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(Bloomberg) — BYD Co.’s reliance on financing from working capital has masked surging debt levels at the Chinese electric vehicle giant, according to calculations from Hong Kong-based GMT Research.

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While it’s common for fast-growing firms to use debt to fuel expansion, BYD appears “addicted” to supply chain financing, GMT, an accounting consultancy that previously raised the alarm about China Evergrande Group, said. 

When adjusted to reflect receivables that have been removed from the balance sheet because they’ve been sold or borrowed against, and treating excess payables — any amount over 90 days — as a liability, BYD’s true net debt was more like 323 billion yuan ($44.1 billion) as of June 30, GMT said in a Jan. 10 research report. The company’s market value in Hong Kong is about $105 billion.

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BYD itself put its net debt at 27.7 billion yuan as of mid-2024. Representatives for BYD declined to comment.

“However it’s structured, it’s clearly a form of financing, or hidden debt,” GMT analyst Nigel Stevenson said. “It’s using sleight of hand to present these liabilities as part of working capital.”

Price War

The hidden debt makes it harder for investors to get a handle on BYD’s actual financial situation as competition in China’s EV market intensifies. A bruising price war, spearheaded in part by the carmaker, has crushed weaker rivals and delivered a boom in business for the bigger players. It’s also left suppliers increasingly reliant on a smaller pool of manufacturers that have the power to command ever tougher terms.

Core to GMT’s concerns are the lack of details about what BYD considers ‘other payables,’ which ballooned to 165 billion yuan at the end of December 2023 from 41.3 billion at the end of 2021, according to the company’s financial reports. 

By way of comparison, Geely Automobile Holdings Ltd., the listed arm of Chinese car tycoon Li Shufu’s empire, reported trade payables of 87.4 billion yuan in 2023, up from 57.4 billion yuan in 2021. Its ‘other payables’ category meanwhile contains more information on Geely’s obligations and to whom the funds are owed.

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It’s likely the figure for BYD includes supply chain financing, which enables suppliers to either receive early payment of invoices if they stump up a fee, or more typically, wait for an extended period until they get their money, according to Stevenson. 

The way BYD reports its payables aren’t in violation of accounting rules. However, the US GAAP and the International Financial Reporting Standards have introduced amendments that require disclosures to help assess how this financing affects liabilities, cash flow and liquidity risk.

Unclear Risks

Some suppliers don’t mind the wait because they themselves can borrow against that money owed, using BYD as a sort of collateral. But for investors trying to figure out the financial intricacies around a company as huge as BYD, the “nature of these obligations is unclear,” Stevenson said. 

“The risk is you have no idea what the terms are, how quickly the funds may be withdrawn or to whom exactly these amounts are owed,” he said.

For BYD, and other Chinese EV makers like Nio Inc. and Xpeng Inc., extended payment periods can stretch to hundreds of days. BYD took an average 275 days to pay suppliers in 2023, Bloomberg-compiled data show.

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While long payment terms are becoming standard in China, they’re far more than the 45- to 60-day payment cycle for automakers in other parts of the world. Tesla Inc.’s Global Vice President Grace Tao has said the US EV maker typically pays suppliers within 90 days.

BYD manages its supply chain financing through a system called Dilink, which launched in 2021 and, by May 2023, had issued some 400 billion yuan of promissory notes. The platform, which partners with financial institutions and lets BYD’s suppliers manage their receivables from carmakers, has also sparked questions about how it’s treated in suppliers’ own financial reports.

In April last year, the Beijing stock exchange asked Guizhou Anda Energy Technology Co. to explain why an adjustment to its 2023 annual report slashed revenue by almost 40% while net income rose 4%, and to clarify whether its treatment of Dilink notes complied with accounting standards. The company, which supplies raw materials to BYD, said it reduced the provision for impairment on its notes receivables due to BYD’s track record in making payments. 

In November 2023, the Shanghai stock exchange queried Shangshui Intelligent Equipment about why it hadn’t made provisions for bad debt in its accounting treatment of Dilink notes. The company said BYD’s bonds were AAA-rated and therefore didn’t represent a credit black mark.

—With assistance from Pearl Liu and Charlotte Yang.

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