Hong Kong Equity | Automobile Company in-depth BYD Company 比亞迪股份 (1211 HK) ACCUMULATE Three engines to drive growth Share Price Target Price BYD enters into the new product cycle in 2018, the new generation NEVs with HK$47.2 HK$54.2 “DragonFace” design are well-accepted by car buyers and achieved significant growth after launch. BYD will continue enhancing its competitiveness with upgrading its NEVs with long driving range and high battery density. In addition China / Automobile / Auto Maker to the new Skyrail projects going into operation and the external sales of EV batteries to begin in 2019, we believe BYD will enter into upward cycle. Initiate 7 January 2019 Accumulate with TP of HK$54.2 and a 15% upside from here. New generation of NEPVs drive automobile segment growth: BYD entered into a new Alison Ho (SFC CE:BHL697) product cycle in 2018 and more than 10 NEPV models have been launched last year. (852) 3519 1291 Among them, Yuen EV, Tang DM and Qin Pro with the “Dragon Face” design recorded [email protected] significant sales volume growth, which also ranked top 20 of best-selling NEVs in China. Given the new appearance and the improvement of driving range, we believe BYD’s NEPV are highly competitive and we expect its NEPVs sales to continue to trend up and Latest Key Data it is likely to offset the revenue loss from the subsidies cut. Total shares outstanding (mn) 2,728 The reduction of NEV subsidies to drag down EV buses’ GPM: The subsidies of EV Market capitalization (HK$mn) 128,768 buses have cut by 40% in 2018, we expect the subsidies will continue to reduce in 2019. Enterprise value (HK$mn) 257,537 Given that BYD’s EV buses sales volume is hard to increase substantially to offset the 12M average daily turnover (HK$mn) 355 subsidies cut resulting from the fierce market competition, we estimate EV buses 12M volatility (%) 41% PEG FY17-19E (x) 7.8 revenue and GPM to drop in 2019E. ROE avg FY17-19E (%) 7 EV batteries capacity increase to capture the growing demand for NEVs : BYD starts to P/B FY18E (x) 2.0 provide EV batteries to external customers in 2019E, the increase of EV batteries Net debt/equity FY18E (%) 97 capacity from 16Gwh in 2017 to 40Gwh in 2019E is likely to bolster its revenue and profit growth in the long run against the backdrop of strong demand for NEVs. Performance (%) BYD benefits from the shifting demand to Glass casing: BYD guided that its glass casing 1M YTD 12M capacity will increase to 800k-900k pieces per day by end-2018, with yield improving to Absolute (18) (6) (33) 80% (2.5D) and 70% (3D). This implies an actual annual production capacity of over Relative to HSI (12) (5) (17) 200mn pieces. Given that BYD has already supplied both glass back-cover and metal middle frame to Huawei P20, Vivo X21 and Xiaomi 8, the expansion of glass capacity supports BYD to continue to gain market shares, we expect its mobile segment revenue Major Shareholders (%) to increase stably in 2019E. Wang Chuan Fu 28.5 Lv Xiang Yang 13.2 Account receivables days increase at a fast pace: BYD’s account receivable days Youngy Inv 8.9 increased from 167 days in 2016 to 189 days in 2017, which slow down the cash inflow and increase the risk of write off the bad debt. Initiate with a Accumulate rating. BYD’s share price dropped 35% in the past 12 months Auditor as profit declined. However, we believe its profit growth will recover in 2019E driven by Ernst & Young the significant increase of NEV sales, beginning of external sales of EV batteries and the expansion of glass casing capacity. We initiate Accumulate rating with target price of HK$54.2, which implies FY19E P/E of 32.0x and FY19E P/B of 2.1x. Price Chart Turnover (HK$mn) Price (HK$) Investment Summary 2000 BYD 90.0 FY-end Dec 2016 2017 2018E 2019E 2020E 1800 HSI Turnover (RMB mn) 80.0 100,208 102,651 121,671 143,438 163,682 1600 Chg (%) 70.0 29 2 19 18 14 Net Profit (RMB mn) 1400 5,052 4,066 2,977 4,369 5,094 60.0 Chg (%) 79 (20) (27) 47 17 1200 50.0 EPS (RMB ) 1.875 1.401 0.998 1.509 1.774 1000 Chg (%) 40.0 67 (25) (29) 51 18 800 P/E (x) 22.1 29.5 41.4 27.4 23.3 30.0 600 P/B (x) 2.1 2.1 2.0 1.8 1.7 20.0 400 P/OCF (x) -57.9 17.7 19.9 12.3 14.4 10.0 EV/EBITDA (x) 14.2 15.0 15.1 12.5 11.4 200 DPS (RMB ) 0.555 0.141 0.109 0.240 0.373 0 0.0 18-Jan 18-Apr 18-Jul 18-Oct 18-Dec Yield (%) 1.3 0.3 0.3 0.6 0.9 Source: Company data, Bloomberg, Orient Securities (Hong Kong) Source: Bloomberg, Orient