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China
Consumer Discretionary
What's new: We revisit our earnings forecasts for BYD after factoring in its
2019 preliminary results. We upgrade BYD to Buy (1) from Hold (3) as we
see an overall re-rating ahead, mainly driven by the value discovery of
BYD’s leading EV battery technology and capacity, and China’s stimulus
plan to delay the phasing out of NEV subsidies.
What's the impact: 2019 preliminary results. BYD’s 2019 earnings fell
by 42% YoY to CNY1.6bn, better than our estimate of a 47% YoY drop,
mainly on a better-than-expected top line (-2% YoY vs. our estimate of -11%
YoY).
Undervalued EV battery segment. As discussed in our in-depth report on
China’s EV battery marker published on 30 August 2018, we believe BYD is
the No.2 EV battery maker, after CATL, in China in terms of technology and
capacity. However, we believe the EV battery segment’s value has not
been well discovered by the market in the past years, mainly as: 1) the
market was concerned about BYD’s capability of acquiring orders from its
competitors (EV makers), and 2) the market held a very pessimistic view on
LFP (the one BYD is leading) competing with NCM (the one BYD is lagging
compared to CATL) due to the energy density bottleneck of LFP.
But the story is now changing. Based on the market’s expectation of
Tesla likely using LFP in the Model 3 following its announcement in 2H19,
BYD officially launched its blade LFP battery technology on 29 March 2020;
this new LFP battery has higher energy density than the current NCM622.
Based on our checks, various EV makers have shown interest in this new
technology. Due to NCM811’s fire outbreak concerns, we expect LFP to
take a meaningful share in the low-end EV market over 2020-21, rather
than dying out in PV EVs as the market was previously expecting; we see
this triggering a re-rating for BYD.
What we recommend: We separated BYD’s EV battery segment from its
EV segment in our valuation, and introduce an average 2020-21E NAV of
CNY73bn for this new segment, based on battery sales of 14GWh, ASP of
CNY0.85/Wh, EBITDA margin of 22% and an EV/EBIDTA multiple of 28x
for the average 2020-21E financials. We value the remainder of the EV
segment at CNY96bn, based on an EV/EBITDA multiple of 20x.
Accordingly, we lift our SOTP-based TP to HKD50 from HKD44 as roll over
our basis to average 2020-21E from 2020E. We upgrade BYD to Buy (1)
from Hold (3) as we see increasing re-rating opportunities for BYD, amid
potential stimulus. Downside risk: lower-than-expected NEV sales.
How we differ: Our 2020-21E EPS are 28-35% below the consensus, as
we are more cautious on China’s NEV market demand over 2020-21E.
31 March 2020
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
BYD (1211 HK)
Target price: HKD50.00 (from HKD44.00)
Share price (31 Mar): HKD40.50 | Up/downside: +23.5%
Kelvin Lau
(852) 2848 4467
kelvin.lau@hk.daiwacm.com
Jay Lu
(852) 2848 4970
jay.lu@hk.daiwacm.com
Forecast revisions (%)
Year to 31 Dec 19E 20E 21E
Revenue change 10.2 5.2 1.6
Net profit change 9.6 (1.8) (0.9)
Core EPS (FD) change 9.6 (1.8) (0.9)
80
91
103
114
125
30
38
45
53
60
Apr-19 Jul-19 Oct-19 Jan-20
Share price performance
BYD (LHS) Relative to HSI (RHS)
(HKD)
(%)
12-month range 33.55-59.70
Market cap (USDbn) 14.25
3m avg daily turnover (USDm) 59.79
Shares outstanding (m) 2,728
Major shareholder
Mr. Wang Chuan-fu (23.1%)
Financial summary (CNY)
Year to 31 Dec 19E 20E 21E
Revenue (m) 119,653 121,336 131,940
Operating profit (m) 6,466 6,075 7,024
