BYD Electronic | 285.HK

Rating Neutral Maintain Assembly service dragged on margin Target Price HKD 10.15 Current price HKD 11.40 Upside -10.9% %

1H19 result missed on metal casing margin deterioration and 26 August 2019 increased assembly service

BYDE 1H19 net profit with revenue and net profit attributable to Hayman Chiu shareholders +19.3%/-49.3% to RMB23,280mn and RMB575mn [email protected] respectively. Though sales was ~9% ahead of market consensus, (852) 2235 7677 EPS was 50% of market consensus due to the GM shortfall which came in at 6.7% (vs. 1H19 consensus at ~9.3%), and GM deteriorated to 5.5% in 2Q19. The increase in sales was driven by Trading data both glass casing and plastic casings, while IoT (new intelligent 52-Week Range (HK$) 14.92/7.88 product) and assembly service grew 30%/38% Yoy respectively. 3 Mth Avg Daily Vol (m) 10.24 However, the plunge in metal casing GM more than offset the No of Shares (m) 2,253.2 positives, the blended GM miss was driven by i) weak demand Market Cap (HK$m) 25,686.5 for metal casing from Chinese OEMS, especially in May and Major Shareholders (%) BYD (65.6%) June when US government placed on its restricted Auditors Ernst & Young entity list and led to order disruption, ii) Increased sales Result Due FY19: Mar 2020 contribution from low margin assembly business (1H19: 51% of sales vs. 44% in 1H18), as FLEX has been eliminated from Huawei’s supplly chain and BYDE would gain market share as a Company description result. Established in 2002, BYDE is a leading manufacturer of handset components and Well exposed to increasing glass covers adoption by Chinese modules, such as plastic casing, metal casings, flaghsip smartphones; Entering US client supply chain and keypads. It also provides assembly services

for handsets. Its parent company, BYD (1211.HK) With increasing adoption in full-screen OLED and wireless charging technology, as well as less signal interference (vs. metal casing), we keeps some of handset components and are seeing increasing penetration in glass covers by smartphone modules, such as LCD displays, FPCs, and players. The glass cover market was originally dominated by Biel camera modules. Its customers include Samsung Crystal and Lens Tech (300433 CH) (a duopoly with >90% market (005930 KS), (NOK.US), Huawei, BBK, share) and after years of effort made by BYDE, they managed to , Toshiba (6502.JP), Asus (2357.TT), HTC gradually break into Android camp’s supply chain and become the 3rd (2498.TT) and HP (HPQ.US). glass cover supplier (based on common industry practice, we believe their order allocation would be low-mid teens at the initial stage). Price chart According to Counterpoint Research, glass covers penetration rate HK$ would increase from 7% to 60% in 2020E, BYDE would be 30.0 well-exposed to this blue ocean as they have already penetrated into 25.0 core clients in Android camp and became their major casing supplier. 20.0 Recent projects that BYDE took part include Samsung Galaxy S10, 15.0 Huawei P30, Vivo X27, OPPO Reno and Mi 9. Meanwhile BYDE is also entering a renowned US consumer electronics OEM 10.0 supply chain, and act as a first step to further explore other business 5.0

0.0

17 18 19

18 19 16 17

- - -

- - -

opportunities with this US client in the long run. -

Feb Feb Feb

Aug Aug Aug Aug

BYDE began construction of the 3D glass projects in Shantou and Sources: Bloomberg, CIRL in May and in July 2017, with total designed capacity ~200mn pc when fully ramped up. As glass casing product yield expected to further improve, together with higher GM than metal casing (currently GM at ~high-teens vs. metal casing GM at low-mid teens in 1H19, based on our estimation), we expect glass casings GM to gradually improve to mid-20s. We expect BYDE’s glass cover shipment would grow ~38.4% CAGR from ~80mn pieces in FY19E to 153mn pieces in FY21E. We expect ASP would be lowered at ~4% CAGR in FY18-FY21E as we see mid-high end smartphones would also adopt glass covers, hence implying a shift of product mix and lower ASP for BYDE.

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Upcoming growth engines: IoT and automotive intelligent segment ; Diversifying product mix favours re-rating story in the long run

We recognized BYDE’s investment in new business segments (IoT and automotive intelligent segment) began to bear fruit in FY18. Total revenue grew >80% to ~RMB5.6bn in FY18 and accounted for 13.6% of total revenue (vs ~8% in FY17). In 1Q19, IoT segment revenue came in at RMB2.6bn and accounted for ~11% of revenue in 1H19.

