BYD Electronic:Those were the days

Initiate with Neutral

We initiate on BYDE with a Neutral rating given 1) BYDE was one of the earlybeneficiaries of the booming metal casing adoption trend that began in 2013-14,with its share price up 191% during that period (vs HSI index;s rise of 4%). Weexpect limited share price upside from the trend in coming years. 2) Assemblybusiness cap gross margin. BYDE revenues are mainly from assembly, withlower gross margin of 2-3% vs. metal casing at 15-20%. 3) Undemandingvaluation. BYDE currently trades at 7.2x/6.6x our 2016/17E PE, close to itshistorical avg-1std. We see the valuation as undemanding and justified by itssingle-digit EPS growth toward 2018, and believe the positives of metal casingsmigration has already been priced in over 2013-14.

Early beneficiary of boom in metal casings

BYDE entered the metal casing market in 2013 and was one of the earlybeneficiaries of the booming metal casing adoption rate back in 2013-14 whenApple launched its first full metal casing smartphone, iPhone 5, triggering a spikein the metal casing adoption rate. BYDE’s share price rose 191% in 2013-14.

With relatively moderate growth in metal casings given higher penetration rateand lower unit growth of the smartphone market, we expect limited share priceupside from this story in coming years. We estimate metal casing to contribute20%/20% revenues and 56%/57% gross profit in 2016/17E with slightly risinggross margin of 21.0%/22.0% in 2016/17E (vs ~20% in 2015) given improvingutilization rate.

Assembly business cap gross margin

BYDE’s gross margin dropped by 4.1ppts to 6.5% in 2015 due to the risingpercentage of assembly business for Chinese handset makers. We recognisemanagement’s efforts in raising the utilization rate of metal casing to improve thegross margin; however, given assembly business is more likely to remain as themajor revenues contributor, we remain conservative on its future gross margintrend. Assembly business contributes 60% of revenues in 2015 with lower grossmargin of 2-3% (vs metal casing at ~20% and the company’s blended grossmargin at 6.5%). We estimate assembly business to contribute 55%/57%revenues and 13%/14% gross profit in 2016/17E with flat gross margin of1.8/1.8% (vs 1.8% in 2015).

Undemanding valuation

BYDE currently trades at 7.2x/6.6x our 2016/17E PE, close to its historical avg-1std of 6.5x. We see the valuation as undemanding and justified by its singledigitEPS growth of 9% toward 2018, and the positives of metal casingsmigration has been priced in 2013-14. We adopt the historical avg-1std of 6.5xas our target PE.

Upside/downside risks to our Neutral rating

We could take a more positive stance if we see better-than-expected grossmargin improvement in metal casing and better-than-expected product mix.

Downside risks to our Neutral rating include: 1) slower-than-expected grossmargin improvement in metal casing and 2) poorer-than-expected product mix.