In a report on October 29, BofA analyst Ming Hsun Lee and Jessie Lo said rising blade battery adoption and a better mix of electronic business will drive the growth of Chinese carmaker BYD.
Han is BYD's first model to adopt an LFP blade battery, with a satisfactory driving range (550- 605km) and battery density (140-160Wh/kg).
BYD intends to expand total battery capacity to 40GWh/53GWh/66GWh by end-2019/20/21 to meet the demand for LFP blade battery, the report said.
Aside from supplying EV battery to itself, BYD expects to sell more EV battery to external clients. BofA raised EV battery sales contribution from external clients by 2022 from 19% to 34% given LFP blade battery is efficient in saving costs.
BofA reiterated Buy rating on BYD-H, and gave a new price target of HKD179, up about 66% from HKD108 and representing a 13.67 percent upside potential from its closing of HKD156.6.
Here is the full report:
Likely faster margin expansion; raise EPS and PO
BYD earlier revised up its 3Q20 earnings guidance by RMB600mn to RMB1.7-1.9bn, (up 1,351% to 1,581% YoY), on account of: (1) EV sales rebound due to new model launch (Han) and upgraded Tang, and (2) BYDE's increasing smartphone component shipment and assembly business related to ceramic and glass material.
We raise our 2020/21/22 EPS estimate by 1%/45%/50%, given: (1) higher adoption of LFP blade battery to reduce COGS and improve margin; (2) we raise our estimate for BYD's EV battery sales to external clients; (3) we raise BYD's Passenger EV (PEV) volume sales by 5%/19% for 2021/22E; and (4) BYDE's stronger order wins.
We reiterate Buy on BYD-H, based on our PO upside potential. Our new POs for BYD-H is HKD179, based on our latest SOTP valuation.
Capacity expansion of blade battery to meet solid demand
Han is BYD's first model to adopt LFP blade battery, with satisfactory driving range (550- 605km) and battery density (140-160Wh/kg).
BYD intends to expand total battery capacity to 40GWh/53GWh/66GWh by end-2019/20/21 to meet demand for LFP blade battery.
Aside from supplying EV battery to itself, BYD expects to sell more EV battery to external clients. We previously expected 19% of EV battery sales contribution from external clients by 2022, but raise it to 34% given LFP blade battery is efficient in saving costs.
Further cooperation with Toyota group ahead
BYD recently announced it has signed strategic alliance agreement with Hino Motors to jointly establish a 50:50 joint venture (JV) in 2021 to develop CEVs (commercial EV) and auto parts for EVs, and the JV will launch first CEV model under Hino brand by 2025.
The cooperation with Hino will expand BYD's client base in CEV powertrain, in our view.
Market expansion of CEV in Europe market
On 22 September, BYD signed a contract with Nobina (Northern Europe's largest public transportation operator) to supply 106 units of BEV bus, and deliver in 2H21.
So far, BYD has gained over 1.4k units BEV bus orders from 20 countries, and has become the No.1 in market share (over 20%) in BEV bus supplier in the Europe. We expect BYD's CEV business to continue market expansion and share gain in the global market with competitive models.
Earnings revisions
Volume sales
We lower our estimate of BYD's 2020 PEV volume sales, given slightly lower-than- expected delivery of Han on supply shortage in 3Q20. On the other hand, we raise our 2021/22E volume sales by 3.8%/6.9%, mainly because we expect stronger EV sales growth, aided by more adoption of LFP blade battery – to lower cost/selling price but maintain good driving range and battery density.
BYD will design an EV model (D1) to sell to Didi, while the volume should be limited in 2020 as BYD is still ramping up the LFP blade battery capacity this year.
Mgmt. indicates that BYD may ship more D1 in 2021 to Didi and we will factor in this in our model when there is more visibility on the cooperation.
GPM
We expect GPM of auto business to improve in 2021-22 as the Han's volume sales are ramping up, and given it is a high-margin product due to higher ASP.
It also uses the LFP blade battery, which lowers manufacturing cost.
BYD will likely have most of its PEV models adopt LFP batteries in 2021, and we believe this will be positive for BYD's GPM.
BYDE
BYD consolidates revenue of BYDE in consumer electronic business, as BYD owns a 65% stake in BYDE. However, due to the related party transaction of mask sales (BYDE manufactures masks and then sells to BYD, who sell masks to overseas clients), BYD's consumer electronic business did not consolidate the mask-related sales.
We slightly raise BYD's revenue of consumer electronic business for 2021-22, as we expect more orders from smartphone component manufacturing.
In mid-October, BYD revised up its 3Q20 earnings guidance by RMB600mn to RMB1.7- 1.9bn (up 1,351% to 1,581% YoY) owing to: (1) NEV sales rebound in 3Q20 on new model launch (Han) and upgraded Tang, (2) BYDE's increasing smartphone component shipment and assembly business related to ceramic and glass material, and (3) earnings contribution from BYDE's mask manufacturing.