BYDE has established in-depth collaboration with renowned clients in the fields of intelligent home, gaming, commerce, IoT and emerging electronics products, which we believe BYDE will ride on this foundation and continue to ramp up IoT segment through taking part in clients’ projects.

For automotive intelligent segment (incl. central control system , communication modules, multi-media modules etc.) , BYDE revenue doubled Yoy to RMB 400mn in 1Q19 and further grew 90% QoQ to RMB761mn (~3.2% of 1H19 revenue). As their in-house developed DiLink system would be adopted on all BYD 2018 new car models such as Qing Pro,Tang. This marks their fist step into automobile segment and would be another long term growth engine for BYDE. DiLink is a new connected car platform that features input from 341 sensors and has 66 control parameters. DiLink is the first large-scale opening of the sensor and executive systems of the car which allows developers to further improve the system. BYD will become the first automaker to open its car hardware system. In addition to DiLink, BYDE’s multi-media intelligent systems, we believe BYDE would be able to win new orders from both domestic and foreign automotive OEMs. In addition, BYDE began to see increasing business opportunities in IoV (Internet of Vehicles) related products, as they have built up relationships with players like Continental, Harman, Gemalto, and Nvidia .

Exhibit 1: BYD’s DilLink System

Source: BYD 2018 Annual Report, cleantechnica.com

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Trading at 11.4x FY20E PE with 3% EPS CAGR in FY18-21E; Maintain Neutral on near term overhang persists

With sales expected to grow 14.7% CAGR in FY18-21E, we expect EPS would only grow at 3.6% CAGR in FY18-21E, due to increased contribution from low margin assembly service, and metal casing remains weak upon the arrival of 5G. Neverthelss, we identify increasing glass cover adoption, which brings GM improvement, while the ramp up of IoT and auto intelligent segment would drive medium term sales and earnings growth. BYDE is diversifying away from smartphones related business, we believe this would be BYDE’s re-rating story in the long run.

BYDE is trading at FY20E 11.4x PE (5% discount to HK, and Taiwan listed peers’ average). Sino-US trade tensions continue to impose an overhang on near term stock price, we maintain BYDE’s rating at Neutral with new TP at HK$10.15, based on 10.3x FY20E PE (15% discount to HK, China and Taiwan listed peers’ average).

Exhibit 2: Glass cover smartphones are expected to account for >40% of total shipment in FY19E

70% 60% 60%

50% 41% 40%

30% 26%

20% 13% 10% 7%

0% 2016 2017 2018 2019E 2020E

Glass cover (% of smartphone shipment)

Source: Counterpoint Research, CIRL

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Exhibit 3: BYDE’s revenue (top) and GP mix (bottom, increasing glass cover and new business contribution would improve blended GM)

100%

90%

80% 42.6% 47.1% 47.7% 45.2% 70% Assembly service income 60% Intelligent product & Automotive intelligent system 50% 7.9% 13.6% 15.6% 18.7% 40% Metal casing

30% 12.6% 33.8% 31.9% 18.3% Glass cover 20% 16.3% 11.3% Plastics casing 10% 0.7% 3.8% 10.6% 8.0% 7.2% 7.2% 0% 2017 2018 2019E 2020E 100%

90%

80% Assembly service income 70% Intelligent product & Automotive 60% intelligent system 50% Metal casing

40% Glass cover 30%

20% Plastics casing

10%

0% 2017 2018 2019E 2020E

Source: Company data, CIRL estimates

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Exhibit 4: Financial statement

