Is BYD Currently Undervalued Despite Its Elevated P/E Ratio?

The valuation of BYD (SEHK:1211), the Chinese electric vehicle and automotive giant, has sparked debate among investors. While its price-to-earnings (P/E) ratio of 21.9x appears elevated relative to peers and historical benchmarks, a discounted cash flow (DCF) analysis suggests the stock may be undervalued by approximately 15%. This article examines the tension between traditional valuation metrics and intrinsic value estimates to determine whether BYD's current price reflects its true worth.

Traditional Valuation Metrics: A Cautionary Signal

BYD's P/E ratio of 21.9x is significantly higher than the 9.6x average for its industry peers and the estimated fair P/E of 17.4x. This premium valuation implies that the market is pricing in robust future earnings growth, but it also raises concerns about overvaluation. For context, the Asian Auto industry's average P/E is 22x, meaning BYD aligns with sector norms but remains expensive relative to direct competitors.

The company's EBITDA multiples further highlight this disconnect. While specific EBITDA multiples for BYD are not explicitly detailed in recent reports, Wells Fargo's analysis of Boyd Gaming used a 7x multiple on its 2026 estimated EBITDA to derive a price target. If applied to BYD's context, such a multiple would suggest a much lower valuation, underscoring the divergence between sector-specific and company-specific metrics.

Additionally, BYD's free cash flow (FCF) yield appears weak. Despite reporting $322 million in EBITDA for Q3 2025, the company's net cash flow from operating activities declined by 27.42% year-over-year. This erosion of liquidity, coupled with a 32.60% drop in net profit for the quarter, raises questions about the sustainability of its cash flow generation. A price-to-free cash flow (P/FCF) metric, though not directly provided, would likely reflect these challenges, further complicating traditional valuation assessments.

DCF Analysis: A Contrarian Perspective

A DCF model from Simply Wall St estimates BYD's intrinsic value at HK$118.85, approximately 15% above its current trading price of HK$100.6. This suggests the market may be underestimating the company's future cash flow potential. The model incorporates a terminal growth rate of 2.00% and assumes a free cash flow (T+1) of -$416,624 million, leading to a terminal value of -$10,608,841 million. While the negative terminal value appears concerning, it reflects the model's sensitivity to long-term growth assumptions and highlights the risks of overreliance on short-term projections.

The DCF approach also accounts for BYD's strong year-to-date revenue growth of 12.75%, reaching RMB 566.27 billion for the first nine months of 2025. This resilience, despite a 3.05% quarterly revenue decline, indicates underlying demand for the company's products. Moreover, BYD's total assets and owners' equity have grown by 15.14% and 32.53%, respectively, signaling robust balance sheet strength. These factors, when discounted to present value, contribute to the DCF model's optimistic valuation.

Reconciling the Discrepancy: Market Skepticism vs. Long-Term Potential

The divergence between traditional metrics and DCF estimates stems from differing assumptions about BYD's future. The elevated P/E ratio reflects skepticism about the company's ability to sustain earnings growth, particularly given its recent net profit decline and cash flow challenges. In contrast, the DCF model assumes a gradual normalization of cash flows and a stable long-term growth rate, which may not materialize if market conditions deteriorate.

Investors must also consider qualitative factors. BYD's aggressive investment in research and development-up 31.30% year-over-year-positions it to innovate in competitive markets. However, its reliance on government subsidies and exposure to supply chain risks could hinder growth. The DCF model does not fully account for these variables, which introduces uncertainty into its intrinsic value estimate.

Conclusion: A Nuanced Investment Decision

BYD's valuation presents a paradox: traditional metrics suggest overvaluation, while DCF analysis implies undervaluation. This discrepancy underscores the importance of aligning valuation methods with the company's strategic trajectory. For investors with a long-term horizon, the DCF model's 15% upside may justify the risk, particularly if BYD can stabilize its cash flows and capitalize on its R&D investments. However, those prioritizing short-term stability may prefer to wait for clearer signs of earnings resilience.

In the end, BYD's true value lies in its ability to execute its growth strategy amid macroeconomic and industry-specific headwinds. Until then, the market's skepticism and the DCF model's optimism will likely remain at odds.