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Automobiles| Company Research Bringing China to the World 23 February, 2016

买入

首次覆盖

新能源汽车领航成就绿色梦想 BYD (1211 HK)

Market Data: Feb 19, 2016

Closing Price (HK$) 37.3

Price Target (HK$) 49.1

HSCEI 8,113

HSCCI 3,491

52-week High/Low (HK$) 62.3 /18.7

Market Cap (USD Mn) 17,412

Market Cap (HK$ Mn) 135,400

Shares Outstanding (Mn) 2,476

Exchange Rate (RMB-HK$) 0.838

Price Performance Chart:

Source: Bloomberg Analyst Vincent Yu, CFA A0230513070005 BAM599 Research associate Alison Zhang A0230115050003 BFR269 [email protected]

Financial summary and valuation 2013 2014 2015E 2016E 2017E Revenue (RMB million) 49,768 55,366 65,907 86,796 102,364 YOY (%) 12.1 11.2 19.0 31.7 17.9 Net income (RMB million) 553 434 2,733 3,704 4,495 YOY (%) 579.6 -21.6 530.5 35.5 21.4 EPS (RMB) 0.23 0.18 1.10 1.50 1.82 Diluted EPS (RMB) 0.23 0.18 1.10 1.50 1.82 ROE (%) 2.2 2.6 10.3 9.2 10.8 Debt/asset (%) 68.1 69.3 68.4 62.3 64.0 Dividend Yield (%) 16.8 0.0 0.0 0.0 0.0 P/E (x) 133.0 178.5 28.3 20.9 17.2 P/B (x) 3.0 2.7 2.5 1.6 1.6 EV/EBITDA (x) 32.6 26.4 20.8 14.9 13.0 Note: Diluted EPS is calculated as if all outstanding convertible securities, such as convertible preferred shares, convertible

debentures, stock options and warrants, were exercised. P/E is calculated as closing price divided by each year’s EPS..

投资要点：

新能源汽车领导者。比亚迪作为中国新能源领先企业，拥有汽车、IT、新能源三大产业群。比亚迪

在新能源汽车领域深耕多年，坚持技术创新，推出秦、唐等高品质车型。2015 年，比亚迪已成为

全球新能源汽车销量冠军。作为中国新能源汽车龙头，比亚迪新能源汽车业务快速增长，成为公司

业绩主要驱动力。我们预计，公司新能源汽车收入占比将由 2014 年的 13.1%升至 2016 年的

41.1%。

新能源汽车加速启动。为减少大气污染、降低进口石油依赖，新能源汽车已成为我国重点支持产

业。2015 年，中国新能源汽车市场实现爆发式增长，销量同比增长 3.4 倍，未来仍将保持强劲势

头。我们预计，受益于新能源汽车市场的快速增长和全领域覆盖的高性价比车型，比亚迪新能源汽

车销量将实现 2015 年 6.2 万台，2016 年 13.9 万台，2017 年 19.6 万台，同比分别增长 194%、

126%和 41%。由于新能源汽车利润率较高，随着该项业务占比提升，公司净利润将获明显改善。

动力电池优势显著。受益于技术优势和规模效应，比亚迪动力电池成本低于行业平均 25%，单车具

有 0.5-1.5 万元成本优势。同时，比亚迪拥有三元电池技术储备，未来电池能量密度有望进一步提

升。公司计划于 2016年中推出插电混动 SUV “宋”，并首次搭载三元电池(NCM)。

二次充电电池业务逐步改善。比亚迪二次充电电池业务主要包括手机及移动电子设备电池、太阳能

电站和储能电站。受益于全球储能电站需求改善，我们预计，2015 年比亚迪二次电池业务亏损收

窄，2016 年有望实现盈亏平衡。此外，比亚迪有望实现新能源汽车动力电池梯次利用，与储能电

站业务产生协同效应，电池生命周期成本大幅下降，获得明显竞争优势。

首次覆盖给予买入评级。日前，比亚迪拟非公开发行不超过 2.61 亿股 A 股股票已获证监会批复。

我们预计 2015/16/17 年摊薄后 EPS 为人民币 1.10/1.35/1.64 元，同比增长 531%、22.6%和 21.4%。

由于公司各项业务驱动因素不同，我们采用分部估值法，给予新能源汽车 2.3 倍 16 年 PS，传统汽

车 6.4倍 16年 PE，手机业务 0.6倍 16年 PB，二次充电电池业务 0.8倍 16年 PB，对应目标价港币

49.1元及 31.6%的上升空间，我们给予首次覆盖买入评级。

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-50.0%

0.0%

50.0%

100.0%

BYD-H HSCEI Index

http://www.hibor.com.cn/


October 12, 2010 Building Materials | Company Research

Please refer to the last page for important disclosures Page 1

23 February 2016 Automobiles| Company Research

Investment highlights:

BYD is one of China’s leading new energy names, primarily as a provider of plug-in and electric vehicles, although it also provides traditional vehicles, mobile handset components and assembly services, and battery products for both portable electronics and energy stations. BYD became the world’s largest new energy vehicle (NEV) manufacturer by unit sales in 2015, with its core products being plug-in hybrid models, Qin and Tang. Given BYD’s dominating position in China’s booming NEV market, NEV business is expected to be the key revenue driver in following years. We expect to see a substantial change in BYD’s revenue structure, with NEV sales accounting for 26.2% of revenue in 15E, 41.1% in 16E and 46.0% in 17E. We initiate coverage of the company with a BUY rating.

Green lights ahead. NEV sales surged by 3.4x YoY in China in 2015, and we expect the strong growth to continue, given substantial government policy support as part of its efforts to tackle airborne pollution and ease reliance on imported fuel. We forecast BYD to book NEV unit sales of 61.5k (+194% YoY) in 15E, 139k (+126% YoY) in 16E and 196k (+41% YoY) in 17E, underpinned by a rapidly expanding NEV market, market share gains on the back of compelling NEV models, and battery cost and technology advantages. As a result of the shift in sales mix to high-margin NEVs, we forecast net profit to enjoy robust growth.

Charged up. Thanks to its proprietary battery technology and scale advantages, BYD’s battery costs are Rmb5-15k/unit lower versus domestic NEV manufacturers. The company has also made some progress on increasing pack-level automotive battery density, developing nickel-cobalt-manganese (NCM) lithium-ion (Li-on) batteries. BYD will begin commercialising NCM Li-on with the launch its new plug-in hybrid sports-utility vehicle (SUV) Song in mid-2016.

Rechargeable batteries, energy stations to recover. BYD’s rechargeable battery business encompasses batteries used in handsets and portable electronic devices, and batteries used as storage solutions for renewable energy power stations, such as solar. We forecast a narrowing loss for the segment in 15E and breakeven in 16E as demand for storage stations rises, and the company begins to see potential cost savings driven by synergies between recycled NEV batteries and storage stations.

Initiate with a BUY. BYD recently received approval to issue a private placement of 261m A-shares (002594:CH) to raise Rmb15bn. Given this, we forecast EPS of Rmb1.10 in 15E (+531% YoY), Rmb1.35 in 16E (+22.6% YoY) and Rmb1.64 in 17E (+21.4% YoY). We employ a sum-of-the-parts valuation approach to reflect the company’s wide range of businesses, using a 2.3x 16E PS ratio for its NEV business, 6.4x 16E PE for its traditional autos segment, 0.6x 16E PB for its handset components business, and 0.8x 16E PB for its battery business, to derive a target price of HK$49.1. With 31.6% upside, we initiate coverage of BYD with a BUY rating.






