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BYD: A Mixed Bag Of Sweet And Sour

  • BYD's NEV business continues to grow as models gain traction.
  • Smartphone components remain a drag due to market maturity and sales weakness.
  • Current valuation of 23x earnings is not attractive relative to Great Wall.

BYD (OTCPK:BYDDY) (OTCPK:BYDDF) continues to execute on its new energy vehicle, suggesting that the company could become a competitor to Tesla (NASDAQ:TSLA) given its home-court advantage. However, handset business remains a drag due to smartphone maturity and sales weakness in BYD's key clients such as Nokia (NYSE:NOK), Samsung (OTC:SSNLF) and Motorola. While the company has the right idea of ramping up its rechargeable battery and photovoltaic business, this segment remains a drag and it is uncertain how or what will be the future of this company. At the current valuation of 23x 2016E earnings, BYD remains the priciest automaker within my coverage universe. As such, I prefer companies with exposure to the growing SUV segment, commands superior pricing power and execution in sales and volume target, hence my bias towards Great Wall Motors rather than BYD (see - Great Wall Motor: Rollin', Rollin', Rollin').

First half NPAT of Rmb467m, +27% y/y, came in at the high end of the management guidance, driven by solid growth from new energy vehicle sales, which now accounts for 20% of the total sales. Auto and auto parts revenue grew 56% in the first half, partially due to the rising popularity of the S7 SUV. Auto sales increased on average 14% to 210k units as non-NEV vehicles only grew 6% to 190k. Although NEV still accounts for a smaller portion of the overall sales profile, it resulted in a positive impact on gross margins, rising 10bps to 15%. Net-net, it seems that the NEV business is profitable and this is important given NEV models are considered BYD's key differentiator.

While the auto segment is doing well, handset component certainly disappointed with revenue increasing only 3% y/y coupled with falling gross margin. Clearly, the decelerating smartphone market in China is negatively impacting BYD's key clients including Samsung, Motorola and Nokia that have been losing shares to either Xiaomi or Apple (NASDAQ:AAPL). I expect the handset component business to continue to be pressured in the medium term, as it is difficult to see any earnings visibility in this segment.