Net profit (m) 1,610 1,294 1,638
Core EPS (fully-diluted) 0.590 0.474 0.600
EPS change (%) (42.1) (19.6) 26.6
Daiwa vs Cons. EPS (%) (13.6) (35.4) (27.7)
PER (x) 62.8 78.1 61.7
Dividend yield (%) 0.3 0.3 0.3
DPS 0.118 0.095 0.120
PBR (x) 1.8 1.8 1.7
EV/EBITDA (x) 9.2 9.4 8.6
ROE (%) 2.9 2.3 2.8
2
BYD (1211 HK): 31 March 2020
BYD: SOTP valuation
Multiple (x)
NAV average 2020-21E
NAV
(CNY m)
per share
Rechargeable Battery
10.0 x
24,422
9.0
Mobile handset
6.0 x
24,799
9.1
Auto - Conventional
5.0 x
4,973
1.8
Auto- NEV
20.0 x
95,981
35.2
Auto- EV Battery
28.0 x
73,304
26.9
Monorail
4.0 x
1,776
0.7
Sub-total
225,255
82.6
- Net debt/cash
(59,969)
(22.0)
- Minority interest
(7,697)
(2.8)
Equity value (CNYm)
157,590
57.8
Exchange rate, 1HKD = x CNY
0.91
Equity value (HKDm)
173,176
Conglomerate discount
20%
Equity value/share (HKD)
50.00
Source: Daiwa estimates and forecasts
3
BYD (1211 HK): 31 March 2020
Financial summary
Key assumptions
Profit and loss (CNYm)
Cash flow (CNYm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E
BYD NEV volume (units) 20,972 67,016 115,738 126,977 248,509 243,305 213,208 245,623
Volume growth - NEV (%) 889.2 219.5 72.7 9.7 95.7 (2.1) (12.4) 15.2
BYD ICE volume (units) 419,418 393,760 394,188 296,014 274,152 220,183 245,119 252,909
Volume growth - ICE (%) (16.9) (6.1) 0.1 (24.9) (7.4) (19.7) 11.3 3.2
Battery shipment (%) (0.8) 15.5 23.5 18.9 2.8 3.0 (8.0) 5.0
Handset shipment (%) 23.9 36.5 15.7 4.3 4.1 16.0 0.0 7.0
Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E
Automobile 26,270 38,934 55,022 53,501 65,069 56,256 59,154 63,990
Mobile handset 24,116 32,928 38,083 39,708 41,341 47,956 47,956 51,312
Other Revenue 4,980 5,750 7,103 9,442 15,381 15,442 14,226 16,637
Total Revenue 55,366 77,612 100,208 102,651 121,791 119,653 121,336 131,940
Other income 950 499 1,012 1,867 2,940 3,649 3,701 3,958
COGS (47,743) (65,753) (81,189) (84,716) (103,724) (103,076) (104,644) (113,833)
SG&A (6,694) (8,295) (11,058) (11,713) (13,545) (13,760) (14,318) (15,041)
Other op.expenses 0 0 0 0 0 0 0 0
Operating profit 1,879 4,063 8,972 8,089 7,462 6,466 6,075 7,024
Net-interest inc./(exp.) (1,292) (1,464) (1,647) (2,247) (3,293) (3,194) (3,205) (3,625)
Assoc/forex/extraord./others 287 1,196 (757) (221) 217 (247) (247) (247)
Pre-tax profit 874 3,795 6,568 5,621 4,386 3,025 2,623 3,152
Tax (134) (657) (1,088) (704) (829) (545) (472) (567)
Min. int./pref. div./others (306) (315) (428) (850) (776) (871) (857) (947)
Net profit (reported) 434 2,823 5,052 4,066 2,780 1,610 1,294 1,638
Net profit (adjusted) 87 1,634 5,052 4,066 2,780 1,610 1,294 1,638
EPS (reported)(CNY) 0.179 1.140 1.957 1.491 1.019 0.590 0.474 0.600
EPS (adjusted)(CNY) 0.036 0.660 1.957 1.491 1.019 0.590 0.474 0.600
EPS (adjusted fully-diluted)(CNY) 0.036 0.660 1.957 1.491 1.019 0.590 0.474 0.600
DPS (CNY) 0.000 0.000 0.178 0.141 0.204 0.118 0.095 0.120
EBIT 1,879 4,063 8,972 8,089 7,462 6,466 6,075 7,024
EBITDA 6,092 9,376 15,889 15,052 16,745 16,299 17,182 19,707
Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E
Profit before tax 874 3,795 6,568 5,621 4,386 3,025 2,623 3,152
Depreciation and amortisation 4,212 5,314 6,917 6,963 9,283 9,833 11,107 12,683
Tax paid (192) (399) (1,152) (1,208) (806) (545) (472) (567)
Change in working capital (6,106) (5,977) (16,811) (7,113) (4,882) 8,101 (7,401) (1,522)
Other operational CF items 1,251 1,110 2,633 2,105 4,542 3,649 3,697 4,092
Cash flow from operations 38 3,842 (1,846) 6,368 12,523 24,063 9,553 17,837