Income statement Cash flow Year to Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E Year to Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E Revenue 38,775 41,047 49,790 55,085 62,033 Pre-tax profit 2,992 2,536 1,686 2,313 2,836 Gross profit (reported) 4,264 4,172 3,593 4,487 5,385 Taxes paid (247) (433) (30) (231) (317) EBITDA 4,623 4,496 3,700 4,529 5,003 Depreciation 1,587 1,918 1,985 2,180 2,129 Depreciation (1,587) (1,918) (1,985) (2,180) (2,129) Associates 0 0 0 0 0 EBIT 3,036 2,579 1,716 2,349 2,874 CFO bef. WC change 4,332 4,020 3,641 4,262 4,648 Net interest income (exp.) (44) (43) (29) (36) (38) Change in working cap (1,894) 588 1,245 (14) (35) Associates 0 0 0 0 0 Cashflow from operation 2,437 4,608 4,886 4,249 4,614 Exceptionals/others 0 0 0 0 0 CAPEX (2,621) (2,120) (2,000) (2,000) (2,000) Profit before tax 2,992 2,536 1,686 2,313 2,836 Free cash flow (184) 2,488 2,886 2,249 2,614 Tax expenses (407) (347) (231) (317) (388) Dividends 518 439 292 401 491 Minority interest 0 0 0 0 0 Balance sheet adj. (60) (14) 0 0 0 Net profit 2,585 2,189 1,456 1,997 2,448 Sharse issued 0 0 0 0 0 Others (666) (994) (148) 109 90 Balance sheet Net cash flow (391) 1,919 3,031 2,759 3,194 Year to Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E Net cash (debt) start 3,213 2,822 4,741 7,772 10,530 Cash & equiv 2,822 4,741 7,772 10,530 13,725 Net cash (debt) at year-end 2,822 4,741 7,772 10,530 13,725 Trade receivables 8,556 7,209 13,104 14,637 16,642 Other receivables 0 0 0 0 0 Ratios Inventories 4,608 4,768 4,404 4,836 5,402 Year to Dec FY17A FY18A FY19E FY20E FY21E Other current assets 655 371 371 371 371 Growth rate (%) Fixed assets 7,431 7,634 7,649 7,469 7,340 Revenue 18.2 5.9 21.3 10.6 12.6 Intangible assets 14 26 26 26 26 EBITDA 45.1 (2.7) (17.7) 22.4 10.5 Investment, associates etc 1,300 1,302 1,302 1,302 1,302 EBIT 108.0 (15.1) (33.5) 36.9 22.3 Total assets 25,386 26,051 34,628 39,172 44,808 Net profit 109.6 (15.3) (33.5) 37.2 22.6 EPS 109.6 (15.3) (33.5) 37.2 22.6 Account payables 8,983 7,892 14,669 16,619 19,155 Margins (%) Other payables 0 0 0 0 0 Gross margin 11.0 10.2 7.2 8.1 8.7 Short-term debt 0 0 0 0 0 EBITDA 11.9 11.0 7.4 8.2 8.1 Other current liabs 2,105 2,170 2,370 2,456 2,528 EBIT 7.8 6.3 3.4 4.3 4.6 Long-term debts 0 0 0 0 0 Net margin 6.7 5.3 2.9 3.6 3.9 Deferred tax and others 107 164 164 164 164 Other ratios Other long-term liabs 0 0 0 0 0 ROE (%) 18.2 13.8 8.4 10.0 10.7 Total liabilities 11,195 10,226 17,203 19,240 21,847 ROA (%) 10.2 8.4 4.2 5.1 5.5 Net gearing (%) (19.9) (30.0) (44.6) (52.8) (59.8) Share capital 0 0 0 0 0 Interest coverage (x) 68.9 60.2 58.7 65.7 75.7 Reserves 14,191 15,825 17,425 19,932 22,960 Receivables days 80.5 64.1 96.1 97.0 97.9 Shareholders' equity 14,191 15,825 17,425 19,932 22,960 Payables days 95.0 78.1 115.9 119.9 123.4 Minorities 0 0 0 0 0 Inventory days 48.7 47.2 34.8 34.9 34.8 Total equity 14,191 15,825 17,425 19,932 22,960 Effective tax rate (%) 9.9 13.0 13.7 13.7 13.7 Net cash (debt) 2,822 4,741 7,772 10,530 13,725 Source: Company data, CIRL estimates

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Exhibit 5: Peer valuation comparison

bloomberg Mkt Cap Price Share Price Movement (%) PER (x) Yield (%) code (HKD mn) (HKD) 1M YTD FY16 FY17 FY18 FY19E FY20E FY16 FY17 FY18 FY19E FY20E

