.
A separate investment message is that for the fastest profit growth, don’t look to China’s state-owned enterprises. The companies that will grow the fastest are ones in which the government doesn’t have a controlling stake.
One company that stands out as a non-state enterprise with tremendous growth potential is BYD (BYDDF), which is arguably the largest vertically integrated electric vehicle (EV) manufacturer in the world.
Like China’s other EV makers, the bulk of its car sales still are cars with conventional engines. But its EV operations will be accelerating. Recently China introduced a system of credits that advantage automakers that make the most energy-efficient cars, and especially EVs. A hybrid car, for instance, would get fewer credits than an all-electric car.
In this regard BYD has a huge edge over other mostly state-owned auto manufacturers. Because it is vertically integrated, making batteries as well as cars, the company doesn’t have to go outside its own boundaries to source anything it needs. As China wields these credits as a way to foster growth in its EV industry both domestically and for exports, BYD should be a standout winner.
The company has been preparing itself for takeoff — accelerating production — in the EV market since at least the beginning of decade.
Free cash flow has been largely negative for the last 10 years, but that is now turning around. It’s become ever clearer why the negative cash flow never bothered Warren Buffett, who through a subsidiary of Berkshire Hathaway (BRK.B) owns around 25% of BYD’s floating shares.
With the company now poised to benefit from the capital expenditures it has been making, free cash flow in 2018 should turn positive, and it should remain positive for years to come. This will free BYD from having to rely on adding debt in order to finance ever greater growth.
BYD Company remains a strong recommendation and is our favorite way of participating in one of the fastest-growing markets over the next generation, EVs.
