BYD’s Q4 Margin and Vehicle Profit Beat; FVE Raised to HKD 280; H-Shares Undervalued

BYD 01211 delivered a solid fourth quarter, with net profit up by 11 times year over year and at the midpoint of the company’s preliminary announcement. The company delivered a 6-percentage-point increase in vehicle margin despite rising battery costs during the period. In view of the solid results, we raise our fair value estimate to HKD 280 (CNY 244) from HKD 265 (CNY 236), which implies a 2023 price/sales ratio of 1.4 times and price/earnings ratio of 36 times. Excluding its stake in BYD Electronics, the implied forward price/sales ratio for its combined automotive and battery business is 1.7 times. Trading at 25% below our fair value estimate, we view H-shares of BYD as undervalued.

We raise our 2023-24 vehicle sales forecast to reflect the year-to-date run-rate and increase our revenue forecast as a result. As we factor in a higher vehicle margin witnessed in 2022, we raise 2023-24 earnings in anticipation of economies of scale and lower battery costs to offset price competition in the mass segment this year. With passenger new energy vehicle volumes up 89% year over year in the first two months of 2023, we believe sales momentum will remain robust for BYD. We forecast total vehicle sales will reach 2.7 million units in 2023, up 45% year over year.

We believe BYD’s current model portfolio, built on leading in-house blade battery and DM-i technology, is competitive in terms of driving range and energy efficiency. Driven by the expansion in vehicle delivery, we estimate the company’s revenue will register a 23% CAGR over 2022-25. The development of NEV technology and battery energy density will result in higher profitability over the longer term. Growing economies of scale and lower unit production costs will lead to an improved outlook for vehicle profits. As a result, we see the company’s net profit growing at 32% CAGR during 2022-25, reaching CNY 38 billion in net profit in 2025.