Robust NEV business outlook intact
- 1H22 net earnings in line with expectations
- Strong NEV segment with new models in the pipeline
- Scale advantage and advanced technology in both battery and chip to support NEV business expansion
- Maintain BUY with HK$380 TP
Interim results at upper end of positive profit alert. 1H22 total revenue climbed 66% y-o-y to Rmb151bn, led by strong sales revenue from its automobile & battery (auto) segment. Auto revenue surged 169% to Rmb109bn, driven by a 162% increase in vehicle sales to about 646,000 units.
However, the challenging smartphone market dragged its handset assembly operations, and revenue slipped 4% y-o-y to Rmb41bn.
More importantly, blended interim GP margins improved 2.4ppts/2.3ppts y-o-y and h-o-h to 13.5%, again contributed by the strong auto performance. As a result, total gross profits doubled to Rmb20bn. Hence, interim net profit surged 206% y-o-y to Rmb3.6bn, at the upper end of the positive profit alert.
Strong NEV business driven by robust product pipeline. In 7M22, BYD has chalked total vehicle sales of about 803,880 units, exceeding its 2021 NEV sales by 33%. During the period, several of its key NEV models have done well, including Dynasty series on the DM-i platform. In fact, sales of PHEVs surged 450% in 1H. The Han EV remains a strong selling model in China. In 1H, sales of pure EVs rose 240%.
New models to boost future sales include the marine series (Dolphin and Seal) as well as Denza D9 (high-end model). BYD is leveraging its e3.0 platform to introduce more pure EV models in the future.
Sales visibility is good given the strong order flows so far. Currently, customers have to wait several months for delivery of the vehicles given the tight capacity. Another catalyst is that product offerings cover a large customer group, of which the mainstream segment is an important volume driver.
Ahead of peers. BYD’s scale advantage is hard to replicate as its sales is expected to cross 2m units in 2023. Besides, its technological advantage in EV battery and auto chip production enhances its market position. BYD’s cell-to-body technology is expected to give the company a strong engineering edge. Lastly, the expiry of the NEV subsidies at the end of 2022 is expected to have a small impact on its 2023 sales outlook, as the company is moving up the value chain and adjusting its pricing strategy to reflect this impact. So far, its price increase in 1H22 has not slowed volume sales.
All in, BYD has a better cost structure compared to peers given its strong expansion in 1H GP margins. We anticipate GP margins to improve to 15.4% in FY24 from 11.2% in FY21.
Strong fundamentals yet to be priced in. The strong set of interim results point to BYD’s strong earnings fundamentals. We forecast net earnings CAGR of 80% in FY21-24F to support higher valuations. However, BYD’s recent share price performance has been lackluster due to a volatile stock market and stake divestment by Berkshire Hathaway. The latter sold about 1.33m H-shares recently, reducing its stake to 19.92% from 20.49%. Hence, we anticipate share price overhang in the near-term due to the divestment. The stock is currently trading at 71x/46x FY22/23F PE. Any share price correction provides investment opportunity in the long term. Our HK$380 TP is based on SOTP (24x/10x EV/EBITDA on auto & battery/handset assembly, and 3x PB on its semiconductor unit). Maintain BUY.