Table of Contents

Green lights ahead ........................................................................................................... 3

Traditional autos: In the rearview mirror .......................................................... 6

NEV in 2016: Opportunities and challenges ...................................................... 7

Auto battery strength ................................................................................................... 17

Handset components .................................................................................................... 18

Rechargeable batteries ............................................................................................... 20

Financial analysis ........................................................................................................... 21

Valuation ............................................................................................................................. 22

Investment risk ............................................................................................................... 24






Green lights ahead Founded in 1995, BYD started life as a manufacturer of rechargeable batteries, and today is one of China’s leading new energy names, primarily as a provider of NEVs, although it also continues to provide battery products for electronic devices and energy storage solutions (with significant technological crossover with its automotive batteries), solar power plants and mobile handset components and assembly services through its 66% interest in BYD Electronics (285:HK).

The company has undergone a period of substantial change in its revenue structure, from deriving 49% of its topline from traditional automobile sales and a further 39% from its handset components business in 13A, to a company in which the main revenue stream (46%) stems from sales of NEVs in 17E.

Fig 1: BYD revenue breakdown, 2013-17E

Source: Company, SWS Research

BYD tapped into the automobiles business through the acquisition of economy sedan manufacturer Xi’an Qinchuan in 2003, giving it access to auto production licenses, and began development work on NEVs. The company launched its first NEV model, the F3DM, in 2008, China’s only homegrown plug-in hybrid (PHEV) model until 2013. The company became the world’s largest NEV maker by unit sales in May 2015, with its core products being the mid-sized sedan Qin and the SUV Tang, launched mid-2015.

While to date the Qin has been the company’s flagship NEV model and driven sales, we see the high-performance SUV Tang as likely to replace the sedan as torchbearer for the company in coming years.

2.0%13.1% 26.2%

41.1%46.0%

0

20

40

60

80

100

120

2013 2014 2015E 2016E 2017E

ICE autos NEV Handset Battery

(Rmbbn)

49.8

86.8

65.9

55.4

102.4






Fig 2: BYD NEV history, 1995-2015

Source: Company website, SWS Research

In addition to the Qin and Tang, other major NEV models include the multi-purpose vehicles (MPVs) E5 and E6, primarily pitched at the taxi markets, electric buses, the Qin (EV), compact-SUV Song (PHEV), micro-SUV Yuan (PHEV), scheduled for launch in 2016 and the PHEV minivan Shang.

To date, the company operates only one joint venture with a foreign auto manufacturer, Daimler (DAI:GR), with which it produces the pure-electric sedan Denza.

With national policy support for NEVs (see Figure 11), BYD’s NEV sales volume expanded 5.7x YoY in 2014, and we expect it nearly tripled again YoY in 2015 and to expand 1.3x YoY in 16E and 41% YoY in 17E. We expect the revenue contribution of BYD’s NEV business to reach 26.2% in 15E, 41.1% in 16E and 46.0% in 17E, given the rising popularity of NEVs in China and the company’s compelling product mix.

BYD is focused now almost entirely on its NEV business, leaving its traditional vehicle models business to taper off. The company’s traditional vehicle unit sales fell 12.0% YoY in 15A, and we expect sales to fall a further 5% YoY in 16E as the company has no new models scheduled for launch in the year and competition in the domestic passenger vehicle market is intensifying. We expect the revenue contribution from the company’s traditional vehicles segment to contract from 34.4% in 14A to 25.6% in 15E and further to 18.7% in 16E.

The overall automobiles segment revenue contribution will thus rise from 47.4% in 2014 to 51.8% in 15E and 59.8% in 16E, driven largely by NEV revenue.

Fig 3: BYD’s NEV sales Fig 4: BYD’s 2015E revenue contribution, by segment

Source: Company, CAAM, SWS Research

1.3 3.2 3.1 20.9

61.5

139.0

195.9

179%136%

-1%

570%

194%

126%

41%

-200%

0%

200%

400%

600%

0

50

100

150

200

250

2011 2012 2013 2014 2015E 2016E 2017E

NEV sales YoY growth (RHS)

('000 units)

Handset components,

40.3%

Rechargeable battery, 7.9%

ICE, 25.6%

NEV, 26.2%Automobile,

51.8%






BYD also manufactures handset components and provides assembly services, with major customers including Samsung Electronics (005930:KS), Nokia (NOKIA:FH) and Huawei. BYD manufactures metal/plastic casings, keypads, flexible printed circuit boards (FPCB), and liquid crystal displays (LCDs), as well as providing original design manufacture (ODM) and electronic manufacturing services (EMS). Metal casings are widely used in smartphone design by Samsung and tier-II domestic handset brands, and have become the key revenue driver of BYD’s handset business. With global smartphone shipment growth slowing as penetration levels mature, as well as intensifying competition for metal casing production, we expect BYD’s handset components segment revenue growth to remain at 10% YoY in 2015-17E.

BYD’s company’s lithium-ion and nickel batteries are widely used in mobile handsets, digital cameras, power tools and other portable electronic devices. In recent years, BYD expanded its business into lithium-iron-phosphate (LFP) batteries and energy stations. However, declining prices of photovoltaic products due to antidumping rulings against Chinese products in Europe and the US resulted in the company’s solar station business making a net loss in 2014.

We believe the company’s rechargeable batteries business revenue growth will largely track growth in global smartphone shipments in 2015-17E. We also note signals of improvement in energy stations in 2015, leading us to forecast a smaller net loss for the year. We forecast overall segment revenue growth of 5-10% YoY in 2015-17E, with revenue contribution from the segment around 7% over the three years.

Fig 5: BYD revenue forecasts (Rmbm) 2013 2014 2015E 2016E 2017E

Revenue

Automobile 25,291 26,270 34,150 51,863 63,938

ICE autos 24,291 19,019 16,904 16,219 16,873

NEV 1,000 7,251 17,246 35,644 47,065

Handset 19,459 24,116 26,528 29,180 32,098

Battery 5,018 4,980 5,229 5,752 6,327

Total 49,768 55,366 65,907 86,796 102,364

as % of revenue

Automobile 50.8% 47.4% 51.8% 59.8% 62.5%

ICE autos 48.8% 34.4% 25.6% 18.7% 16.5%

NEV 2.0% 13.1% 26.2% 41.1% 46.0%

Handset 39.1% 43.6% 40.3% 33.6% 31.4%

Battery 10.1% 9.0% 7.9% 6.6% 6.2%

Total 100.0% 100.0% 100.0% 100.0% 100.0%

YoY growth

Automobile 12.2% 3.9% 30.0% 51.9% 23.3%

ICE autos -21.7% -11.1% -4.1% 4.0%

NEV 625.1% 137.8% 106.7% 32.0%

Handset 13.4% 23.9% 10.0% 10.0% 10.0%

Battery 7.3% -0.8% 5.0% 10.0% 10.0%

Total 12.1% 11.2% 19.0% 31.7% 17.9%

Gross margin

Automobile 18.0% 19.2% 19.5% 20.8% 20.4%

ICE autos 18.0% 17.0% 16.0% 15.0% 14.0%

NEV 17.2% 24.8% 22.9% 23.4% 22.7%

Handset 12.2% 12.6% 12.0% 11.0% 10.0%

Battery 13.6% 9.5% 10.0% 10.0% 10.0%

Total 15.3% 15.4% 15.7% 16.8% 16.5%

Source: Company, SWS Research






Traditional autos: In the rearview mirror BYD’s internal combustion engine (ICE) models recorded a 12.0% YoY decline in sales volume in 2015, against growth in the overall Chinese passenger vehicle market of 7.3% YoY. We expect BYD’s traditional vehicle segment to remain sluggish in 16E, mainly because:

1) Passenger vehicle demand remains weak and competition is intensifying. We expect auto market growth (as measured by sales volume) to accelerate mildly in 16E, to 7.7% YoY; in part we base this forecast on our anticipation of rising replacement demand, as consumers who bought in 2009-10 to take advantage of the government’s 50% tax reduction on cars with less than a 1.6L engine displacement, are likely to replace their aging vehicles by the end of 2016.

2) The domestic sedan market has been fading in importance since 2012, as buyers increasingly favour SUVs over sedans. Meanwhile, competition within the sedan market is heating up, causing BYD sedan sales to fall 20.4% YoY in 2015. By contrast, BYD’s sales of SUVs increased 17.6% YoY in 2015, (vs SUV market growth of 53% YoY). BYD lagged SUV market growth due to its limited model range.

3) BYD’s strategy is to mainly focus on NEV development, leading to slow progress in traditional vehicle development, resulting in a lack of new models.

We expect BYD’s traditional vehicles sales to decrease 5.0% YoY in 16E (15E: -12% YoY) as sales of its SUV models partially offset the slump in sales from its aging sedan models.

Fig 6: BYD’s traditional vehicle sales lag industry growth

Source: CAAM, SWS Research

33.2%

5.2% 7.1%

15.7%

9.9%7.3% 7.7% 9%

15.8%

-13.8%

1.3%

11.1%

-16.7%-12.0%

-5.0%

3.0%

-20%

-10%

0%

10%

20%

30%

40%

2010 2011 2012 2013 2014 2015 2016E 2017E

PV industry BYD






Fig 7: China’s sedan and SUV sales units growth Fig 8: China passenger vehicle market breakdown


NEV in 2016: Opportunities and challenges Policy support. Government efforts to reduce the country’s oil consumption and pollution underpin policy efforts to boost the new energy sector. Regulators announced plans to cut oil consumption from 17.5% of total nationwide primary energy consumption in 2014 to 13.0% in 2020. Auto emissions in particular are a major source of air pollution, again underscoring the need to find cleaner-burning fuel sources for transportation.

Fig 9: China energy mix targets, 2020 Fig 10: Transportation as % of oil consumption, 1995-2013

Source: NBS, BP, NDRC, SWS Research

The introduction of supportive policies for NEV R&D, sales subsidies and tax breaks on purchases resulted in a threefold surge in NEV sales volumes in 2014. In 2015, policy support expanded from a focus on NEV purchases to include NEV usage, such as enhancing the construction of battery charging infrastructure and setting a unified standard for charging interfaces. We believe more comprehensive policy support will help to mitigate ease-of-use issues and stimulate NEV demand.

Fig 11: Major NEV policies

Date Department Policy/Event Key Words Highlights

Jun-12 State Council Development plan of energy saving and new

energy vehicles (2012-2020)

Promotion target 500k EV/PHEVs by 2015 & 5m by 2020

Productivity 2m EV/PHEVs in 2020

Fuel consumption 6.9L/100km for ICE autos by 2015 & 5.0L/100km by 2020

Sep-13 MoF, MoST, Notice on continuing the promotion and Subsidy NEV subsidy cut of 10% in 2014 and 20% in 2015, based on 2013 level

37%

24%

7%

48%

27%

7%

6%12%

3%

-5%

17%

56%

25%47%

100%

23% 24%

50%

36%

53%

-20%

0%

20%

40%

60%

80%

100%

120%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sedan SUV

74.0% 75.1% 74.7% 72.3% 69.1% 69.8% 69.4% 67.0% 62.8%55.4%

4.4% 5.7% 6.6%6.4% 9.6% 11.2% 12.9%

16.7% 20.7%29.4%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sedan MPV SUV Crossover

66.0% 62.0%

17.5%13.0%

10.9%15.0%

5.6% 10.0%

0%

20%

40%

60%

80%

100%

2014 2020E

Coal Oil Non-fossil fuel Gas

0%

10%

20%

30%

40%

0

100

200

300

400

500

600

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Total oil consumption Transportation: as % of total consumption (RHS)

(m tonnes)






MIIT, NDRC application of new energy vehicles Promotion target 10k NEVs for major cities/region & 5k for others

Promotion target ≥30% of new public transportation vehicles to be NEVs

Jan-14 MoF, MoST, MIIT, NDRC

Notice on further work on the promotion and application of new energy vehicles

Subsidies NEV subsidy cut narrowed by 5% in 2014 & 10% in 2015,based on 2013 level

Jul-14 State Council Guidance on accelerating the promotion and

application of new energy vehicles Tax breaks Zero consumption tax on purchases of EVs or PHEVs (4Q14 – end-2017)

Nov-14 MoF, MoST, MIIT, NDRC

Financial rewards of charging Infrastructures Financial rewards Financial rewards of charging infrastructures for cities/regions meet promotion target

Apr-15 MoF, MoST, MIIT, NDRC

NEV subsidy policy (2016-2020)

Subsidies NEV subsidy cut of 20% in 2017-2018 & 40% in 2019-2020

Subsidies Vehicles must have maximum range ≥100km & be able to sustain speeds of

≥100km/h for 30min to qualify for subsidies

CV Subsidy Subsidy cuts of Rmb100-150k for buses of 6-8m in length

OEM warranty Passenger vehicles ≥8 years or ≥120k km;

Commercial vehicles ≥5 years or≥200k km

May-15 MoF, SAT,

MIIT Notice on preferential vehicle and vessel tax of

NEV Tax breaks Zero vehicles tax for NEV

Sep-15 State Council No purchase and traffic restrictions on NEV Free license plate Beijing removes NEVs from license plate lottery

Source: MoF, MIIT, NDRC, State Council websites, SWS Research

China’s NEV sales volume to grow at a 30% Cagr in 2015-20E. After robust sales growth in 2015, we expect the market to mature quickly, while rapid technology improvements result in NEVs that are competitive with ICE automobiles without state purchase subsidies by 2020. The government targets cumulative sales of 5m NEVs by 2020, representing a 30% Cagr from 2015-20E.

Fig 12: China’s NEV sales volume forecast


Commercial vehicles growth less rapid. We expect to see a less rapid rate of growth in unit sales of commercial vehicles than passenger vehicles in 2016, after the government cut back its subsidies for electric buses, especially for six to eight-metre buses. Additionally, a relatively high penetration rate for EV buses will dampen the prospects for rapid future growth.