Capex (8,578) (12,290) (13,053) (14,793) (17,852) (13,932) (16,955) (20,588)
Net (acquisitions)/disposals 480 1,562 (694) (796) 3,148 800 800 800
Other investing CF items 197 (8) 326 (127) 473 0 0 0
Cash flow from investing (7,901) (10,736) (13,421) (15,717) (14,231) (13,132) (16,155) (19,788)
Change in debt 5,314 5,774 4,532 9,783 1,531 (5,000) 9,000 8,000
Net share issues/(repurchases) 3,342 3,200 596 100 0 0 0 0
Dividends paid (124) (37) (1,238) (782) (826) (557) (322) (259)
Other financing CF items (1,262) (187) 12,380 2,066 3,211 (3,402) (3,450) (3,844)
Cash flow from financing 7,271 8,750 16,270 11,168 3,917 (8,958) 5,228 3,897
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash (592) 1,856 1,003 1,819 2,209 1,974 (1,373) 1,945
Free cash flow (8,540) (8,448) (14,899) (8,425) (5,329) 10,132 (7,401) (2,752)
4
BYD (1211 HK): 31 March 2020
Financial summary continued …
Balance sheet (CNYm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E
Cash & short-term investment 3,950 6,011 7,111 8,936 11,151 13,125 11,752 13,697
Inventory 9,978 15,751 17,378 19,873 26,330 26,166 26,564 28,896
Accounts receivable 22,435 26,679 45,733 53,277 44,240 35,896 43,681 47,499
Other current assets 4,471 6,079 8,132 20,736 33,638 33,402 33,588 34,758
Total current assets 40,834 54,519 78,354 102,821 115,359 108,588 115,584 124,849
Fixed assets 36,379 38,126 42,049 47,831 49,485 51,087 54,452 59,890
Goodwill & intangibles 10,821 11,824 12,008 14,128 16,615 18,312 19,995 21,662
Other non-current assets 5,974 11,016 12,661 13,319 13,112 12,864 12,617 12,370
Total assets 94,009 115,486 145,071 178,099 194,571 190,852 202,648 218,772
Short-term debt 19,173 26,413 32,928 45,649 50,768 47,768 53,768 59,768
Accounts payable 25,851 30,656 34,663 39,527 45,222 44,940 45,623 49,630
Other current liabilities 7,998 9,041 10,726 19,821 20,578 20,217 20,501 22,293
Total current liabilities 53,022 66,110 78,318 104,997 116,569 112,925 119,893 131,691
Long-term debt 10,979 11,230 9,339 10,862 13,924 11,924 14,924 16,924
Other non-current liabilities 1,113 2,116 2,005 2,283 3,384 3,384 3,384 3,384
Total liabilities 65,114 79,457 89,661 118,142 133,877 128,233 138,201 151,999
Share capital 2,476 2,476 2,728 2,728 2,728 2,728 2,728 2,728
Reserves/R.E./others 22,890 29,818 48,528 52,276 52,470 53,524 54,495 55,874
Shareholders' equity 25,366 32,294 51,256 55,004 55,198 56,252 57,223 58,602
Minority interests 3,529 3,735 4,153 4,953 5,496 6,367 7,223 8,170
Total equity & liabilities 94,009 115,486 145,071 178,099 194,571 190,852 202,648 218,772
EV 129,433 134,594 138,181 150,580 156,593 150,738 162,215 169,464
Net debt/(cash) 26,202 31,632 35,156 47,575 53,542 46,568 56,941 62,996
BVPS (CNY) 10.245 13.043 18.788 20.162 20.233 20.619 20.975 21.481
Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E
Sales (YoY) 11.2 40.2 29.1 2.4 18.6 (1.8) 1.4 8.7
EBITDA (YoY) 14.2 53.9 69.5 (5.3) 11.2 (2.7) 5.4 14.7
Operating profit (YoY) 4.2 116.2 120.8 (9.8) (7.8) (13.3) (6.1) 15.6
Net profit (YoY) (84.2) 1,772.9 209.2 (19.5) (31.6) (42.1) (19.6) 26.6
Core EPS (fully-diluted) (YoY) (84.7) 1,734.4 196.7 (23.8) (31.6) (42.1) (19.6) 26.6
Gross-profit margin 13.8 15.3 19.0 17.5 14.8 13.9 13.8 13.7
EBITDA margin 11.0 12.1 15.9 14.7 13.7 13.6 14.2 14.9
Operating-profit margin 3.4 5.2 9.0 7.9 6.1 5.4 5.0 5.3
Net profit margin 0.2 2.1 5.0 4.0 2.3 1.3 1.1 1.2
ROAE 0.4 5.7 12.1 7.7 5.0 2.9 2.3 2.8
ROAA 0.1 1.6 3.9 2.5 1.5 0.8 0.7 0.8
ROCE 3.5 6.1 10.5 7.6 6.2 5.2 4.8 5.1
ROIC 3.2 5.5 9.5 7.1 5.5 4.7 4.3 4.6
Net debt to equity 103.3 97.9 68.6 86.5 97.0 82.8 99.5 107.5
