BYD Co. (1211.HK), the leading Chinese electric vehicle manufacturer, has been flagged for potentially masking its true level of debt through intricate supply chain financing, according to a report by Hong Kong-based GMT Research, cited by Bloomberg. This method, while not uncommon in rapidly expanding companies, has raised concerns about transparency and financial stability as BYD navigates the competitive landscape of the EV market in China.
GMT’s analysis suggests that BYD’s actual net debt might be significantly higher than reported, estimating it at 323 billion yuan ($44.1 billion) as of mid-2024, contrasting with BYD’s own figure of 27.7 billion yuan ($3.78 billion). This discrepancy arises from the company’s practice of removing receivables from its balance sheet by selling or borrowing against them, and by treating payables over 90 days as part of working capital rather than liabilities. This approach, according to GMT analyst Nigel Stevenson, represents a form of hidden debt that could mislead investors about BYD’s financial health.
The backdrop to this financial strategy is a fierce price war within China’s EV sector, where BYD has played a significant role. This environment has not only weeded out weaker competitors but has also intensified the leverage that major manufacturers like BYD have over their supply chains. The company’s ‘other payables’ have seen a dramatic increase, jumping from 41.3 billion yuan ($5.63 billion) at the end of 2021 to 165 billion yuan ($22.52 billion) by December 2023, with scant details provided on the nature of these obligations. This lack of clarity is particularly concerning, notes the report, when compared to peers like Geely Automobile Holdings Ltd., which offer more transparent breakdowns of similar financial commitments.
BYD’s reliance on supply chain financing, facilitated through its Dilink platform – an advanced intelligent system designed to enhance the driving experience – involves issuing promissory notes to suppliers, which can either be cashed early for a fee or held for extended periods. This system, which launched in 2021 and, by May 2023, had issued some 400 billion yuan ($54.61 billion) of promissory notes, while beneficial for cash flow management, complicates the financial reporting landscape. According to the GMT report, the treatment of these notes in financial statements has come under scrutiny, with suppliers like Guizhou Anda Energy Technology Co. and Shangshui Intelligent Equipment facing queries from stock exchanges about their accounting practices related to Dilink notes.
The extended payment terms BYD employs, averaging 275 days to pay suppliers in 2023, are significantly beyond the industry norms seen globally, which average around 45 to 60 days. This strategy, while advantageous for BYD’s cash reserves, introduces risks related to liquidity and supplier relations, especially if market conditions shift or if there’s a sudden need to settle these obligations.
The broader implications for investors are significant. The opaque nature of BYD’s financing strategies could obscure the true risks associated with investing in the company, particularly in a sector as volatile and capital-intensive as electric vehicles. As regulatory bodies and international accounting standards evolve to address such practices, companies like BYD might face increased pressure to provide clearer insights into their financial dealings, impacting their market perception and investor confidence.
This situation underscores the need for investors to look beyond reported figures and delve into the intricacies of how companies like BYD manage and report their financial obligations, especially in a market where supply chain financing has become a critical component of business strategy.
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