Fig 13: China’s state subsidy for commercial NEVs

Rmb ('000)

Range (km)

6≤R＜20 20≤R＜50 50≤R＜

100

100≤R＜

150

150≤R＜

250 R≥250

Electric Bus

Ekg<0.25 220 260 300 350 420 500

0.25≤Ekg<0.35 200 240 280 320 380 460

0.35≤Ekg<0.5 180 220 240 280 340 420

0.5≤Ekg<0.6 160 180 200 250 300 360

0.6≤Ekg<0.7 120 140 160 200 240 300

Plug-in Bus -- -- 200 230 250

Source: MoF, MoST, MIIT, NDRC, SWS Research; Note: (1) Ekg refers to energy consumption per unit load; (2) R for the maximum range (km) under electric mode

8 13 18 75

331

563

788

946

1,087

1,251

0

300

600

900

1,200

1,500

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

('000 units)






For 2016, we estimate the government will offer Rmb400-500k/vehicle in purchase subsidies for major EV bus models with lengths of 10-12m. However, subsidies for EV buses with lengths of six to eight metres, accounting for approximately two-thirds of the EV bus market, will be cut from Rmb300k per unit to as little as c.Rmb200k/unit in 2016, which we expect to weigh on 2016 sales growth.

Fig 14: 6-8m EV buses to see biggest subsidy cut Fig 15: 6-8m EV buses have the largest market share

Rmb ('000) Length (m) 2013-2015 2016 2016 vs. 2015

Electric Bus

L≤6 -- 80-100 --

6＜L≤8 300 200-250 -33%

8＜L≤10 400 302-400 -20%

10＜L≤12 500 400-500 -20%

L>12 500 480-600 -4%

Plug-in Bus L≥10 250 200-250 -20%

Source: MoF, MoST, MIIT, NDRC, SWS Research

Personal vehicles to take off. We expect sales of new energy passenger vehicles in the five years to 2020 will grow at a 39% Cagr, with cumulative volume to reach 4.1m units by 2020. We base this forecast on government support for NEV sales, such as purchase subsidies and free license plates; upgraded technology and declining battery cost driven by scale effects; and, an improving charging infrastructure, making NEV usage more convenient.

Fig 16: Domestic passenger NEV sales volume forecast


Looming subsidy cuts may boost NEV sales in 2016. Government policy is shifting to encourage technology upgrades and eliminate low-quality products, by removing support for lower-end products. The government cut 2016 subsidies for EVs with maximum range of less than 150km by 20.6%, but increased subsidies for vehicles with a 250km-plus range. However, subsidies are scheduled to fall 20% every two years from 2016 levels. We expect continued strong NEV sales volume growth in 2016, driven by relatively steady subsidies for the year and forward buying.

L ≤ 6, 2.5%

6 ＜ L ≤ 8,

66.2%

8 ＜ L ≤ 10,

10.1%

L > 10, 21.2%

59

207

414

628

777

914

1,072

0

300

600

900

1200

1500

2014 2015 2016E 2017E 2018E 2019E 2020E

('000 units)






Fig 17: Subsidies for passenger NEVs

Rmb 2013 2014 2015 2016 2016 VS.

2015 2017-2018 2019-2020

EV

80≤R<150 35,000 33,250 31,500

100≤R<150 25,000 -20.6% 20,000 15,000

150≤R<250 50,000 47,500 45,000 45,000 0.0% 36,000 27,000

R≥250 60,000 57,000 54,000 55000 1.9% 44,000 33,000

PHEV (R≥50) 35,000 33,250 31,500 30,000 -4.8% 24,000 18,000

Source: MoF, MoST, MIIT, NDRC, SWS Research; Note: R for the maximum range (km) under electric mode

Free license plates are another critical driver. In 2015, the four tier-I cities, Beijing, Shanghai, Guangzhou and Shenzhen, where license plate issuance for passenger vehicles is controlled in order to reduce inner-city congestion, allocated a combined c.100k license plates specifically for new NEVs, equivalent to c.50% of that year’s sales of passenger vehicles. We see the availability of free license plates for NEV buyers as likely to be a significant consideration for consumers, which otherwise often have to pay high prices (a significant proportion of the cost of the vehicle) in order to secure a license plate. In Beijing, regular license plates are issued on the basis of regular lotteries, with a c.1:250 chance each round (held bi-monthly), while in Shanghai, which has some of the strictest license plate controls, new plates at auction can sell for more than Rmb80,000.

Fig 18: Restrictions on license plate in major cities

City Date Restriction type Probability of winning plates / Plate price (Rmb)

NEV license quota

Shanghai 1994 Auction Rmb80k

Free license plates available with

evidence of home charging post

installation (c.Rmb2,000)

Beijing December

2010 Lottery 1 : 250

51k plates issued in 2016

Guiyang July 2011 Lottery

Guangzhou July 2012 Auction & Lottery Rmb20k 880 plates per month

issued

Shijiazhuang June 2013 Restriction on 3rd car purchase for each family --

Tianjin December

2013 Auction & Lottery Rmb15-20k

Hangzhou March 2014 Auction & Lottery Rmb20-25k

Shenzhen December

2014 Auction & Lottery Rmb25-30k

Free license plates since Oct 2015

Source: Transport commissions of municipal cities, SWS Research

We also observed a growing demand for NEV plates in these cities last year. The number of applicants surpassed available NEV plate quota in Beijing in 2H15, until Beijing applied a 100% allocation policy for NEV plates starting October 2015. The number of NEV plate applicants varies in accordance with ordinary plate auction prices in Guangzhou, which experienced its first NEV plate shortage in December 2015.

We expect the free license plates policy will act to further boost demand for NEVs in 2016, as rising plate prices and narrowing chances of winning lotteries reduce the attractiveness of ICE vehicle ownership.






Fig 19: Allocation of NEV license plate in Beijing Fig 20: Allocation of NEV license plate in Guangzhou

Source: bjhjyd.gov.cn, jtzl.gzjt.gov.cn, SWS Research

Battery cost: 50% downside potential by 2020. Costs of automotive battery production are widely expected to fall c.50% from current levels due to rising economies of scale to US$150/kWh by 2020. Given battery systems represent 25-40% of the total production cost for an NEV, 50% battery cost savings will make NEVs more affordable to customers, to a degree.

Fig 21: Automotive battery cost at pack level

Source: SWS Research

Subsidy reductions offset gains from falling costs. We expect battery costs to remain stable in 2016, mainly because capacity will only just meet demand during the year. Prices of several critical upstream materials, such as lithium carbonate and lithium hexafluorophosphate are likely to peak in 2016 (see Figures 23-24), due to limited capacity. Although major domestic battery manufacturers are in the process of expanding, facilities will take one to two years to come on-stream. Our forecasts are built on an assumption that capacity shortages will ease from 2017, after consultation with battery market experts.

Although battery costs are likely to decline, the government’s plans to cut back subsidies from 2017 (40% cut from 2016 levels by 2020) will likely mitigate much of the battery cost savings (50% downside potential from 2016 level by 2020).