HK Listed Peers GROUP 992 HK 64,279 5.35 (16.8) 1.1 13.6 13.6 13.6 13.8 10.1 5.0% 4.9% 4.9% 4.0% 4.8% AAC TECHNOLOGIES 2018 HK 44,654 36.95 (17.2) (18.7) 9.6 7.4 10.0 13.6 11.5 4.1% 5.3% 3.9% 3.2% 3.4% FIH MOBILE LTD 2038 HK 7,721 0.94 11.9 14.6 6.9 -1.8 -1.1 -6.0 -18.4 4.3% 0.0% 0.0% 0.0% 0.0% FIT HON TENG LTD 6088 HK 23,260 3.43 10.3 1.2 14.7 14.9 12.5 11.2 9.7 0.0% 1.4% 2.0% 2.4% 2.2% SKY LIGHT HOLDIN 3882 HK 267 0.28 (8.2) (42.3) 4.2 -0.5 -0.9 3.5 2.5 11.4% 0.0% 0.0% 0.0% 0.0% SUNNY OPTICAL 2382 HK 115,169 105.00 16.3 50.9 76.4 34.1 38.9 30.5 22.5 0.3% 0.7% 0.6% 1.0% 1.3% TRULY INTL HLDGS 732 HK 3,355 1.02 (7.3) 7.4 5.1 47.9 43.2 4.4 4.5 8.8% 1.0% 0.0% 0.0% 0.0% CHINA DISPLAY OP 334 HK 972 0.46 (17.9) (8.0) 8.0 6.9 9.8 9.4 6.6 4.5% 4.2% 4.3% 0.0% 0.0% 2369 HK 1,409 0.28 (11.1) (61.1) -0.3 -0.5 -3.4 - - 0.0% 0.0% 0.0% 0.0% 0.0% TONGDA GROUP HLD 698 HK 3,758 0.58 0.0 (25.6) 3.3 3.4 6.6 4.7 4.1 9.0% 9.3% 4.8% 5.0% 6.7% JU TENG INTL HDG 3336 HK 1,924 1.65 (10.8) (21.8) 3.7 23.6 11.7 6.7 5.1 6.1% 4.8% 6.1% 5.2% 6.2% Q TECHNOLOGY GRO 1478 HK 8,466 7.41 (5.0) 66.5 34.5 16.1 480.7 19.6 14.8 0.6% 0.5% 1.2% 0.7% 1.0% VITAL INNOVATION 6133 HK 383 0.45 (10.0) (19.0) 19.2 -3.0 19.0 - - 13.1% 0.0% 0.0% 0.0% 0.0% SKY LIGHT HOLDIN 3882 HK 267 0.28 (8.2) (42.3) 4.2 -0.5 -0.9 3.5 2.5 11.4% 0.0% 0.0% 0.0% 0.0% COWELL 1415 HK 1,031 1.24 (10.1) 33.3 4.7 4.8 9.3 8.6 6.2 6.4% 5.5% 70.8% 7.2% 8.2% WAI CHI HOLD 1305 HK 167 0.77 (3.8) (35.3) 25.7 7.7 3.7 - - 0.0% 0.0% 0.0% 0.0% 0.0% TK GROUP HOLDING 2283 HK 2,833 3.40 (8.1) (20.2) 13.6 9.4 8.1 7.8 6.6 4.1% 5.0% 5.9% 6.1% 7.4% KA SHUI INTL HLD 822 HK 308 0.35 (28.1) (1.4) 5.2 9.1 2.7 - - 0.0% 0.0% 0.0% 0.0% 0.0% SAS DRAGON HLDG 1184 HK 1,446 2.31 (3.8) (2.1) 7.1 4.8 4.6 - - 4.3% 8.7% 8.7% 0.0% 0.0% PANASIALUM HOLDI 2078 HK 420 0.35 (9.1) (52.1) -3.2 -2.7 -1.8 - - 0.0% 0.0% 0.0% 0.0% 0.0% SCUD GROUP LTD 1399 HK 382 0.35 (10.3) 25.0 -2.7 15.6 3.4 - - 0.0% 0.0% 0.0% 0.0% 0.0% SIM TECH GROUP 2000 HK 602 0.25 (16.9) (19.9) 8.1 5.6 2.6 - - 4.1% 6.5% 6.5% 0.0% 0.0% WILLAS-ARRAY ELE 854 HK 256 3.00 (10.4) (11.8) -3.5 6.6 2.2 - - 0.0% 9.4% 12.7% 0.0% 0.0% Average 12,319 (7.6) (7.9) 14.1 13.6 37.9 10.5 8.2 6.1% 4.8% 10.2% 3.8% 4.6%

