BYD Co. Limited (HK:1211) has come under the spotlight after Hong Kong-based GMT Research flagged the potential concealment of its debt through complex supply chain financing. GMT’s latest report raises concerns about BYD’s transparency and financial stability as it leads its way in the highly competitive Chinese EV market. Meanwhile, analysts at GMT Research cautioned that supply chain finance is risky because the conditions, the timing of fund withdrawals, and the exact recipients of the funds are unclear.
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Notably, supply chain financing allows suppliers to receive payment for their invoices sooner, either by paying a fee for early payment or, more commonly, by agreeing to wait for a longer period before receiving their funds. This arrangement helps companies manage their cash flow and offers suppliers flexibility in when they are paid.
GMT Raises Concerns over BYD’s Debt
GMT report mentioned that it’s typical for fast-growing companies to use debt for expansion, but BYD appears overly dependent on supply chain financing.
GMT’s report suggests that BYD’s actual net debt could be significantly higher than the reported ¥27.7 billion, estimating it at ¥323 billion as of mid-2024. This gap is mainly because the company removes receivables from its balance sheet through sales or borrowing, and treats payables over 90 days as working capital instead of liabilities. This method creates hidden debt, potentially misleading investors about BYD’s financial condition.
Overall, BYD’s reporting of payables is as per the accounting rules. However, the recent changes to US GAAP and International Financial Reporting Standards require companies to disclose more details about how financing impacts liabilities, cash flow, and liquidity risk.
Is BYD a Good Stock to Buy Now?
According to TipRanks, 1211 stock has received a Strong Buy rating, backed by seven Buy and one Hold recommendations. The BYD Co. share price target is HK$357.4, which implies an upside of 30% from the current trading level.