Securities (Hong Kong) Orient Securities (Hong Kong) Limited Please read the analyst certification, company disclosure and disclaimer in the last page 1 Hong Kong Equity | Automobile Company in-depth NEV sales growth outperforms traditional vehicles The slowdown of vehicles sales in China The increase uncertainty amid the trade war slowed personal spending, the auto market Figure 1: Vehicles sales in China was also affected by the weak consumption sentiment and the sales growth has dropped Automobile accumulated sales since 6/2018. The monthly sales volume of automobiles was down by 13.9% yoy in China Mn unit volume (LHS) YOY growth(%) (RHS) % in 11/2018, the 4th consecutive month of decline, according to CAAM. Among which, the 35 15 US brands vehicles sales registered a significant decline after 4/2018 and performed 30 25 10 20 most badly (-32.7% yoy in 11/2018), which was primarily due to an increase tariff to US 15 5 10 0 imported vehicles. The sales of Chinese brand vehicles also performed weakly and 5 0 (5) recorded -23.3% yoy growth in 11/2018, underperformed the industry. The accumulated vehicles sales edged down by 1.65% yoy to 25.4 mn units in China in 11M2018. With the haze of the trade war, we believe the auto market may continue to decline if no preferential policy comes out in the future. Source: CAAM, Orient Securities (Hong Kong) Figure 2: Monthly vehicles sales by brands Figure 3: Sales volume of NEVs in China Sales volume of new energy car (LHS) 40.00 YOY growth (RHS) 30.00 Unit 20.00 1,200,000 400% 10.00 Chinese brands 1,000,000 350% 0.00 300% Japanese brands 800,000 250% -10.00 600,000 200% -20.00 Germany brands 400,000 150% 100% -30.00 US brands 200,000 50% -40.00 0 0% 2018-01 2018-02 2018-03 2018-04 2018-05 2018-06 2018-07 2018-08 2018-09 2018-10 2018-11 Source: CAAM, Orient Securities (Hong Kong) Source: CAAM, Orient Securities (Hong Kong) Strong Momentum of NEV sales in China According to CAAM, new energy vehicles (“NEVs”) sales maintain a strong momentum Figure 4: Cities restricting fuel vehicles despite the decline of auto market, which sales volume was up by 37.6% yoy to 169,000 licenses plates units in 11/2018. The accumulated sales volume was up by 68% yoy to 1.03 mn units in 1 Beijing 11M2018, outperformed traditional fuel vehicles sales, the penetration rate keeps 2 Shanghai increasing and rose from 2.7% in 2017 to 4.1% in 11M2018. 3 Guangzhou 4 Shenzhen The local government encouraged the use of NEVs against the backdrop of easing the air 5 Tianjin pollution, especially in the 1-st tier cities, the government highly restricts the number of 6 Guiyang new license plates for fuel vehicles, but not for NEV plates, which bolsters the demand 7 Hangzhou 8 Shijiazhuang for NEVs. Apart from that, the government subsidies, low energy cost and an increase 9 Hainan number of charging stations are also the reasons to attract car buyers to purchase NEVs. Source: Internet data, Orient Securities (Hong Kong) Given an upgrading technology and growing popularity of NEVs in China, NEV sales are expected to keep rising going forwards. Figure 5: The reasons for Chinese drivers to buy NEVs Pros Cons 1 Lower energy costs 1 Lack of charging facilities 2 Easier to get license plates 2 Long charging hours 3 Government subsidies 3 Immature technology 4 Environmental protection 4 Worry about safety problem Source: Internet data, Orient Securities (Hong Kong) See last page for disclaimer. 2 Hong Kong Equity | Automobile Company in-depth High performance NEVs are entitled higher subsidies Low technology NEVs makers may exit the industry Figure 6: The subsidies for NEVs In order to encourage purchasing NEVs, the state and the local government both continue to reduce provided the huge amount of subsidies to NEV buyers in 2013-2015, the subsidies RMB 120-139 (WH/KG) normally reached 50% of NEVs’ price, which attracted car buyers to shift from traditional Year 150≤R<200 YOY change vehicles to NEVs. In 2016, the media reports that some low technology auto makers 2013 50,000 The cheated the subsidies by inflated the production volume or producing the low-qualities 2014 47,500 -5% subsidies NEVs, the government then raised their subsidies requirements and impose the stricter 2015 45,000 -5% for NEVs policy that only the NEVs with high battery energy density and long driving range can 2016 45,000 0% keep reducing 2017 36,000 -20% enjoy the higher subsides.