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CSCI-Auto-BYD (1211 HK)：Front runner of a policy-fuelled NEV market - 20171003

Front runner of a policy-fuelled NEV market

• A pick-up in domestic NEV shipment growth in Jul-Aug likely signals solid NEV sales recovery ahead as policy impacts are fading gradually.
• We expect a mild recovery in the company’s NEV sales in 2H17 and even stronger sales growth in FY18E in view of an improving NEV product mix and the subsidy amount to remain unchanged in FY18E.
• We maintain upbeat on BYD’s NEV business on a longer-term perspective despite weak YTD shipment growth in FY17E, and anticipate re-rating potentials going forward, especially in FY18E, on the back of strong recovery in NEV shipments versus continuous declining ICE sales. After lowering and raising FY17E and FY18E NEV sales growth forecast respectively, we generated a new SOPT-based PT of HKD82.0, pegging on FY18E 1.8x price-to-sales ratio of NEV. (Prev. FY17E 1.5x). Maintain BUY.

Fading policy impacts will benefit NEV manufacturers in 2H17 and 1H18. Compared to a tepid 4.7% YoY sales growth in domestic ICE sector during the Jan-Aug period, NEV shipments were up 30% YoY over the same period. We attribute the solid NEV shipment growth to the particularly robust sales growth in July (+55%) and August (+76%) on the back of the fading impacts of the NEV subsidy policy, versus negative growth in 1Q17. The new subsidy policy, which became effective on 1-Jan 2017, included a 20% subsidy reduction and review of the list of NEV makers eligible for receiving subsidies. Nonetheless, in light of the upcoming peak sales period in the latter half of the year, we expect NEV sales growth in 2H17 and FY18E to be potentially driven higher on the back of: 1) launch of the dual-credits (双积分) scheme, which is to become effective from Apr-2018 and expected to drive OEMs to accelerate NEV sales albeit at lower selling prices, and 2) NEV sales growth in FY18E will be less constrained by potential policy launches than in 1H17 as the NEV subsidy amount will remain unchanged in FY18E following the 20% reduction.

Product mix will be strengthened by new models in 2H17 and 1H18. Weighed by the subsidy reduction, BYD NEV shipment growth (excl. bus) has declined 11% YoY to 57k units in Jan-Aug 2017 from 64k units over the same period last year, while ICE shipments have remained almost flat as compared to FY16. However, the new Song (宋) NEV models, launched in Apr-17, have contributed to majority of total NEV sales, and thus, we expect a continuous rebound ahead given that several new models will be added to the company’s product mix, including MPV Song MAX to be unveiled in 2H17, compact size A0/A00 BEV models and heavy duty truck BEV models to be unveiled in FY18E. As such, we have lowered our FY17E NEV sales growth estimate to 24% YoY (from 40% YoY) and revised up our FY18E NEV sales growth forecast to 70% YoY (from 50% YoY).

Potential re-rating room in mid-to-long terms. From a long-term perspective, we believe the “dual credits” scheme and upcoming timetable to ban pure ICE cars domestically will largely benefit OEMs with substantial exposure to NEV, like BYD. Thus, we remain upbeat on BYD’s NEV business in the mid-to-long term despite weak YTD sales in FY17E. After lowering and raising our FY17E and FY18E NEV sales forecast, we generated a new SOPT-based PT of HKD82.0, pegging on FY18E 1.8x price-to-sales ratio of NEV. (Prev. FY17E 1.5x). Maintain BUY.