BYD (1211 HK) : Turning the corner

Upgrade to Outperform and raise target price fromHK$27.50 to HK$56.70. Our new target price is based on50x 2015F P/E. We apply a higher target multiple of50x P/E, or one standard deviation above the five-yearmid-cycle valuation to reflect BYD’s potential to benefitfrom EV/hybrid vehicle adoption and the turnaround takingplace across all divisions.

Brighter days ahead for new energy vehicle (NEV)sub-division. Despite slow NEV adoption in China,favorable government policies along with BYD’sappealing 2014 NEV model lineup should support afurther re-rating of the company. We expect salescontribution from NEV as a percentage of the PV divisionto rise from 4.9% in 2012 to 13.2%/18.4% in FY14F/15F.

Passenger vehicle (PV) division on course for arecovery. According to CAAM, BYD’s PV divisionrecorded FY13 unit sales of 506k. The Speed/L3/S6 wereamong the top-sellers with 124k/99k/93k units sold.

Despite concerns over intense competition within thelocal PV market, we believe our 9% PV unit sales growthassumption for FY14F/15F is achievable.

Improving outlook for handset division. For years,handsets had been BYD’s bread and butter product. Thismight once again be the case as the handset divisionlooks set to take off in 2014 thanks to (1) strong newmodel line-ups from existing international customers,including Nokia, HTC and Motorola; and (2) surgingdemand from Chinese smartphone customers Huawei,Lenovo and Coolpad. Growing demand for high-marginmetal casings from key customers should also supportthe handset division in FY14F/15F.