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Fig 22: 2016 battery cell cost forecast

Cost structure 2015 % change 2016 YoY%

Cathode 28.3% 10.0% 31.5%

-1.3%

Anode 6.9% -10.0% 6.2%

Electrolyte 7.9% 15.0% 9.2%

Separator 7.7% -20.0% 6.2%

Cover & others 23.9% -5.0% 23.0%

Labour 3.3% 5.0% 3.5%

Manufacturing cost 13.5% -15.0% 11.6%

Other cost 8.6% 0.0% 8.8%

Source: Realli, SWS Research

Fig 23: Battery-grade lithium carbonate prices, 2015 Fig 24: LiPF6 price trend, 2010-16E

Source: Wind, SWS Research

Charging infrastructure to improve convenience. On 9 October 2015, the National Development and Reform Commission (NDRC) released “NEV Charging Infrastructure Development Guidelines (2015-20)”, in which it set a target charging network of 4.8m charging points nationwide by 2020. This would lift the coverage ratio of charging posts per vehicle from one post for every four NEVs on the road in 2014 to 1:1 by 2020, making NEV usage substantially more convenient.

Fig 25: Charging infrastructure guidance by 2020

('000) 2014 2020E

Charging stations 0.78 12

Charging posts 31 4,800

NEVs on road 120 5,000

Coverage 4:1 1:1

Source: NDRC, SWS Research

As part of its planned network build-out, the NDRC laid out a "four verticals and four horizontals" plan for the coming five years, calling for higher penetration in key urban areas such as the Beijing-Tianjin-Hebei, Yangtze River Delta and Pearl River Delta regions.

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Fig 26: Charging infrastructure plan in 2016-2020

Source: NDRC, SWS Research

Compelling models. According to a popular EV-sales blog, BYD booked total NEV sales of 61.7k units in 2015, taking 11% of the global market for NEVs. Sales were driven primarily by bestselling model Qin, one of only two PHEV sedans available in the domestic market at the time (the other being Roewe’s E550). As of mid-2015, Qin sales dropped off as the company shifted emphasis and resources (due to its limited battery production capacity) onto its newly launched plug-in hybrid SUV model Tang. By November 2015, only six months after launch, the model sold 5.5k units.

Fig 27: Cumulative global NEV sales by automaker,

Nov 2015

Fig 28: Monthly sales of Qin and Tang

Source: d1ev, CAAM, SWS Research

Technical edge. BYD uses its in-house developed “dual-mode” (electric and ICE powertrain switching) technology in all its plug-in hybrid (PHEV) models. The company’s latest released model – the Tang – utilises its second-generation dual-mode technology even as other domestic manufacturers are beginning to test first-generation tech, and it aims to release its third-generation iteration with the launch

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of its 7-seater SUV model Ming, which it indicates will be driven by a six-engine powertrain (one ICE and five electric engines).

Fig 29: BYD’s Dual-Mode technology


Note: As of time of publication, BYD has yet to release previews of the Ming

In comparison with BMW’s xDrive40e, a high-end plug-in hybrid SUV, the Tang offers faster acceleration and longer EV range, while the manufacturer’s suggested retail price (MSRP) for the Tang is just one-third of the BMW’s.

Fig 30: Key parameters of Tang and BWM xDrive40e

BYD Tang BMW xDrive40e

MSRP (Rmb'000) 279.8 928

0-100km/h acceleration (s) 4.9 6.8

100km consumption (L) 2 3.9

Range (km) 80 27

Powertrain 2.0TI engine + 2 motors 2.0T engine + 1 motor

Max power of engine (kW/rpm) 151/5,500 180/5,000

Max torque of engine (N.m/rpm) 320/1,750-4,500 350/1,250-4,800

Max power of motor (kW) 110 83

Max torque of motor (N.m) 250 250

Total power (kW) 371 313

Total torque (N.m) 820 450

Source: Company websites, BMW website, Autohome, SWS Research

BYD has focused PHEV technology development for passenger vehicle design and EV technology for public transportation use. Given the relative scarcity of charging posts, PHEVs are more suitable for individual users, using electric power to cover short distances while consuming petrol over long distances to boost range. However, public transportation vehicle fleets, with set ranges and ready access to large charging stations, are more easily converted to full EV technology.






In 2015, BYD accounted for 75% of the domestic market for plug-in hybrid passenger vehicles, almost entirely from sales of Qin and Tang models. We expect BYD, with its proprietary advanced dual-mode technology, to continue to dominate the PHEV market.

Fig 31: China’s plug-in hybrid PV market share, by company

Source: ChinaEV, CAAM, SWS Research

In 2015, BYD accounted for 7% of China’s electric passenger vehicle market, driven by 9.4k sales of the E6 and E5 mid-sized sedans primarily targeting taxi fleets. Because small/mini sedans are eligible for high subsidy payments and require limited R&D expenditure, smaller vehicles (within A00- and A0-class) accounted for 82% of the electric passenger vehicle market. However, BYD, which does not manufacture A00- or A0-class vehicles, has a 37% share of the mid- to large (A-class; e.g. BYD’s E6 and E5 models; or B-class) electric passenger vehicles market, mainly driven by strong demand from taxi firms for the E6.

Fig 32: China’s electric PV market share, by company Fig 33: Domestic electric PV market share, by class

Source: ChinaEV, SWS Research; Note: Geely includes Geely-Kandi and Geely-Zhidou

Market share to improve in 2016. We expect BYD’s share of the PHEV market to improve slightly in 2016, but forecast its share of the EV market to shrink. Sales of Tang and a new plug-in SUV model Song, to be released in 2016, will drive sales, while Qin is likely to encounter increasing challenges from rival PHEV models, such as the Roewe E550 (launched in November 2014) and Guangzhou Auto’s (2238:HK) GA3S (to be launched in the near future), while competition in the EV market will intensify as new models are launched.

We believe PHEVs will account for an increasing share of the market for NEVs in 2016, driven by growing demand in cities with license plate restrictions; and rising






demand for PHEVs from chauffeur services platforms, such as Didi Dache.

We expect BYD’s share of the NEV market to improve from 27.7% in 2015 to 30.9% in 16E.

Fig 34: BYD’s market share forecast PV EV BYD PHEV BYD Total BYD

2015 Units ('000) 143 9.4 64 48 207 57.4

Market share 69% 6.6% 31% 75.0% 27.7%

2016E Units ('000) 269 15 145 113 414 128

Market share 65% 5.6% 35% 77.9% 30.9%


NEV sales to double in 2016. We expect BYD to sell 139k NEV cars in 16E (+126% YoY) and 195.9k units in 17E (+41% YoY).