For 2021-22E, we do not expect earnings contribution from mask manufacturing, but we raise our EPS mainly on higher EV sales, higher EV battery sales to external clients, and better margin due to more adoption of LFP blade battery.
Net-net, we raise 2020/21/ 22E EPS by 1%/45%/50% on (1) EV volume sales turning to positive growth YoY starting 2H20; (2) higher adoption of blade batteries across various models in 2021 to improve GPM and battery supply to external clients; (3) robust equity income contribution from BYDE due to orders from APPL, Xiaomi, etc.
Valuation
Our PO for BYD-H is HKD179. We derive this using sum-of-the-parts (SOTP) valuation. We apply 2021E sales/earnings (unchanged) for traditional businesses (ICEV, consumer electronics related) and consumer electronics business, while we roll over to 2022E earnings for its EV battery, IGBT, and other EV components business, given (1) rising EV penetration is a long-term trend and sales visibility is higher than that for traditional business, and (2) it is in line with our valuation metric for Nio and CATL as investors are taking more forward-looking approach in these businesses for valuation.
Auto – ICEV business
We continue to assign 12x P/E (unchanged) target multiple to BYD's 2021E PAT, similar to China peers.
Auto – EV business
We break down the EV business into three parts to better capture the value of each business, namely, EV battery, IGBT and other EV components.
For the EV battery business, we apply 8.5x P/S (unchanged) to BYD's 2022E sales.
Our target multiple of 8.5x P/S is in line with our target multiples for Nio (considering CB dilution) and CATL, as these companies are leaders in EV and EV battery industries.
Tesla currently trades at 11x P/S (2022E sales), which is around 30% premium to our target multiple for the business.
Thus, we believe our target multiple for BYD's EV battery business is not aggressive as Tesla's global leading edge in brand, EV battery/powertrain, and autonomous driving should enable it to trade at premium to its peers.
For the IGBT manufacturing business, we apply 16x P/S (previously 10x) to its 2022E IGBT sales. We benchmark valuation of StarPower Semiconductor (603290 CH, not covered) at 16x 2022E P/S based on consensus estimates.
StarPower mainly focuses on IGBT-specific for industrial application, while BYD focuses on IGBT-specific for EV application.
After spinning off the IGBT business, the likelihood of BYD supplying to external clients should increase on the back of the “import substitution” effect amid US- China trade tension.
Lastly, we apply 3.5x P/S (previously 2.5x) to its other EV components sales in 2022E; 3.5x P/S is similar to its peers' average.
Consumer electronics battery business: We apply 3x P/S (unchanged) for the consumer electronic battery business, on long-term growth outlook, higher than Samsung SDI's estimated valuation of 2.4x P/S, given BYD's sales growth should be higher than that of Samsung SDI.
Consumer electronics business – BYDE and non-BYDE: We apply BYDE's (65% owned by BYD) market cap in our SOTP, and continue to apply H-share listed tech companies' average P/E, 8x (unchanged), for non-BYD electronics business' net income.
SkyRail: We continue to assign 6x P/E (unchanged), similar to peers in China.
Price objective basis & risk
BYD (BYDDF)
Our PO for BYD-H is HKD179. We derive our PO using sum-of-the-parts (SOTP) valuation.
Auto ICEV - assign 12x P/E target multiple to BYD's 2021E PAT, similar to China peers.
EV battery - apply 8.5x P/S to BYD's 2022E sales. Our target multiple of 8.5x P/S is in line with our target multiples for Nio (considering CB dilution) and CATL - these companies are leaders in EV and EV battery industries.
IGBT business - we apply 16x P/S to its average of 2022E IGBT sales. We benchmark StarPower Semiconductor's (603290 CH, not covered) current valuation at 16x P/S, based on consensus estimates, and do not think applying 16x to BYD's IGBT business is too aggressive.
EV components - we apply 3.5x P/S to its other EV components sales in 2022E -- 3.5x P/S is similar to peers' average.
Consumer electronics battery - apply 3x P/S for the consumer electronic battery business, due to long-term growth outlook, higher than Samsung SDI's estimated valuation 2.4x P/S.
Consumer electronics - BYDE and non-BYDE: we apply BYDE's (65% owned by BYD) market cap in our SOTP, continue to apply H-share listed tech companies' average P/E, 8x for non-BYD electronics business' net income.
SkyRail: assign 6x P/E (unchanged), similar to peers in China.
Downside risks: failure to improve operational metrics, as measured by plant utilization, average engine size, NEV competition.
Upside risks: SUV sales speeding up, success in more NEV models.
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