Expect strong product offerings to boost earnings
- FY21 net earnings below expectations; higher raw material costs dragged margins
- NEV’s robust growth supported by strong pure electric and hybrid technology
- Anticipate raw material costs to ease – positive to earnings
- Maintain BUY with TP of HK$330 based on SOTP
Twin NEV growth pillars. BYD has chalked up fantastic NEV sales growth of 220%+ in FY21 to about 600k units. The sales momentum has remained solid so far this year, rising by about 500% increase in 2M22. Leveraging on its DM-i technology, BYD is rapidly expanding its product offerings, including Qing PLUS, Song PLUS, Tang DM-i series, Song Pro to ride on the strong sales of PHEVs in the country. Besides, its e-platform 3.0 is expected to create more robust intelligent smart EVs to support the launch of Marine series. BYD is ahead of the curve in technology capability and volume sales. We forecast the company to post CAGR of 60% (FY21-23F) in volume sales to c.1.6m units, underpinned by its strong twin NEV technology capabilities. Further expansion of its Dynasty and Marine series are important volume drivers. In 2022, over five new models are scheduled for launch.
Margin erosion expected to ease. Supply chain improvement should support margin recovery. FY21 GP margins fell by about 7ppts to c.11%, but on a quarterly basis, it hovered around 11-12% during 1/2/4Q. We forecast it will recover to 15% by FY23 on easing commodity inflation. The incorporation of DM-i technology, e3.0 smart features and the blade battery will enable BYD to raise ASPs, partly mitigating raw material pricing pressure. Inhouse production of certain key components and expanded capacity should also help to manage production cost better.
Globalisation strategy. BYD is accelerating its overseas roadmap to enter the European market with its BEVs. The Tang, Han, and Yuan EV series will be the main products aimed for overseas markets. In 2021, the company had shipped 1,000 EVs to European customers. Underpinned by the company’s strong R&D capability in BEV and PHEV development, the globalisation strategy is expected to be a long-term volume driver.
Solid balance sheet after share placement. BYD stockpiled raw materials (+200% in FY21) to support its anticipated robust business growth. The Rmb36bn proceeds from sale of shares in FY21 will help to finance both working capital and capex. We forecast annual capex of Rmb25bn in FY22/23 to support business expansion. As of end Dec-21, BYD had net cash of Rmb17bn.
BYD’s plan to list BYD Semiconductor is progressing. This exercise will help to lessen the huge funding costs required and accelerate core business expansion pace.
FY21 results below; but business outlook expected to improve. Total revenue rose by c.38% to Rmb211bn, attributable to growth across all business segments. However, net profit declined c.28% to Rmb3bn, largely due to sharp increase in raw materials costs especially in 2H. FY21 GP margin slipped c.6.6ppts to 11%, resulting in a 11% decrease in gross profit. We believe 2021 should be the trough and looking forward, we anticipate some improvements following better mix and control over production costs. While supply chain is expected to remain volatile in the near-term, the company is taking measures to ensure a more stable production and shipment flows.
Reiterate BUY. Our HK$330 TP is based on SOTP, which translates to FY23F PE of c.64x. The stock is currently trading at 71x FY22F PE, which is slightly below its historical average. The sector was sold down recently and as a result, reduced our target auto P/S ratio to 4x from 4.5x previously. Given the strong fundamentals, we reiterate our BUY rating on BYD.