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CSCI-Auto-BYD (1211 HK)：Re-rating on NEV turnaround and battery sales - 20180104

Re-rating on NEV turnaround and battery sales

• Strong sales of MPV Song MAX demonstrated a well market acceptance of its brand new design, and bode well for strong sales of the second generation of Qin (秦) and Tang (唐) to be released in FY18E given their similar exterior design, in our view.
• We expect to see a re-rating on BYD, to be underpinned by substantial sales of its in-house-made motive lithium batteries to external clients in 2H18.
• In anticipation of increase in sales of new NEV models in FY18E and battery sales kick-off in 2H18, we have revised up our SOTP-based PT to HKD88 (from HKD82), representing 25% upside, thus maintain BUY.

Song MAX’s sales boom bodes well for strong growth of new NEV models in FY18E. Our recent channel checks indicated that Song MAX sales in Dec-17 have likely significantly exceeded Nov-17’s figure of 10,265 units, largely benefiting from its revolutionary design, in our view. As such, we think this will bode well for strong sales of the second generation of Qin and Tang scheduled to be released in FY18E given their similar design to make up for the design defects in the old models. On the other hand, a brand new A0 BEV SUV derived from model Yuan (å…ƒ) to be launched in FY18E will likely become another major driver for NEV sales due to its competitive range of 250km per charge and price tag of around RMB60,000 after subsidy. In addition, as compared to the A00 models with a lower range per charge, we expect the A0 models will be less impacted by the potential subsidy reduction scheme in FY18E, whereas on the contrary, models with a higher range are likely to receive a wider range of subsidies when compared to FY17. Thus, we expect the company’s NEV sales to experience a turnaround in FY18E on the back of competitive new models and less pressure from the subsidy reduction policy.

Sales of motive lithium battery to kick off in 2H18, ramp-up by end-FY18. BYD’s in-house lithium battery production capacity amounted to 16Gwh as of end of FY17, including 10Gwh in LFP and 6Gwh in NCM, whereby the 10Gwh LFP capacity was primarily supplied for BEV Buses and some of the PHEV models which had been adequate for FY17/18 production per our estimates, whilst the NCM capacity will add an additional 10Gwh to the existing capacity by the end of FY18E according to the company’s plan. In view of the estimated lithium battery usage in FY18E will be around 14Gwh including all the new PV and CV models, the available battery capacity for external sales will be around 12Gwh (26Gwh-14Gwh). And on assumption that lithium battery ASP will come down further to c.RMB1.3/wh and NPM will remain at c.20% in FY18E, total earnings to be contributed by 12Gwh of independent battery sales will be c.RMB3bn, given that battery sales will most likely kick off in 2H18 and start to ramp up towards the end of the year, we estimate 25% of total available capacity will be sold in FY18E at most. If such independent battery sales segment trades at FY18E 30x PER like its peers, BYD’s market capitalisation will increase by c.RMB23bn.

Valuation re-rating will be underpinned by external battery sales. On assumption of increase in NEV sales in FY18E and potential valuation re-rating triggered by lithium battery sales kick-off in 2H18, we have included the battery sales segment in our SOTP valuation and generated a new PT of HKD88 (prev. HKD82), representing 25% upside potential, thus we maintain our BUY rating.