比亚迪(002594)

20% YoY decline in preliminary FY17 net profit on 2% YoY revenue growth

On 26 February, BYD announced its unaudited preliminary FY17 results (in PRCGAAP) after market close. In summary, the company recorded a 2.3% YoYincrease in gross revenue to RMB105.9bn but a 19.7% YoY drop in net profit toRMB4.1bn. The earnings are near the lower end of the company’s FY17E net profitguidance of RMB4.0-4.3bn in October 2017. In addition, the preliminary FY17 netprofit translates to 4Q17 net profit of RMB1.3bn (down 8.8% YoY), with lowerearnings YoY drop vs. 9M17 probably due to a year-end rise in new energy vehicle(NEV) sales and sequential improvement in conventional car sales, partially offsetby the negative impact of NEV subsidy cut, in our view.

According to the announcement, BYD attributes the FY17 earnings decline to thedecrease in traditional car sales and weak environment for the solar business,partially offset by strong handset metal casing demand growth. The companyalso highlights that 1) its traditional car business has improved with the launchof the Song MAX MPV and 2) it has booked revenue from the monorail businessstarting 2H17.

Deutsche Bank view - limited surprise with outlook partly masked by subsidycut

BYD’s preliminary FY17 net profit is in line with our FY16E earnings estimateof RMB4.2bn. Going forward, while we expect its traditional car sales to furtherimprove on more model refreshes with the new design and its NEV sales to growfast, the latest round of government NEV subsidy cut will cap its earnings growthprospect in FY18E. As such, we have a Hold rating. Our SOTP-derived target priceimplies FY18E P/E of 31.6x, the highest target P/E benchmark among its localpeers, which we think is justified by its exposure to China's NEV market and its26% FY17-19E two-year EPS CAGR.

Key downside risks: weak car sales, a slow margin recovery in the auto and batterybusinesses, and more equity fund raising. Key upside risks: rapid auto sales andmargin improvement, and better sales and/or a margin recovery in the batterybusiness.