August 31, 2016 ACTION Buy BYD Co. (1211.HK) Return Potential: 15% Equity Research Electrifying the world’s largest new car market; reinstate at Buy Source of opportunity Investment Profile Electrification is set to reshape China’s auto market and we expect BYD to Low High lead this trend given its strong product portfolio, vertically integrated model Growth Growth and high OPM vs. peers. A comparative analysis with Tesla shows many Returns * Returns * strategic similarities but BYD’s new energy vehicle business trades at a sizable Multiple Multiple discount, which we see as unjustified given its large cost savings, capacity Volatility Volatility utilization, and front-loaded investment. China’s new energy vehicle market is Percentile 20th 40th 60th 80th 100th poised to deliver c.30% CAGR (vs. 4% for traditional cars) over the next decade. BYD Co. (1211.HK) We have removed the RS designation from BYD. It is on the Buy List with a Asia Pacific Autos & Autoparts Peer Group Average * Returns = Return on Capital For a complete description of the investment 12-m TP of HK$61.93, implying 15% upside. Our scenario analysis, flexing profile measures please refer to the disclosure section of this document. sales volume and margin assumptions, implies a further 30% valuation upside. Catalyst Key data Current Price (HK$) 54.00 1) More cities in China are likely to announce local preferential policies in 12 month price target (HK$) 61.93 Market cap (HK$ mn / US$ mn) 110,705.4 / 14,270.1 the new energy vehicle (NEV) segment once the result of the subsidy fraud Foreign ownership (%) -- probe is announced. 2) BYD plans to launch electric versions of the Song/Yuan SUVs and its e-logistic product this year. 3) Increased battery 12/15 12/16E 12/17E 12/18E EPS (Rmb) New 1.14 1.87 2.51 3.23 capacity should remove the bottleneck of recent years. 4) Our 2016E-18E EPS revision (%) 55.6 45.7 33.8 -- EPS are up to 41% above Bloomberg consensus (we believe the street has EPS growth (%) 537.9 63.7 34.7 28.4 EPS (dil) (Rmb) New 1.14 1.87 2.51 3.23 not sufficiently factored in BYD’s unique competitive edge in new energy P/E (X) 28.7 24.9 18.5 14.4 P/B (X) 2.5 2.5 2.3 2.1 vehicles), and strong FY2016 earnings would be a positive catalyst. 5) EV/EBITDA (X) 12.9 10.1 9.2 8.0 Stricter fuel consumption standards for passenger cars in China. Dividend yield (%) 0.0 1.3 1.4 1.7 ROE (%) 9.8 11.7 13.1 15.1 Valuation CROCI (%) 14.1 12.8 13.7 13.7 Our 12-m TP of HK$61.93 is based on a sum-of-the-parts valuation, with the Price performance chart lion’s share contributed by BYD’s NEV business (using a 10-year DCF). We 55 12,500 see BYD’s current valuations as attractive given: 1) its 20X 12-m fwd. P/E is 50 11,500 below historical median -1std; 2) the NEV business (incl. EV battery) trades 45 10,500 at 1.1X 2020E P/S and 11.0X 2020E P/E, well below Tesla’s 1.4X and 20.0X respectively, and we expect this gap to narrow given the strong medium- 40 9,500 term revenue/earnings growth outlook for BYD’s business; 3) completion of 35 8,500 its recent private placement has improved balance sheet/cash flow metrics. 30 7,500 Sep-15 Dec-15 Mar-16 Jun-16 Key risks Scaling down of purchase subsidy; lower market share/OPM as competition BYD Co. (L) Hang Seng China Ent. Index (R) increases; disruptive battery technologies impacting competitive edge. INVESTMENT LIST MEMBERSHIP Share price performance (%) 3 month 6 month 12 month Absolute 20.1 39.9 70.6 Asia Pacific Buy List Rel. to Hang Seng China Ent. Index 9.6 16.1 74.2 Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/31/2016 close. Coverage View: Neutral Yipeng Yang +86(10)6627-3189 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies Yuqian Ding covered in its research reports. As a result, investors should be +86(10)6627-3327 [email protected] Beijing Gao Hua Securities Company Limited aware that the firm may have a conflict of interest that could Longjin Li affect the objectivity of this report. Investors should consider +65-6654-5141 [email protected] Goldman Sachs (Singapore) Pte this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research August 31, 2016 BYD Co. (1211.HK) BYD Co.: Summary Financials Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E