TARIFF RESISTANCE PART OF OUR CAUTIOUS OPTIMISM IN 2025
THE TD COWEN INSIGHT
BYD has minimal direct exposure to tariffs as it provides services domestically and sources from domestic suppliers. The shares are down 7% YTD (down 2% since U.S. “Liberation Day”) and trading at ~14x forward cons EBITDA (<14.5x it was trading at on Jan 1) which we believe presents attractive value given the strong earnings upside.
Impact: NEUTRAL
We see BYD as one of the more resilient stocks against an increasingly challenging macro outlook and hostile trade environment. Specifically:
Used car value stabilizing, could be further boosted by tariffs. Used car value, a key determinant of total loss ratio (i.e., negatively correlated), has stabilized since August 2024 after a rapid moderation from pandemic peaks which pressured claims volume over recent quarters. Meanwhile, the 25% tariffs on steel, aluminum, imported vehicles, and auto parts are estimated to add anywhere between US$300 to US$6,000 to new car pricing, which in turn should increase demand of used vehicles. Consequently, used car values should rise (Manheim forecasts +2.1% in 2025), pushing the total loss ratio down, and in turn, drive claims volume up. This would be a positive for BYD SSSG and EBITDA margin.
Auto insurance premium increases moderating. U.S. motor vehicle insurance inflation skyrocketed to a peak of 22.6% in Apr/24 against an already pressured consumer. Consequently, many consumers chose to delay/not file insurance claims. Insurance premium inflation has fallen to 11.1% as of February 2025 and recent approved rate changes (see our insurance sector colleagues' note here) point to continued moderation towards the 20-year average of 5%, a positive to claims volume growth and SSSG.
Given its cost-plus pricing model, inflation in parts are directly passed onto its customers, leaving BYD's profitability intact. However, depending on the magnitude and duration of the tariff impact, the risk is that it could re-accelerate insurance premium inflation (albeit with a lag as policy renewals take time) and in turn pressure claims volume again.
While the trade outlook remains fluid, we are cautiously optimistic on the near-term outlook given the positive used car pricing trend and the potential tariff offsets. Longer- term, we believe BYD is well-positioned for an inflection in industry conditions, supported by its scale (which has driven recent share gains), the substantial runway for store network growth, and an optimized cost structure stemming from Project 360.