[China ] Autos July 21, 2021 BYD Buy (002594 CH ) (Initiate) Full speed ahead TP: CNY300 Upside: 31.9% Mirae Asset Securities Co., Ltd. Yongdai Park [email protected] Recommendation Initiate at Buy with TP of CNY300 We derived our target price for BYD by applying a P/E of 105x (average 2022F multiple of peers) to our 2022F EPS. From 2021 to 2023, we forecast revenue and net profit to expand at CAGRs of 23% and 36%, respectively. Earnings should be driven by revenue growth at the auto/parts business amid increasing new energy vehicle (NEV) sales. Our NEV sales volume forecasts for BYD are 400,000 units (+110% YoY) for 2021, 520,000 units (+30% YoY) for 2022, and 670,000 units (+30% YoY) for 2023. Catalysts: 1) Strong new model sales; 2) BYD Semiconductor IPO; and 3) external sales of electric vehicle (EV) batteries Investment points Quickly transitioning to EVs We believe BYD is the traditional automaker best-positioned to respond to China’s accelerating transition to EVs. The company produces and sells both battery EVs (BEVs) and plug-in hybrid EVs (PHEVs) and is looking to move beyond the low/mid-tier segment to the premium/luxury segment (2022-23). The company also has EV core component technologies (batteries/motors/power control units) and an EV-dedicated platform. We forecast EVs as a share of overall sales volume to rise to 69% in 2021, 75% in 2022, and 8 1% in 2023 (vs. less than 50% in 2019 and 2020). As the mix of EVs increases, the market is likely to assign a higher valuation to the company, in line with pure EV makers. EV battery earnings growth Surging demand for batteries due to the fast-growing EV market presents an opportunity for BYD, which is China’s second largest battery supplier after CATL. We see EV battery revenue showing average annual growth of 471% over the next three years. Management is strongly committed to external sales, and the company’s Blade Battery has been recognized for its performance and safety. BYD is already a battery supplier to FAW and Changan, while automakers like Toyota, Ford, and Daimler are also actively considering the company’s products. The spin-off and IP O of the battery unit (expected in 2022) should provide upside momentum to share prices (as seen in the semiconductor unit spin-off). Risk factors 1) Sluggish sales due to intense EV market competition ; and 2) weaker -than -expected battery sales to outsi de parties Key data Current price (7/20/21, CNY) 227.50 Market cap (CNYbn) 592.6 600 BYD SHSZ300 500 Exchange Shenzhen Market cap (Wtr) 104.99 400 EPS growth (21F, %) 53.2 Shares outstanding (mn) 679.2 300 P/E (21F, x) 95.7 52-week low (CNY) 78.10 200 Market P/E (21F, x) 23.5 52-week high (CNY) 273.37 100 0 Dividend yield (%) 0.1 19.6 19.12 20.6 20.12 21.6 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec) 2018 2019 2020 2021F 2022F 2023F Absolute -6.2 -3.4 158.3 Revenue (CNYmn) 130,055 127,739 156,598 199,367 236,861 293,509 Relative -8.5 -3.7 134.8 OP (CNYmn) 4,242 2,312 7,086 11,131 13,473 17,390 OP margin (%) 3.3 1.8 4.5 5.6 5.7 5.9 NP (CNYmn) 2,780 1,614 4,234 6,801 8,188 10,616 EPS (CNY) 0.93 0.59 1.55 2.38 2.86 3.71 ROE (%) 4.6 2.6 6.6 9.5 10.3 11.7 P/E (x) 54.8 80.6 125.2 95.7 79.5 61.3 P/B (x) 2.5 2.1 8.2 9.1 8.2 7.2 Source: Company data, Mirae Asset Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. July 21, 2021 BYD I. Investment points 1. Accelerating transition to EVs With the shift to EVs gaining momentum in China, we think BYD is better positioned than rivals to capture growing demand, in light of the following: BYD manufactures two types of EVs—BEVs and PHEVs. While its current offerings are in the low/mid-priced segment, the automaker plans to launch higher-priced premium/luxury models in the near future. BYD also develops/manufactures core EV components in-house (batteries, motors, power control units, etc.) and has its own EV platform (e-platform 3.0). As such, the automaker is capable of optimizing vehicle electrification and mass producing EVs. We expect BYD’s EV sales volume to reach 400,000 units (+110% YoY) in 2021, 520,000 (+30%) in 2022, and 670,000 (+30%) in 2023, with auto/parts revenue growing at a CAGR of 28% over the