BYD ELECTRONIC 285 HK 23,794 10.56 (5.2) 7.3 18.4 8.8 10.4 15.6 11.4 1.3% 2.3% 1.9% 1.3% 1.8%

Casing peers

FOXCONN TECH 2354 TT 22,764 16.08 (4.5) 6.3 8.8 8.9 9.6 11.0 10.4 5.7% 5.7% 5.2% 4.8% 4.8% CATCHER TECH 2474 TT 42,227 54.78 (4.6) (2.7) 8.0 7.5 5.8 11.2 9.0 4.4% 5.6% 5.7% 5.2% 5.0% CASETEK HOLDINGS 5264 TT 5,546 13.18 5.0 33.9 6.6 10.5 -12.3 123.2 15.2 0.0% 4.9% 2.0% 1.5% 2.6% COXON PRECISE 3607 TT 542 4.45 (5.3) 13.8 -7.3 -5.3 -2.5 - - 8.1% 4.6% 2.9% 0.0% 0.0% COMPAL ELEC 2324 TT 19,524 4.43 (8.1) 2.5 9.8 13.1 8.3 9.8 9.0 6.5% 6.9% 7.1% 6.6% 6.9% QUANTA COMPUTER 2382 TT 54,139 14.01 (8.3) 6.3 14.8 14.7 13.7 13.8 12.7 6.0% 6.2% 6.6% 6.4% 6.8% WISTRON CORP 3231 TT 17,428 6.13 0.4 28.3 22.5 16.6 13.4 12.3 11.0 4.5% 4.9% 6.3% 6.4% 7.2% PEGATRON 4938 TT 33,140 12.68 (9.3) (1.4) 7.0 8.7 11.5 11.1 10.6 9.5% 8.1% 7.2% 6.6% 6.8% INVENTEC 2356 TT 18,856 5.25 (9.9) (4.8) 13.9 10.9 11.2 11.1 10.3 6.6% 8.0% 7.4% 7.5% 8.0% EVERW-A 300115 CH 12,663 13.92 17.8 53.5 15.7 19.1 277.5 32.1 22.3 1.3% 0.8% 0.9% 0.6% 0.9% JANU-A 300083 CH 4,927 3.44 20.5 31.8 32.7 9.3 -1.4 - - 0.7% 0.0% 0.0% 0.0% 0.0% LUXSHARE PRECI-A 002475 CH 152,025 28.43 26.0 137.3 102.7 57.3 40.5 35.1 26.2 0.1% 0.1% 0.2% 1.8% 1.7% TONGDA GROUP HLD 698 HK 3,758 0.58 0.0 (25.6) 3.3 3.4 6.6 4.7 4.1 9.0% 9.3% 4.8% 5.0% 6.7% JU TENG INTL HDG 3336 HK 1,924 1.65 (10.8) (21.8) 3.7 23.6 11.7 6.7 5.1 6.1% 4.8% 6.1% 5.2% 6.2% Average 27,819 1.5 18.4 19.2 15.7 37.3 23.5 12.2 5.2% 5.4% 4.6% 4.8% 5.3%

BYD ELECTRONIC 285 HK 23,794 10.56 (5.2) 7.3 18.4 8.8 10.4 15.6 11.4 1.3% 2.3% 1.9% 1.3% 1.8%

Source: Bloomberg, CIRL

Exhibit 10: BYDE 12 month forward P/E Ratio Exhibit 1:

25 12 mths Forward P/E Ratio Pork avg. -1std. products 20 sold in supermark 15 et counters a +1std.

- 10

-1std.

5

0 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19

Source: Bloomberg, CIRL

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Risk Factors

Downside risks include: 1) Escalating Sino-US trade tensions, 2) Further slowdown in PRC customers’ smartphone shipment; 3) increased competition; 4) 3D-glass adoption ramp up slower than expected; 5) pricing pressure arising from overseas players and domestic peers

Rating Policy

Rating Definition Buy Outperform HSI by 15% Stock Rating Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Sector Rating Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10%

Analysts List

Hayman Chiu Research Director (852) 2235 7677 [email protected] Lewis Pang Associate Director (852) 2235 7847 [email protected]

Kenneth Li Associate Director (852) 2235 7619 [email protected] Farica Li Research Analyst (852) 2235 7617 [email protected]

Leanna Xiao Research Analyst (852) 2235 7719 [email protected] Chloe Chan Research Analyst (852) 2235 7170 [email protected] Edith Li Research Analyst (852)2235 7515 [email protected]

Analyst Certification

I, Hayman Chiu, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others.

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