BYD (1211 HK):At the inflection point

Maintain Outperform but lower our target price to HK$57.00. We maintain our Outperform rating on BYD but cut our target price from HK$60.00 to HK$57.00 to reflect share dilution from the latest share placement. Our target price is still based on 50x 2015F P/E. We cut our 2014F earnings forecast by 10.2% to reflect the loss in solar division in 1H14F but keep our 2015F forecast largely unchanged. We continue to like BYD, China’s leading new energy vehicle (NEV) company, and believe the company is in pole position to benefit from NEV adoption.

New energy vehicle in the fast track. We believe NEV adoption is well under way in China because of the surging pure EV demand for public transportation and mass market demand for plug-in hybrid vehicles. More importantly, we view favorable government policies along with BYD’s appealing 2014/2015 NEV model lineup (Qin/Tang/E6/Denza/K9) should support a further earnings upside for the company in FY15F/16F. We expect sales contribution from NEVs as a percentage of the passenger vehicle division to rise from 4.9% in 2012 to 18%/33% in FY14F/15F.

Handset division the solid performer. Handset division has been the stable profit contributor for BYD and we expect momentum will extend into FY14F/15F because of the solid new model line-ups from existing international customers (Nokia/HTC) and increasing demand from Chinese smartphone customers (Huawei/ Coolpad). In additional, we view the growing demand for better-margin metal casings from key customers should provide upside surprise for the division.

Gasoline auto and solar divisions the potential drag. While we see good progress from the NEV sub-division and the handset division, we view the increasing competition from the low-end compact-size passenger vehicle market in China and lack of economies of scale for the solar cell/module manufacturing the risks for the BYD’s FY14/FY15F earnings.