BYD:3Q17profit as guided;4Q17E earnings to improve slightly QoQ

4Q guidance below expectation but new energy vehicle (NEV) sales stillGrowing。

    BYD has reported 3Q17results under PRC GAAP. Gross revenue grew by 3.8% YoYto RMB28.9bn on higher demand for its own brand passenger and commercialnew energy vehicles (up 9.7% and 7.5% YoY, respectively), partially offset by a36.4% YoY decline in conventional vehicle sales during the period. Gross profitmargin declined by 2.3ppt YoY probably on lower NEV margin after subsidy cut,in our view. Meanwhile, BYD’s 3Q17net profit declined 23.9% YoY to RMB1.1bn,which is near the mid-range of BYD’s previous guidance.。

    In its announcement, BYD guided that it expects to register a 15.1-20.0% YoYdecline in FY17net profit to RMB4.04-4.29bn, which translates to 4Q17E net profitof RMB1.2-1.5bn (vs. RMB1.4bn in 4Q16), implying an YoY decline of up to 10.0%or an YoY growth of up to 8.0%. For 4Q17, BYD expects NEV sales to continue togrow at a high pace, while traditional passenger vehicle sales can improve withgood market reception for the new Song Max MPV. Besides, management seespositive outlook for its handset component and assembly business, and morerevenue/profit recognition for its monorail projects.。

    Deutsche Bank view - Buy BYD-H as scalable Chinese NEV play。

    BYD’s FY17E earnings guidance accounts for about 91-96% of our forecast.Considering the guidance, we trim our FY17-19E revenue by 0.8-3.6% on 1) moreprudent vehicle sales forecast and 2) a possible cut in subsidy income amountin FY18amid policy refinement. We also cut our FY17-19net profit forecasts by6.9-11.8% on lower margin assumptions for the auto business.。

    Our SOTP-derived target prices are based on 1) a peer average FY18E P/E of 15.5x,22.4x and 7.4x for the handset business (18% of SOTP value), battery business(6% of SOTP value) and monorail business (2% of SOTP value), respectively; and 2)a peer average FY18E P/sales of 1.7x and 2.1x for the conventional auto business(12% of SOTP value) and the NEV business (62% of SOTP value), respectively.The implied target FY18E P/E is 29.8x, the highest target P/E benchmark amongits local peers, which we believe is justified by its unique exposure to China'sNEV market and its 37% FY17-19E two-year EPS CAGR. We maintain Buy onBYD-H on a positive earnings outlook, mainly driven by robust NEV demandand potential NEV battery sales to third parties. We maintain Hold on BYD-A,given the valuation premium to the H-shares. Key upside risks: rapid auto salesand margin improvement, driven by successful new models, better-than-expectedsales, and/or a margin recovery in battery and handset component businesses.Key downside risks: weakening in NEV sales and margin pressure.。