BYD:Heading in the right direction

Maintain Outperform, raise target price to HK$60.00. Wemaintain our Outperform rating on BYD but raise the targetprice from HK$56.70 to HK$60.00, still basing it on50x 2015F P/E. We cut our 2014F earnings forecast 10.9%to reflect the 1Q14F weakness but raise our 2015F forecast5.8% on stronger NEV sales. We continue to like BYD,China’s leading NEV listco and believe the company is inposition to directly benefit from EV/hybrid vehicle adoption.

1Q14 weakness already in the price. BYD announced1Q14F profit will drop 86.7-95.6% YoY to RMB5.0-15.0m.We attribute the disappointing performance in 1Q14F toweak passenger vehicle sales, low season for handset salesand the money-losing solar division. We expect earnings topick up in 2H14F on better NEV sales, the improving PVmodel line-up, and on the solar division finally breaking even.

New energy vehicle (NEV) sub-division at an inflectionpoint. We share BYD’s view that EV adoption is acceleratingin public transportation and that demand is rising for plug-inhybrid vehicles for the mass market. Favorable governmentpolicies along with BYD’s appealing 2014 NEV model lineup(Qin/E6/K9) should support a further re-rating of thecompany, in our view. We expect sales contribution fromNEVs as a percentage of the PV division to rise from 4.9% in2012 to 13.6%/21.6% in FY14F/15F.

Handset division the company’s bread and butter.Handsets have been a stable profit contributor for BYD foryears. 2014F/2015F is likely perpetuate this trend given(1) strong new model line-ups from existing internationalcustomers, including Nokia, HTC and Motorola; and(2) surging demand from Chinese smartphone customersHuawei, Lenovo and Coolpad. Growing demand for highmarginmetal casings from key customers should provideupside surprise in FY14F/15F.