BAIC: Too Cheap to Ignore

While everyone is focused on Tesla (NASDAQ:TSLA), there are a number of car companies trading at very interesting valuations. I often try to stay away from car companies for a number of reasons. It is a very competitive industry, where margins are fairly slim. It requires large amounts of capex to launch a new model, and ultimately there is very little competitive advantage among most of the companies. For these reasons it is easy to make mistakes when investing in car companies. Nonetheless BAIC (HKG:1958) is currently incredibly undervalued. A bargain that is almost too good to miss. BAIC is a chinese car manufacturer based in Beijing, with ties to the chinese government. The company sells vehicles under its own brand and under Mercedes-Benz and Hyundai, through its joint ventures.

Results 1H20

The results for the first half of 2020, show a decrease in revenues and profits. Something that was expected given the lockdowns and the challenges posed by COVID-19. There was a significant decline in units sold, compared with the same period of 2019.

Earnings for the first half of 2020 were ¥0.12 per share. Considerably lower than the ¥0.37 in 2019. Earnings for the end of 2020 are expected around ¥0.17. Giving the stock a PE of 9.6. BAIC’s own brand represents a small percentage of its sales. BAIC relies heavily on its Joint Ventures, namely with Mercedes-Benz, which saw an increase in sales during 2020.

Valuation

The current market cap is  ¥32.41B, but the company holds ¥51.721B in cash and cash equivalents. It is on track to achieve ¥17.99B in FCF for 2020. It is trading at 1.8x FCF, with an expected dividend yield of 6.44%. Forward price-to-earnings of 4.25.

The FCF yield should improve in the coming years. Additional capex will be required, but nonetheless the valuation is extremely compelling. On top of that you can expect a higher dividend in 2022.

Total debt is around ¥25.47B which discounting from the cash it currently holds, equals ¥26.25B. Discounting all the debt, you are essentially paying 80% discount for the company, and you can expect a ¥17.99B of free cash flow for 2020, which should increase in 2021.

The dividend history can be accessed here.

Catalysts

• Motorization Rate

China has one of the lowest motorization rates among developed economies. The motorization rate simply measures the number of vehicles per inhabitant. The data from 2018 shows there is an average of 173 vehicles per 1,000 people. Less than half of Russia for a comparison.

Source: Statista

It is very likely that in the future decades we see the number of vehicles increase in China. Supported by an increase in GDP per capita and a growing chinese middle class.

• DiDi Chuxing Joint Venture

One of the most anticipated IPOs in China this year is DiDi. The company is considered the Uber of China. Its ride handling service app has an estimated 550 million users, and it is headquartered in Beijing. DiDi is also working on autonomous driving. In 2019, it signed a joint venture with BAIC. With the aim of creating the next generation of connected cars.

• Valuation

The biggest catalyst for BAIC is the current stock price, which shows an extreme undervaluation. The company has no moat, and it even struggles to compete in the chinese car market. Especially with so many new EV companies coming out with new designs and innovations. Nonetheless, taking into consideration the solid balance sheet, its earnings and cash flows. BAIC is extremely attractive.

Risks

• Chinese Government

Among one of the biggest risks surrounding BAIC is the fact that the chinese government is the main shareholder of the company. It is unclear what can happen, but minority shareholders might be at risk of some political decision. It should be noted that this fact hasn’t deterred very well known investors from taking large stakes in companies where the chinese government holds an interest. In fact Berkshire Hattaway (NYSE:BRK.A,BRK.B) took a large stake in PetroChina (SHA:601857), a company that was mostly controlled by the chinese government. The price was so cheap it was difficult to ignore. The initial $500M investment grew to a staggering $3.5B, supported by increasing oil prices.

• Overexposure to China

BAIC has an overexposure to the chinese car market. Although some of their vehicles are sold in other parts of the world. It is extremely dependent on the chinese consumers and the yuan.

• Possible Recession

The possibility of a recession, could impact revenues and the financial performance of BAIC. Car sales usually decrease in a recession. Although there are some reasons to believe car ownership in China will rise over the coming years, in the short-term it is unclear what could happen.

• Joint Ventures

Over the last years vehicles under the BAIC brand had very little impact on sales. BAIC relies heavily on its joint ventures to continue operating. Any change on its joint venture agreements could pose a large threat to its financial performance.

Conclusion

BAIC is an interesting company that is currently undervalued. It is very dependent on its joint ventures with Mercedes-Benz and Hyundai to continue delivering strong results. Nonetheless, given the price the stock trades at it has an upside of at least 50%. It has no moat, but the joint ventures it has in place give the company an advantage against competitors. Mercedes-Benz remains one of the best selling luxury car brands in China. I would not want to hold BAIC for the long-term but given the price it is a value stock. Under HKD 3 per share it is a good buy. It seems at this point you are paying ¥32.41B for the whole company, while receiving ¥51.721B in cash, plus a 55,5% FCF yield. Taking into account that 2020 was a particularly bad year in terms of sales for BAIC, and it should improve in 2021.

Disclosure: I have no position in any of the stocks mentioned.

Author bio: Value of Stocks is an independent financial information provider. Focused on analyzing stocks with a value investing approach. Our main goal is to help investors make better investment decisions.

If you would like a copy of the template I use to perform fundamental analysis then feel free to grab your copy below. I explain how I use the template here!

[convertkit form=1933300]

---

Disclaimer - Engineer my Freedom is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual investment advice on this site. Please consult with a licensed investment professional before you invest your money. This site is for entertainment, informational, and educational use only. Any opinion expressed on the site here and elsewhere on the internet is not a form of investment advice provided to you. We use information, data, and sources in the articles we believe to be correct at the time of writing them, but there is no guarantee of their accuracy, completeness, timeliness, or correctness. We are not liable for any losses suffered by any party because of information published on this site or elsewhere on the internet. Past performance is not a guarantee of future performance. By reading this site or subscribing to it, you agree that you are solely responsible for making investment decisions in connection with your funds.