Author

章晶小姐 (Zhang Jing)
高級分析師

本科畢業於同濟大學工科，碩士畢業於華東師範大學金融貿系。現為輝立証券持牌高級分析師，主要負責汽車及航空板塊的研究，曾獲得《華爾街日報》亞洲區2012年度汽車及零部件最佳分析師第二名，擅長將行業前景與上市公司結合分析。

Bachelor Degree in Tongji University of Engineering; Master Degree in East China Normal University of finance. Currently cover automobile and air sectors. Having worked in research for years and is good at combining analysis for the companies with industry prospects.

Phone:	86 21 51699400-103	Email:	zhangjing@phillip.com.cn
For Research Report and Business enquiry

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BYD Company Limited（1211 . HK）－Between deterministic growth and uncertainty concern

Thursday, October 29, 2009

4809

BYD Company Limited(1211)

Recommendation on 29 October 2009
Recommendation	HOLD
Price on Recommendation Date	$81.650
Target Price	$73.440

Weekly Special - 1171 YANKUANG ENERGY GROUP COMPANY LIMITED

Summary

Driven by strong auto business, the BYD Company Limited recorded 30% y/y and 98% y/y growth on revenue and net profit in 1H09; its auto profit margin rose greatly but was partly offset by the dropped gross margin of IT business; EPS stood RMB0.57.

The Company′s auto business performs excellently while IT business recorded a slow down. We expect EPS forecast in FY09 and FY2010 to RMB1.08 and RMB1.44 respectively, that is HK$1.23 and HK$1.64. Through SOTP valuation, we give 12-month overall TP of HK$73.44, hold rating.

Highlighting Auto business

The BYD Company Limited's main business is composed by IT components and auto business, the IT components business mainly comprises the rechargeable battery and handset component and assembly.

It recorded RMB1.6132billion on revenue in 1H09, 30% growth y/y and RMB117.8million on net profit, 98% growth y/y, EPS RMB0.57 with no dividend recommended.

The good performance for revenue was mainly driven by the 133% increase of auto business which expanded 24ppt to 55% of the total business while handsets part and rechargeable battery in IT business recorded 0.2% and -41% y/y respectively impacted by the weak economy.

Gross margin increased 0.41%

The overall gross margin increased 0.41ppt to 19.62% driven by auto business′s scale effect. We noted its auto profit margin before tax rose to 14.4% from 9.5% but was partly offset by the greatly dropped gross margin of IT business due to sector harsh period and price cut by major customers.

But the Company improved its control in expenses with the proportion of SG&A and R&D cost in total income cut 2.17 pts and financial expenses dropped 29% for partial repayment of bank loans.

Its balance sheet is stronger than last year with total liabilities dropped 5% and net debt to equity ratio declined to 34% from 56%.

Scale effect still positive to traditional auto business

The Company sold out more than 180,000 vehicles in1H09 with the only three models, increased 150% y/y, greatly ahead of the average in this sector. In the first nine months of this year, its auto sales increased 164% y/y and have finished 72% of the full year's sales target.

Besides the high value for money products, we think, its target markets focusing on the second and third tie cities evaded the impact by the crisis which inflicted less to auto sales in this kind of area. Furthermore, Buffet's investing and electric motor launching are also positive factors.

BYD's auto sales continues rising from September, 2008 against the bear market and goes on in 2009, which prompted it to the sixth domestic best seller sedan manufacturer and exceed Geely to be the second self-branded manufacturer. We expect BYD will continue recording strong profit as the lasting scale effect is still a strong engine to the auto business after the acquiring capacity of 80,000 from Xi`an and Hunan.

It also planed to launch three new models of G3, M6 and E6 in the latter half year among which G3, the front-line model of G series, targets the high and middle end market with price over RMB100, 000; M6, a type of MPV prices below RMB200, 000; E6, a pure electric MPV with its core technology of Li-iron battery enjoys the longest endurance miles in the world of its kind, exceeding 400KM.

But it is to be noted that scarcity of matching fast charging facilities limits the popularity of electric cars in China and hinders the sales of F3DM of BYD. From our point, it will take a long time for the commercialization of the Company's electric car on the other hand, the rising expenditure like R&D spend will weigh on BYD's performance in the short-term, therefore, uncertainty with concern still exists.

IT business starts to shed a light

Handsets` demand has showed some signal of stability as Nokia, the biggest custom of the Company, posted 11% and 7% growth Q/Q of its global handset delivery in its 2Q and 3Q performance, and Samsung, 14% and 13%. We believe the worst period has gone for the global handsets market and expect BYD's handsets business will bottom up in 2H09.

With the leading role in global rechargeable battery market, BYD has certain pricing and cost transferring capability. It also has a clear technical path in new businesses such as notebook battery and solar battery technology. We expect a stable growth in this sector's profitability.

Risk

1) Slackened economy largely reduced demands for auto, handset and batteries;

2) Uncertainty of electric car's future development;

3) Litigation with competitors.

Valuation

BYD is applying for IPO in Shenzhen A-share listed, we expect EPS forecast in FY09 and FY2010 to RMB1.08 and RMB1.44 respectively, that is HK$1.23 and HK$1.64, regarding to its optimistic auto part which is able to compensate for the down IT part.

Favored by competitive edge in vehicle battery technology, BYD is likely to play a leadship in the revolutions of auto industry in the future, which accounts for Buffett's purchasing 10% equity shares of BYD at USD 230 million. From this point of view, we think BYD deserved certain premium in valuation. Through SOTP valuation, we give 1.5 x auto parts PEG, 20x Battery, 14x handset P/E to each 2010 EPS, which implies 12-month overall TP of HK$11.20, hold rating.

Financial Forecast

More...

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