Effective tax rate 15.3 17.3 16.6 12.5 18.9 18.0 18.0 18.0
Accounts receivable (days) 117.2 115.5 131.9 176.0 146.1 122.2 119.7 126.1
Current ratio (x) 0.8 0.8 1.0 1.0 1.0 1.0 1.0 0.9
Net interest cover (x) 1.5 2.8 5.4 3.6 2.3 2.0 1.9 1.9
Net dividend payout 0.0 0.0 9.1 9.5 20.0 20.0 20.0 20.0
Free cash flow yield n.a. n.a. n.a. n.a. n.a. 10.0 n.a. n.a.
Company profile
Listed in Hong Kong in 2002, BYD is engaged in the R&D, manufacture and distribution of
automobiles, rechargeable batteries and mobile phone components. It owns 65% of BYD Electronics
(285 HK, Not rated). BYD focuses on autos (especially NEVs), rechargeable batteries (lithium-ion and
nickel batteries used in mobile phones and other portable electronic devices), as well as mobile-
phone components and its mobile phones assembly business (casings, keypads, mobile-phone
designs, etc.).
5
BYD (1211 HK): 31 March 2020
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6
BYD (1211 HK): 31 March 2020
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buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers
wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed
in this report may not be eligible for sale in some jurisdictions.
Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of
DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst
account. ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT:
https://daiwa3.bluematrix.com/sellside/Disclosures.action
Ownership of Securities
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DCMA Market Making
For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared
this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the
issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the
past 12 months except as noted: no exceptions.
Research Analyst Certification
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any
and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views
of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst
is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months.
"2": the security is expected to outperform the local index by 5-15% over the next 12 months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months.
"4": the security is expected to underperform the local index by 5-15% over the next 12 months.
"5": the security could underperform the local index by more than 15% over the next 12 months.
Disclosure of investment ratings
Rating
Percentage of total
Buy*
70.88%
Hold**
22.81%
Sell***
6.31%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2019.
* comprised of Daiwa’s Buy and Outperform ratings.
** comprised of Daiwa’s Hold ratings.
*** comprised of Daiwa’s Underperform and Sell ratings.
Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following
items.
In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in
the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the
amount of the transaction will be in excess of the required collateral or margin requirements.
There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,
real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.
*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content
of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions
regarding the signing of the agreement with us.
Corporate Name: Daiwa Securities Co. Ltd.
Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108
Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan
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Type II Financial Instruments Firms Association