Transforming into a global EV player
- Surging gasoline price positive on NEV market; BYD’s rich line up of new models signal better profit outlook
- Favourable policies with possible extension of NEV tax savings
- Transition into a global EV player with an aggressive overseas expansion strategy; business scale could potentially account for 10% of total in the medium-term
- Reiterate BUY with higher TP of HK$380 based on SOTP
What’s new
Rising gasoline price favourable on NEV sales. The rise in gasoline prices is affecting the sentiment on internal combustion engine car market and favouring NEV sales.
The table below shows NEV volume sales climbed along with the rise in gasoline price (92). We anticipate this trend to continue as DBS Group Research has revised up 2022 Brent crude oil average price to US$102-107/bbl from US$97-102 previously. Therefore, this should be positive on the overall NEV market.
Strong NEV sales signals better profit outlook. BYD has been chalking up above market NEV volume sales growth, largely attributable to its rich model offerings. In May-22 and 5M22, volume sales surged 250%/348% y-o-y, compared to NEV market expansion of 105%/111%, respectively. As we had previously mentioned, the company’s twin NEV technology pillars (e-platform plus DM-i technology) are the key drivers for its strong vehicle sales, and we anticipate this robust trend to continue in the next few years. We forecast vehicle sales to grow by c.50% per annum from FY21-24F to about 2.5m units.
While high raw material costs have affected BYD’s profit margins, we anticipate the higher volume scale and in-house production of certain key components could generate better product margins. Based on the strong volume growth outlook, we estimate gross margins to improve from 11.2% in FY21 to 15.1% in FY24.
Rising market share. Strong vehicle sales has also lifted its market share in recent years. As of end May-22. BYD’s NEV market share reached about 26% and is possible to hit c.35-40% by 2024, as the company is channelling all its resources onto growing its NEV operations. Besides, its strong presence in critical technology knowhow is advantageous to support a faster growth trajectory for its NEV business than peers.
Moving up the value-chain with a rich new vehicle pipeline at higher ASP. 2022 is an exciting year for BYD, with numerous new models lined up for launch. New models include Song Max (both hybrid and pure electric), Yuan EV, Qin EV, Tang DM-P to name a few, and they are priced at higher ASPs, partly to mitigate the rising raw material cost pressure as well as to factor in its higher technology content. In our view, BYD’s NEV models are still priced competitively in the market (ranging between Rmb100k and Rmb300k), and these new models incorporate the latest smart technologies, such as its DilLink 4.0 connectivity system and DiPilot intelligent driving assistance system.
Comparing with Tesla, BYD’s volume performance is remarkable. BYD’s volume sales is catching up rapidly with global EV maker, Tesla, as shown in the chart below. With the strong lineup of new models, BYD volume sales is projected to stay robust.
However, on the profitability front, BYD is behind Tesla. Comparing the operating margins of the two companies, we think there are rooms for BYD to lift its product margins, which is possible with the migration up the value chain. BYD current heavy investment into the production of certain key EV components and parts, which is in a ramp-up stage, is also positive on future profit outlook.
Favourable policy support. The Chinese government is studying the possibility of extending the favourable tax policy to support the NEV industry development. The current vehicle tax waiver will expire after Dec-22 and any extension is positive for the NEV market.
BYD is also well positioned to benefit from the Shenzhen government’s stimulus, under a series of supportive measures to mitigate macro headwinds. For instance, the Shenzhen government is giving an NEV subsidy of Rmb5,000-10,000 for vehicles with ASP at Rmb100-200k and >Rmb200k respectively to stimulate industry sales. Other local governments have also introduced stimulus to encourage vehicle purchases post the lockdowns. Besides, BYD is also making inroads to the lower tier cities with its smaller NEV models. Since BYD is rapidly expanding its range of NEV models to cater various consumer groups, all these should be positive on its NEV sales.
Long-term growth vision – aggressive overseas expansion and battery capacity expansion. Since gaining wide acceptance in the domestic NEV market, BYD is venturing more aggressively into the overseas passenger EV market with its A-segment sedan – ATTO 3. Earlier, BYD was targeting the overseas commercial electric vehicle market and this new direction could provide more growth potential for the company. In the medium-term, overseas business could potentially account for 10% of total (Tesla currently derives over 60% of sales from overseas).
In 2021, China ranked 3rd in the world after Japan and Germany on vehicle exports. China’s exports of passenger EVs have been strong and for May-22/5M22, with volumes growing by 131%/141% y-o-y to 43,000/174,000 units respectively (largely led by Tesla). BYD is taking advantage of its strong product quality to grow its overseas business.
Another important long-term growth catalyst comes from the supply of its blade battery to third-party OEMs. Currently, BYD caters largely to in-house consumption to support its growing NEV portfolio, hence third-party sales has been minimal. This will open the doors to more business opportunities from other OEMs. It has been reported that BYD might supply its blade battery to Tesla China, which produced about 480,000 vehicles in 2021.
Based on market research, BYD Battery is ranked 2nd in China in terms of EV battery installation volume for 5M22, at about 18.8 GWh, which translates to about 23% of market share. BYD is expanding its battery production capacity to support its NEV business growth, estimated at about 30% to reach some 100GWh by this year and potentially hit c.300GWh in next two years. Hence, it looks possible that with the planned capacity expansion, BYD is well positioned to support other auto OEMs. Tesla. Assuming a 10% of its battery production capacity is designated to Tesla, it could potentially cover some 30% of Tesla’s 2021 vehicle output.
However, the pace of expansion will largely depend on the availability of raw materials for EV battery production.
Raised TP; anticipate some near-term profit-taking after recent rally but underlying fundamentals remain healthy. BYD’s share price has appreciated by about 80% from the trough level this year. After the strong rally, we anticipate some near-term corrections, which should provide attractive accumulation opportunities. We have shifted our SOTP valuation base to FY23F to better reflect its growth potential to arrive at new TP of HK$380, based on 3x P/S for its auto operations, 8x EV/EBITDA for battery, 7.5x EV/EBITDA for mobile handsets and 2x P/B for the semiconductor segment. Our FY21-24F net earnings CAGR estimate is 70%. Maintain BUY.
Separately, BYD has completed its A-share repurchase cum employee share ownership plans after buying back some 5.5m A- shares at approximately Rmb290-360/sh recently. These shares will be awarded to important employees as part of its staff incentive scheme.