Fig 35: BYD NEV sales by model

Model (units) 2013 2014 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 2017E

Qin 142 14,800 30,000 3,000 4,000 5,000 8,000 20,000 20,000

Tang - - 18,000 18,000 12,000 18,000 24,000 72,000 93,600

e6 1,544 3,600 8,000 1,000 1,200 1,200 1,600 5,000 5,250

e5 - - 1,400 1,500 1,000 1,500 2,000 6,000 6,600

Qin EV - - - - 1,000 1,300 1,700 4,000 6,000

Song PHEV - - - - - 6,000 12,000 18,000 36,000

Yuan PHEV - - - - - - 3,000 3,000 18,000

F3DM 1,005 - - - - - - - -

Shang - - - 750 750 750 750 3,000 2,000

T3 - - 60 500 500 500 500 2,000 2,400

Bus 433 2,533 4,000 1,000 1,500 1,000 2,500 6,000 6,000

Total PV 2,691 18,400 57,400 23,500 19,200 33,000 52,300 128,000 185,450

Total CV 433 2,533 4,060 2,250 2,750 2,250 3,750 11,000 10,400

Total 3,124 20,933 61,460 25,750 21,950 35,250 56,050 139,000 195,850

YoY growth 570% 194% 126% 41%

Source: Company data, CAAM, SWS Research

Fig 36: Major NEV models in China

Company Model Type MSRP (Rmb) State subsidy

(Rmb) Range (km)

Battery (kWh)

Battery type Energy density

(Wh/kg)

EV

BYD

E6 (2014) Mid MPV 310-370k 55k 300 57 LFP 85

E6 (2016) Mid MPV 310-370k 55k 400 82 LFMP 117

Denza Mid sedan 369-399k 55k 253 48 LFP 87

BAIC

ES210 Mid sedan 350k 45k 175 38 LFP

EV200 Compact sedan 209-247k 45k 200 30 Ternary 103

EV160 Small sedan 189k 45k 160 25.6 LFP

SAIC E50 Mini sedan 235k 45k 170 22 Ternary 100

JAC iEV4 Small sedan 170k 45k 160 19 LFP

iEV5 Mid sedan 180k 45k 200 23.3 Ternary

Geely-Kandi K10 Small sedan 151k 45k 150 26.4 Ternary

K11 Small sedan 153k 45k 150 26.4 Ternary

Chery eQ Small sedan 160-165k 45k 151 22 Ternary 86

Dongfeng-Nissan

Venucia Chenfeng

Compact sedan 243-257k 45k 175 24 LMO

Changan EADO Mid sedan 235-245k 45k 200 30 Ternary 97

Zotye Yun 100 Mini sedan 159-170k 45k 155 18 Ternary 100






Geely-XYD ZD D2 Small sedan 159k 45k 152 15 Ternary 86

Tesla Model S Large sedan 673-1030k NA 420-560 70-90 Ternary

PHEV

BYD Qin Compact sedan 210-220k 30k 70 13.3 LFP 79

Tang Compact SUV 280k 30k 85 18.5 LFP 76

SAIC-Roewe E550 Compact sedan 249-260k 30k 60 11.8 LFP 78

BMW 530Le Large sedan 700k NA 58 11.4 Ternary

Source: Public information, MIIT, SWS Research

Fig 37: Major NEV models to be launched in 2016

Company Model Type Range (km)

EV

BYD Qin Compact sedan 252/300

E5 Compact MPV 256

BAIC EU260 Compact sedan 260

EU300 Compact sedan 300

GWM C20 EV Compact sedan 160

Geely Emgrand Compact sedan 235

FAW Besturn EV Small sedan 160

Geely-Kandi K17 Small sedan 153

JAC S20 iEV Compact SUV 250

GAC GS4 Compact SUV 260

Tesla Model X Large SUV 354

PHEV

BYD Song Compact SUV 70

Yuan Small SUV 70

GAC GA3S Compact sedan 70

SAIC-Roewe E550 Compact sedan 60

Source: Public information, MIIT, SWS Research

Auto battery strength BYD’s automotive lithium-ion battery at present is centred around the company’s lithium-iron-phosphate (LFP) technology, although the company is also developing NCM batteries for its next-generation vehicles. BYD enjoys significant cost advantages compared with other NEV manufacturers as a result of its technical expertise, founded on a relatively long history with the technology, and economies of scale.

Since BYD announced the successful delivery of its first LFP battery in 2007, the technology has become widely adopted in NEVs, primarily due to its high degree of safety, long lifecycle and high availability of raw materials.

BYD successfully improved battery pack density from 85Wh/kg to 117 Wh/kg (+38%), through lifting its tap density. The new LFP battery will be used in the new 2016 E6 model, lifting its maximum range by 30% to 400km.

Fig 38: Battery density improvement of BYD

Model Type MSRP (Rmb)

Range (km) Battery (kWh)

Battery type

Energy density (Wh/kg)

E6 (2014) Mid MPV 310-370k 300 57 LFP 85

E6 (2016) Mid MPV 310-370k 400 82 LFP 117

Source: MIIT, Autohome, SWS Research

BYD batteries ahead of the pack. Compared with the Roewe E550, BYD’s Qin has a






longer EV range and higher energy density, while Qin’s manufacturer’s suggested retail price (MSRP) is 15% lower than its competitor. In the pure EV segment, the company’s Denza sedan has a longer range than peers, such as BAIC’s ES210. Although the Denza MSRP is higher than the ES210’s, the BYD-Daimler model is eligible for higher state/municipal subsidies, adjusting for which the company is available to buyers for the same price as the lower-performance ES210.

Fig 39: BYD models vs. competitors

Model Type MSRP (Rmb) Range (km) Battery (kWh) Battery type Energy density

(Wh/kg)

PHEV

Qin Compact

sedan 210-220k 70 13.3 LFP 79

E550 (Roewe) Compact

sedan 249-260k 60 11.8 LFP 78

EV Denza Mid sedan 369-399k 253 48 LFP 87

ES210 (BAIC) Mid sedan 350k 175 38 LFP

Source: Autohome, MIIT, SWS Research

With the average battery cost in China at Rmb2,000/kWh at the pack level, BYD’s (pack level) battery cost of Rmb1,500/kWh gives it a Rmb5-15k cost advantage for each vehicle over other domestic manufacturers.

Next-phase tech. In the “Energy Savings and New Energy Vehicles Development Plan (2012-20)”, policymakers called for pack-level automotive battery density to reach 300Wh/kg by 2020. Currently ternary battery (NCA, NCM) density is at over 200Wh/kg at the cell level, and is more likely to reach this target. We believe most research will focus on ternary battery technology over the next five years.

BYD decided to incorporate its own ternary battery technology in its new plug-in hybrid SUV Song, scheduled for release in 2016.

Fig 40: Performance comparison of anode materials

Battery type LCO LMO LFP NCM NCA

Model

Nissan Leaf BYD Qin BYD Song Tesla Model S

Cell Density (Wh/kg) 160-200 100-140 100-130 160-220 180-250

Pack Density (Wh/kg) 130-150 80-110 70-100 110-160 130-180

Cycle life Moderate Short Long Moderate Moderate

Safety Low Moderate High Moderate Moderate

Cost High Low Moderate Moderate Moderate

Source: CATARC, SWS Research

Handset components BYD manufactures handset components and provides assembly services, with major customers including Samsung Electronics, Nokia and Huawei. BYD manufactures metal/plastic casings, keypads, FPCBs and LCDs, as well as providing ODM and EMS.

In order to sharpen its focus on NEVs, BYD intends to spin-off non-core businesses in the handset components segment. In February 2015, BYD announced it would dispose of Shenzhen BYD Electronic Components, which operates LCD, FPCB and lens businesses, to Holitech (002217:CH), although we estimate the contribution from these businesses to BYD’s handsets segment revenue at c.10%.

A substantial proportion of the company’s handset components and assembly business (c.82%) is contributed by BYD Electronic International (285:HK), in which BYD holds a 66% equity interest. BYD Electronic, which generated 61% of its revenue






from handset components in 1H15 (the remainder from assembly services), is a major supplier for Samsung Electronics products.