Total revenue 77,612.0 103,214.1 132,373.6 159,351.5 Cash & equivalents 6,010.9 15,318.1 11,321.1 7,591.1 Cost of goods sold (60,439.1) (77,538.0) (100,105.5) (120,666.5) Accounts receivable 27,164.7 35,277.3 44,155.7 53,154.7 SG&A (8,659.2) (11,773.7) (15,761.8) (19,133.4) Inventory 15,750.6 20,206.5 26,087.7 31,445.9 R&D -- -- -- -- Other current assets 5,592.9 6,152.2 6,459.8 6,782.8 Other operating profit/(expense) 499.7 664.6 720.0 675.5 Total current assets 54,519.1 76,954.1 88,024.3 98,974.5 EBITDA 9,013.4 14,567.0 17,226.3 20,227.1 Net PP&E 39,039.0 43,599.3 48,475.2 53,078.0 Depreciation & amortization (5,313.6) (6,492.1) (7,005.9) (7,499.9) Net intangibles 7,168.7 5,927.7 4,686.8 3,445.8 EBIT 3,699.8 8,074.9 10,220.5 12,727.3 Total investments 4,960.1 4,834.3 4,720.2 4,643.0 Interest income 53.4 120.2 306.4 226.4 Other long-term assets 9,798.8 10,778.7 11,317.7 11,883.5 Interest expense (1,517.0) (1,591.8) (1,407.6) (1,284.5) Total assets 115,485.8 142,094.2 157,224.1 172,024.7 Income/(loss) from uncons. subs. 3.0 0.0 0.0 0.0 Others 1,555.8 (267.5) (139.4) (102.6) Accounts payable 30,655.8 36,142.2 45,290.1 52,939.4 Pretax profits 3,795.0 6,335.8 8,979.8 11,566.6 Short-term debt 26,412.9 27,412.9 27,212.9 26,512.9 Income tax (656.8) (1,110.1) (1,663.1) (2,257.9) Other current liabilities 9,041.4 10,684.0 10,756.0 11,242.5 Minorities (314.8) (400.6) (458.3) (504.3) Total current liabilities 66,110.1 74,239.1 83,259.0 90,694.8 Long-term debt 11,229.9 11,229.9 11,229.9 11,029.9 Net income pre-preferred dividends 2,823.4 4,825.1 6,858.4 8,804.4 Other long-term liabilities 2,116.5 2,539.8 3,047.7 3,504.9 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 13,346.4 13,769.7 14,277.6 14,534.8 Net income (pre-exceptionals) 2,823.4 4,825.1 6,858.4 8,804.4 Total liabilities 79,456.5 88,008.8 97,536.6 105,229.6 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 2,823.4 4,825.1 6,858.4 8,804.4 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 32,294.4 49,950.0 55,093.7 61,697.0 EPS (basic, pre-except) (Rmb) 1.14 1.87 2.51 3.23 Minority interest 3,734.8 4,135.4 4,593.8 5,098.1 EPS (basic, post-except) (Rmb) 1.14 1.87 2.51 3.23 EPS (diluted, post-except) (Rmb) 1.14 1.87 2.51 3.23 Total liabilities & equity 115,485.8 142,094.2 157,224.1 172,024.7 DPS (Rmb) 0.000.600.630.81 Dividend payout ratio (%) 0.0 32.3 25.0 25.0 BVPS (Rmb) 13.04 18.31 20.19 22.62 Free cash flow yield (%) (2.6) (5.3) (1.5) (0.4) Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth 40.2 33.0 28.3 20.4 CROCI (%) 14.1 12.8 13.7 13.7 EBITDA growth 46.8 61.6 18.3 17.4 ROE (%) 9.8 11.7 13.1 15.1 EBIT growth 91.8 118.3 26.6 24.5 ROA (%) 2.7 3.7 4.6 5.3 Net income growth 551.3 70.9 42.1 28.4 ROACE (%) 7.1 8.9 10.0 11.1 EPS growth 537.9 63.7 34.7 28.4 Inventory days 77.7 84.6 84.4 87.0 Gross margin 22.1 24.9 24.4 24.3 Receivables days 117.3 110.4 109.5 111.4 EBITDA margin 11.6 14.1 13.0 12.7 Payable days 170.6 157.2 148.5 148.6 EBIT margin 4.8 7.8 7.7 8.0 Net debt/equity (%) 87.8 43.1 45.4 44.8 Interest cover - EBIT (X) 2.5 5.5 9.3 12.0 Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 2,823.4 4,825.1 6,858.4 8,804.4 D&A add-back 5,313.6 6,492.1 7,005.9 7,499.9 P/E (analyst) (X) 28.7 24.9 18.5 14.4 Minorities interests add-back 314.8 400.6 458.3 504.3 P/B (X) 2.5 2.5 2.3 2.1 Net (inc)/dec working capital (5,915.3) (7,082.2) (5,611.6) (6,707.9) EV/EBITDA (X) 12.9 10.1 9.2 8.0 Other operating cash flow 1,305.6 (864.7) (99.2) (229.1) EV/GCI (X) 1.3 1.4 1.3 1.2 Cash flow from operations 3,842.1 3,770.9 8,611.8 9,871.6 Dividend yield (%) 0.0 1.3 1.4 1.7 Capital expenditures (6,072.5) (10,321.4) (10,589.9) (10,357.8) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 1,808.6 904.3 452.1 0.0 Others (6,472.5) (519.7) (628.3) (629.2) Cash flow from investments (10,736.5) (9,936.8) (10,766.1) (10,987.1) Dividends paid (common & pref) 0.0 0.0 (1,642.6) (1,714.6) Inc/(dec) in debt 10,465.6 1,000.0 (200.0) (900.0) Common stock issuance (repurchase) 0.0 14,473.0 0.0 0.0 Other financing cash flows (1,510.7) 0.0 0.0 0.0 Cash flow from financing 8,954.9 15,473.0 (1,842.6) (2,614.6) Total cash flow 2,060.5 9,307.1 (3,996.9) (3,730.1) Note: Last actual year may include reported and estimated data.