same period. We also see EVs’ sales mix rising from less than 50% in 2019 –20 to 69% in 2021, 75% in 2022, and 81% in 2023. Considering that pure EV brands typically garner higher valuations, we think BYD’s growing EV sales mix will lead to corporate value expansion. Figure 1. BYD: Auto/parts revenue forecasts (CNYbn) 200 Revenue (L) YoY (R) 50% 40% 160 30% 120 20% 10% 80 0% 40 -10% 0 -20% 2018 2019 2020 2021F 2022F 2023F Source: Company data, Mirae Asset Securities Research estimates Figure 2. BYD: EV sales volume forecasts Figure 3. BYD: Sales mix of NEVs ('000 units) NEV Conventional 800 100% 80% 600 60% 400 40% 81% 75% 68% 200 48% 50% 20% 44% 31% 23% 15% 0 0% 5% 2014 2015 2016 2017 2018 2019 2020 2021F 2022F 2023F 2014 2015 2016 2017 2018 2019 2020 2021F 2022F 2023F Source: Company data, Mirae Asset Securities Research estimates Source: Company data, Mirae Asset Securities Research estimates Mirae Asset Securities Research 2 July 21, 2021 BYD Diverse lineup BYD manufactures both BEVs and PHEVs, which means that it has a larger target market than rivals focusing on only a single segment. Moreover, the automaker aims to attract a broad swath of customers with its diverse BEV lineup—a strategy that sets it apart from Tesla and NIO. While none of its models has been as successful as Tesla’s Model 3, BYD places multiple models on China’s BEV best-seller list every year <Table 1>. Of note, the BYD Han, released in Jun. 2020, has been hugely popular, becoming China’s fourth best-selling BEV this year (YTD as of June) after the Wuling Hongguang Mini, the Model 3, and the Model Y <Figures 4 and 5>. Table 1. China: Top 15 best-selling BEV models by brand 2016 2017 2018 2019 2020 1 BYD (e6) BAIC BJEV BAIC Tesla 2 BAIC ZD BYD (e5) BYD (Yuan) Wuling 3 BAIC JAC JAC BaoJun Ora 4 Emgrand BYD (e5) BYD (Yuan) Chery GAC NE 5 Zotye Emgrand JMC GAC NE BYD (Qin Pro) 6 BYD (e5) Chery Emgrand Roewe Chery 7 Chery Zotye Hawtai BYD (e5) BYD (Han) 8 Zotye JMC Chery Ora NIO 9 ZD BeiJing BeiJing Emgrand MG 10 BYD (Qin) Changan/Chana Roewe Changan/Chana Weltmeister 11 JMC JMC BaoJun JAC BYD (e2) 12 ZD BaoJun Dongfeng MG BaoJun 13 JAC Hawtai Zotye XPeng BaoJun 14 JAC Zotye Chery BYD (Qin) BYD (Yuan) 15 Kandi Roewe Hawtai Fengshen XPeng Source : Mark Lines, Mirae Asset Securities Research Figure 5. China: Top five best-selling BEV models Figure 4. BYD Han: Monthly sales volume (Jan.-Jun. 2021) (Units) 10,000 Wuling Hongguang Mini 8,000 Tesla Model 3 6,000 Tesla Model Y 4,000 BYD Han 2,000 Ora R1 ('000 units) 0 7/20 8/20 9/20 10/2011/2012/20 1/21 2/21 3/21 4/21 5/21 6/21 0 50 100 150 200 Source: MarkLines, Mirae Asset Securities Research Source: MarkLines, Mirae Asset Securities Research Mirae Asset Securities Research 3 July 21, 2021 BYD In China, the PHEV market is smaller than the BEV market. However, the segment is proJected to grow rapidly going forward, with the government designating PHEVs as NEVs eligible for subsidies. As consumers increasingly switch to EVs, the relatively long driving ranges and stability of PHEVs will likely hold strong appeal for some customers, benefiting BYD, which is the PHEV leader. Table 2. China: Top 10 best-selling PHEV models by brand 2016 2017 2018 2019 2020 1 BYD (Tang) BYD (Song) BYD (Qin) BYD (Tang) Li Auto 2 BYD (Qin) BYD (Qin) BYD (Song) BMW BMW 3 Roewe Roewe BYD (Tang) VW Volvo 4 BYD (Tang) Roewe BYD (Qin) BYD (Tang) 5 Roewe Roewe Roewe VW 6 Roewe BMW Volvo VW 7 Roewe GAC VW BYD (Han) 8 BMW Geely BYD (Song Pro) Roewe 9 GAC BMW Toyota BYD (Song) 10 Emgrand Lynk & Co Roewe VW Source: Mark Lines, Mirae Asset Securities Research Figure 6. China: Top five best-selling PHEV brands Figure 7. China: Top five best-selling PHEV brands (Jan.-Jun. 2021) (Jan.-Jun. 2021) BYD Li One Li Auto BYD Qin Plus DM-i Roewe BYD Han DM VW Roewe RX5 BMW ('000 units) BYD Song DM ('000 units) 0 10 20 30 40 50 60 0 5 10 15 20 25 30 35 40 Source: MarkLines, Mirae Asset Securities Research Source: MarkLines, Mirae Asset Securities Research Expanding into the luxury segment At present, BYD markets low/mid-priced models that sell for CNY300,000 or less (CNY60,000 – 160,000 for the e-series, and CNY110–290,000 for the Dynasty lineup).