Fig 41: BYD Electronic contribution to BYD’s handset segment (Rmbm) 2011 2012 2013 2014

BYD Electronic revenue 15,868 14,091 16,062 19,832

BYD handset segment revenue 19,557 17,156 19,459 24,116

% contribution from BYD Electronic 81% 82% 83% 82%

Source: Bloomberg, SWS Research

According to IDC, the growth of global smartphone shipments moderated to 10% YoY in 2015, from 29% YoY in 2014. As the market becomes increasingly saturated, we forecast smartphone shipments growth to slow further to 5% YoY annually in 2016-17E.

However, the market expects continued growth in use of metal casings as part of smartphone designs in the next two years, particularly among domestic mid-range handset model manufacturers, following trends among higher-end global manufacturers. Metal casings constitute the main revenue stream within BYD’s handset components segment.

Fig 42: Global smartphone shipment

Source: IDC, SWS Research

The company guides BYD’s metal casing business will see continued growth in demand as more domestic mid-range handset model manufacturers incorporate metal casings into their designs, partially offsetting the negative impact from the slowing growth of smartphone shipments.

As a result, we forecast BYD handset components and assembly segment revenue to maintain growth at around 10% YoY growth per annum in 2015-17E.

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Fig 43: Total revenue of BYD’s handset components and assembly business

Source: Company data, SWS Research

Rechargeable batteries BYD’s rechargeable battery business encompasses batteries used in handsets and other portable electronic devices, and batteries used as storage solutions for renewable energy power stations, such as solar. The segment has substantial crossover with the company’s auto batteries technology; it is developing techniques to recycle EV batteries for use in energy storage products. In addition to battery, the company also includes revenue from its photovoltaics (PV) business – production of wafers and assembly of cells and modules used in solar power generation – within the batteries business segment.

The company has a roster of both domestic and international clients in its energy storage stations. In 2015, BYD won a contract to supply a 31.5MW storage project led by Invenergy in Illinois, US, the largest order in terms of installed capacity for the company to date. With rising demand for energy storage as renewable energy installations become more popular, the company guides a narrowing loss in its rechargeable battery sector.

Fig 44: Invenergy’s 31.5MW storage project in Illinois, US


Despite steady revenue in the company’s rechargeable battery and PV business, slowing growth in demand for electronic devices and competition within the solar power business resulted in lower average selling prices (ASPs), pushing segment

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profitability negative in recent years. However, SWS new energy analysts forecast a gradual recovery in energy storage demand in coming years. As BYD raises its brand profile within the sector, we anticipate increasing orders from both domestic and overseas clients.

Batteries previously used in automotive applications have additional recovery value for the company’s storage batteries. Automotive batteries operating at 80% of designed capacity can still be used in storage stations, giving BYD a competitive cost advantage.

With the growing global demand of energy storage, we forecast a smaller loss in 15E and breakeven for the company’s rechargeable battery and PV business in 16E.

Fig 45: Total revenue of BYD’s rechargeable battery and photovoltaic business


Financial analysis We forecast BYD to generate revenue of Rmb65.9bn in 15E (+19.0% YoY), Rmb86.8bn in 16E (+31.7% YoY) and Rmb102.4bn in 17E (+17.9% YoY), driven primarily by robust growth of NEV sales. As a result of the shift in sales mix to high-margin NEVs (net margin of NEV is c.8% vs ICE at c.2%), we forecast net profit of Rmb2.7bn in 15E (+531% YoY), Rmb3.7bn in 16E (+35.5% YoY) and Rmb4.5bn in 17E (+21.4% YoY), of which recurring net profit will grow 250% YoY in 15E, 144% YoY in 16E and 21% YoY in 17E. This translates to EPS of Rmb1.10 in 15E, Rmb1.50 in 16E and Rmb1.82 in 17E.

On 2 February, the China Securities Regulatory Commission (CSRC) approved BYD’s private placement proposal of 261.32m A-shares at Rmb57.4/share, representing 10.55% of the company’s issued share capital or 9.55% of enlarged share capital, to raise c.Rmb15bn. Proceeds will be directed toward expansion of the company’s battery production capacity and research & development of NEVs.

Adjusting for the impact of the placement, we forecast EPS of Rmb1.10 in 15E (+531% YoY) Rmb1.35 in 16E (+22.6% YoY) and Rmb1.64 in 17E (+21.4% YoY).

We expect the company’s debt-to-Ebitda ratio to significantly drop from 396.7% in 2014 to 331.8% in 15E, 114.3% in 16E and 97.8% in 17E, primarily due to improving profitability driven by NEV sales and less reliance on debt financing thanks to the scheduled A-share private placement.

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Fig 46: BYD’s debt-to-Ebitda ratio


We expect the company’s operating cash flow to reach Rmb3.83bn in 15E (+10x YoY), Rmb6.19bn in 16E (+61% YoY) and Rmb8.29bn in 17E (+34% YoY), mainly driven by healthier cash flows from the rapidly expanding NEV business. We note that 14A operating cash flow contracted significantly due to a jump in short-term trade and accounts receivables. Since then, the trend has moderated (accounts receivables days falling from 130.5 in 15E to 114.6 in 16E) and we expect this to persist through our forecast period.

Fig 47: BYD’s operating cash flow


Valuation We apply a sum-of-the-parts valuation (SOTP) methodology to evaluate BYD, given different the company’s wide range of businesses with different drivers and risks.

For the company’s traditional vehicles segment, we apply a 20% discount to the average PE ratio for comparable auto peers listed in Hong Kong to reflect BYD’s underperformance in the sector, or 6.4x 16E PE.

Fig 48. Valuation on BYD’s traditional autos business

2333 HK 175 HK 1114 HK 2238 HK 1958 HK Average

2016E PE 5.1 9.1 7.7 10.2 7.8 8.0

PE multiple 6.4

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285.3%

341.5%374.1%

396.7%

331.8%

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2016E traditional auto segment earnings (Rmbm) 324

Implied market value (ICE autos) 2,069


For the company’s NEVs segment, given the scarcity of auto manufacturers with significant business from electric vehicles at present (BYD being the largest producer globally), we make reference to Tesla’s (TSLA:US) 16F PS ratio based on consensus forecasts. However, to reflect Tesla’s position as a high-end manufacturer with advanced technology against BYD’s mass market positioning, we apply a 10% discount.

Fig 49. Valuation on BYD’S NEV business

Tesla 2016F PS 2.6

PS multiple 2.34

2016E NEV sales (Rmbm) 35,644

Implied market value (NEVs) 83,407

Source: Company data, Bloomberg, SWS Research

For the company’s handset components and assembly segment, we look to its publicly traded subsidiary BYD Electronic (295:HK), which contributes c.80% of the segments revenue and which is trading at a 0.6x 16F PB.

Fig 50. Valuation on BYD’s electronics components business

BYD-Electronic (285:HK) 2016F PB 0.6

PB multiple 0.6

2016E book value (Rmbm) 13,405

Implied market value (Electronics) 8,043


For the company’s battery parts segment, we apply 0.8x 16E PB, based on a blend of valuations of solar products and energy storage solutions peers.

