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

BYD Company Limited （1211 . HK）- IT parts and auto business both take off to ensure growth

Wednesday, October 22, 2008

5919

BYD Company Limited(1211)

Recommendation on 22 October 2008
Recommendation	Sell
Price on Recommendation Date	$16.700

Weekly Special - 603179.CH Xinquan

Summary

The two principal businesses of BYD comprise the IT component business and the automobile business. In 2008 H1, BYD has its operating income grow significantly by 44%. But as the proportion of its handset business at low gross margin increased, the Group’s overall gross margin decreased, and net profit was down by 7.1% yoy.

The growth of auto sales in China mainland slow down obviously, but BYD depending on its high value for money products and new sedan models launched has achieved rapid growth. However, suffering from the slackening market, the growth of BYD’s IT business has some slowdown. Therefore, we lowered BYD’s net profit forecast in 2008 and 2009 to RMB1.65 billion and RMB2.04 billion respectively, by way of EPS, it is HK$0.91 and HK$1.12 respectively. Based on 2009 EPS, we estimate its 12-month target price at HK$13.30 and give it “Sell” rating.

Total income has large increase but gross margin decreased

BYD’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.

The Group’s total income in 2008H1 was reported to be RMB 12.394 billion, representing a large increase of 44% year-on-year, which was mainly driven by large growth in sales of handset components and auto: 67.9% and 70.5% up respectively. The proportion of these two businesses to the overall operating income is increasing. With negative impact such as high rising raw material, RMB appreciation etc., the gross margin of handset components business has a relatively large decrease. As a result the Group’s overall gross margin cut 1.9 percentage points to 19.2% yoy.

The Group’s net profit in 2008H1 fell by 7.1% yoy to 595.7 million, EPS at 0.29. The board of directors has not suggested paying out the interim dividend.

Auto sales went up against the slackening market

With the global economy slowed down and credit market shrank, the auto sales in Europe and America plunged into a depression, sedan sales in China also fell: negative growth is recorded for consecutive two months. China Association of Automobile Manufacturers revealed the sales of sedan car in Sept down by 1.44% yoy, sales for the first 9 months grew by 11.36% yoy, down 12.48 percentage points as compared to 23.84% at same period of last year.

However, relying on its outstanding performance/price ratio, BYD has its auto business go up against the slackening market and is showing excellent performance. In 2008 H1, the company’s auto sales volume and value increased by 94% and 71% respectively. The sales of its leading model F3 reached 89059 units for the first 9 months and run into the fifth of “top ten best-seller sedan” in China. The new model F0 was launched in Sept, whose sales in first month exceeded 10,000 units: 10059 units in accurate. And then, it rapidly occupies low-end minicar market. With this, BYD has itself listed as top ten biggest sedan auto manufacturers in China and has its market image further promoted.

With output enlarged, the scale effect will bring the auto business’s profitability increased. Recently the steel price in China slumped, showed as the chart below, which largely reduced the cost pressure of auto industries and make price cutting more affordable by auto manufacturers. We are relatively optimistic to BYD’s auto business.

Equity investment by MidAmerican Energy Holdings uphold market confidence

MidAmerican Energy Holdings Co., a subsidiary of Buffett, bought 10% equity shares of BYD at USD 230 million, aiming at the creativity of BYD applying green energy technology to autos and BYD’s likely leading battery technology in the revolutions of auto industries in the future. Not long afterwards, BYD spent RMB 200 million purchasing SinoMOS Semiconductor. With this acquisition, BYD owns both R&D and manufacturing capability of driving motors for electric car.

We think BYD’s electric car project is still at starting phase. In short term it will not generate profits. However, MidAmerican Energy Holdings’ share purchase upholds the market’s confidence towards BYD’s share price. Anyway, BYD’s future development still needs continuous concern.

IT parts business

Battery and related products are BYD’s traditional business. Since the company accelerates its diversification steps, the proportion of battery and related products business to overall income has reduced to the current 26%. BYD stands at leading position in global rechargeable battery market. In 2008 H1, though the market goes down, the company still sees growth in battery business, among which Lithium-ion battery sales goes up 27% yoy. But suffering from slowdown of global macro economy, demand for power tools slowed down, which resulted in a yoy decrease of 15% in sales of the Group’s nickel battery products. Anyway, we think the company’s capability of pricing and cost transfer is relatively strong and it can ensure this business segment’s gross margin move within a stable range. In 2008H1, operating profit of this segment still goes up.

Regarding its handset components and assembly services, BYD has relatively strong capability in vertically integrated production of handsets, and it is one of the few suppliers in the world to provide one-stop vertically integrated supply services. Samsung, Motorola, Nokia, Sony Ericsson, TCL, Haier, Huawei, Philips and Amoi are all BYD’s customers. BYD successfully transfer its handset components, modules and assembly business to BYD Electronic (285, HK) which gets listed in Hong Kong market. During the report period, BYD Electronic achieved RMB 3.638 billion income, representing a yearly growth of 96%. In addition, the Group’s handset business also includes LCD, flexible printed circuit board and handset camera module, sales of which increased by approximately 30% yoy. In the future the company plans to put BYD Electronic as capital platform for its handset business.

Risk

1) Slackened economy largely reduced auto demands;

2) Difficult market leads to IT components orders less than forecast;

3) Uncertainty of electric car’s future development;

4) Litigation with competitors

Evaluation

It is estimated that with its three main business segments growing, BYD’s sales performance is expected to show fast growth trend in the coming two years. In 2008 and 2009 we estimate that it will realize RMB 29.87 billion and 39.42 billion in sales, increasing by RMB 9.1 billion averagely in both years. Since the company paid out large dividend, its shares have been increased from 540million to 2.5billion, 2008 and 2009 EPS at RMB0.81 and RMB0.99 respectively (equals to HK$0.91 and HK$1.12 respectively).

On evaluation, the company’s historical average P/E is around 17 times, currently American and European auto companies’ P/E is around 8x in average, Japan and Korean’s at 7.5x, India’s TATA Motor at 5.1x. BYD’s auto belongs to new energy manufacturing industry which is expected to grow rapidly. But in view of stock market turmoil, we prudently estimate its P/E to be 11 times on base of 2009 EPS, that is, RMB3.85. For BYD’s battery and handset business, we estimate at 16 and 9 times P/E respectively on their 2009 EPS, that is RMB 4.96 and RMB2.97 respectively. Therefore, we estimate overall BYD 12-month target price to be RMB11.78 (11.9x P/E on its 2009 EPS, RMB 0.99), equals to HK$13.30.We give it “Sell” rating.

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