Fig 51. Valuation on BYD’s battery business

750 HK 1165 HK 006400 KS 051910 KS Average

2016F PB 0.6 0.5 0.6 1.5 0.8

PB multiple 0.8

2016E Book value (Rmbm) 10,553

Implied MV(Battery) 8,442


We derive a target price of HK$49.1, representing 27.5x 16E PE and 22.7x 17E PE. With 31.6% upside, we initiate coverage of BYD with a BUY rating.

Fig 52. SoTP valuation on BYD (Rmbm)

Valuation (SoTP) Valuation methodology 2016E Multiplier Equity market

value

Automobiles (ICE) Average industry PE, applying a 20% discount 324 6.4x 2,069

Automobile (NEV) Tesla's PS ratio, applying a 10% discount 35,644 2.34x 83,407

Electronics BYD-Electronics PB ratio 13,405 0.6x 8,043

Battery Average industry PB ratio 10,553 0.8x 8,442

Total 101,962

Weighted average shares (m) 2,476






Target price HK$49.1


Fig 53. BYD’s historical forward PE ratio


Investment risk Subsidies below expectation. Although national NEV preferential policies in 2016-2020 have already been released, including purchase subsidies and tax cuts, most municipal policies remain unclear. According to the national policy, subsidies will decline by 20% from 2017 to 2018 and 40% from 2019 to 2020, making it possible for municipalities to reduce subsidies correspondingly. If municipal subsidies are below expectation or delayed, it’s possible that the promotion of NEVs be also fall below our expectation.

Delayed charging infrastructure construction. A robust charging pile infrastructure is critical as it lowers PHEV operating costs and increases convenience/range, thus adoption. At the end of 2015, although NEVs had grown dramatically (331k unit increase), the number of charging piles remains below 100k. To bridge the gap, infrastructure construction must accelerate. However, related business models remain at their nascent stage and are capital intensive. Delays on charging infrastructure build-out will weigh on the market’s growth potential.

Intensifying competition. With government support for NEVs, many other manufactures plan to develop NEV models. By end-2015, over 30 new models were slated for launch over the next three years. A more competitive environment may generate margin pressure and depress profitability.

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Appendix Consolidated income statement Consolidated Balance Sheet

Rmbm 2013 2014 2015E 2016E 2017E

Current Assets 29,966 40,834 43,882 68,659 75,152

Bank balances and cash 4,511 3,950 3,362 20,065 20,728

Trade and other receivables 13,135 22,435 25,349 29,930 31,989

Inventories 8,221 9,978 10,328 12,778 15,770

Other current assets 4,099 4,471 4,843 5,887 6,666

Long-term investment 1,093 1,449 1,556 1,674 1,804

PP&E 34,147 36,379 38,423 40,046 41,872

Intangible and other assets 12,809 15,347 15,078 15,949 16,553

Total Assets 78,015 94,009 98,940 126,328 135,380

Current Liabilities 43,344 53,022 54,895 65,482 73,034

Borrowings 16,172 19,173 20,182 22,200 22,620

Trade and other payables 22,293 25,851 27,045 30,746 32,555

Other current liabilities 4,879 7,998 7,668 12,536 17,859

Long-term liabilities 9,814 12,092 12,816 13,234 13,545

Total Liabilities 53,158 65,114 67,711 78,716 86,579

Minority Interests 3,147 3,529 3,563 3,715 4,112

Shareholder Equity 24,856 28,894 31,228 47,612 48,801

Share Capital 2,354 2,476 2,476 2,737 2,737

Reserves 19,238 22,890 25,189 41,160 41,951

Equity attributable 21,710 25,366 27,665 43,897 44,689

Total Liabilities and equity 78,015 94,009 98,939 126,328 135,380


Rmbm 2013 2014 2015E 2016E 2017E

Revenue 49,768 55,366 65,907 86,796 102,364

Cost of Sales 43,252 47,743 55,541 72,239 85,457

Gross Profit 6,516 7,623 10,366 14,557 16,907

Other Income 456 923 989 1,302 1,535

Repairs and maintenance 2,012 2,229 2,636 3,472 4,095

Administrative expenses 2,074 2,601 3,096 3,819 4,299

EBITDA 5,446 6,721 8,533 11,923 13,683

EBIT 1,898 2,393 3,937 6,782 7,942

Finance Costs 1,017 1,397 1,577 1,634 1,695

Profit before tax 832 874 3,798 5,147 6,247

Income tax expense 56 134 583 790 958

Minority interests 223 306 482 654 793

Profit for the year 553 434 2,733 3,704 4,495







Cash Flow Statement Rmbm 2013 2014 2015E 2016E 2017E

Profit before taxation 832 874 3,798 5,147 6,247

Plus：Depr. and amortisation 3,533 4,212 4,596 5,142 5,740

Finance cost 1,017 1,397 1,577 1,634 1,695

Losses from investments 48 122 0 0 0

Change in working capital (2,913) (6,106) (3,831) (4,570) (3,990)

Others (81) (461) (2,306) (1,165) (1,401)

CF from operating activities 2,436 38 3,833 6,188 8,291

CAPEX (1,043) (2,137) (2,044) (1,622) (1,826)

Other CF from investing activities (4,809) (5,764) 1,062 753 474

CF from investing activities (5,851) (7,901) (982) (870) (1,352)

Equity financing 0 3,342 0 15,000 0

Net change in liabilities 6,220 5,314 (863) (1,982) (1,580)

Dividend and interest paid (1,242) (1,790) (1,577) (1,634) (1,695)

Other CF from financing activities (470) (596) 0 0 (3,000)

CF from financing activities 4,508 6,271 (2,440) 11,384 (6,275)

Net cash flow 1,093 (1,592) 412 16,702 663

Source：SWS Research

Key Financial Ratios

2013 2014 2015E 2016E 2017E

Ratios per share (RMB)

Earnings per share 0.23 0.18 1.10 1.50 1.82

Diluted earnings per share 0.23 0.18 1.10 1.50 1.82

Operating CF per share 1.03 0.02 1.55 2.50 3.35

Dividend per share 0.05 0.00 0.00 0.00 0.00

Net assets per share 10.56 11.67 12.61 19.23 19.71

Key Operating Ratios(%)

ROIC 3.80 3.65 5.62 7.40 8.53

ROE 2.23 2.56 10.30 9.15 10.84

Gross profit margin 13.09 13.77 15.73 16.77 16.52

EBITDA Margin 10.91 11.93 12.95 13.74 13.37

EBIT Margin 3.81 4.32 5.97 7.81 7.76

Growth rate of Revenue(YoY) 12.14 11.25 19.04 31.69 17.94

Growth rate of Profit(YoY) 579.62 (21.62) 530.50 35.51 21.36

Debt-to-asset ratio 68.14 69.26 68.44 62.31 63.95

Turnover rate of net assets 203.13 206.01 219.24 220.18 212.34

Turnover rate of total assets 67.24 64.37 68.32 77.06 78.23

Effective tax rate (%) 6.76 15.34 15.34 15.34 15.34

Dividend yield (%) 16.82 0.00 0.00 0.00 0.00

Valuation Ratios (X)

P/E 133.0 178.5 28.3 20.9 17.2

P/B 3.0 2.7 2.5 1.6 1.6

EV/Sale 3.6 3.2 2.7 2.0 1.7

EV/EBITDA 32.6 26.4 20.8 14.9 13.0







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