比亚迪(002594)

Outlook also better for EV batteries, conventional cars, monorail, etc

We think BYD's share price rally is mainly driven by recent government and OEMvows to hasten new energy vehicle (NEV) development. However, we also seeearnings upside in future years from areas such as electric vehicle (EV) batterysales to third parties, renewed designs for its car portfolio, more monorail projects,additional handset materials, an increase in solar module demand and residentialpower storage demand. These income streams should lead to a 37% FY17-19Etwo-year EPS CAGR, supporting more upside to the share price.

NEV sector re-rating on sales pick-up and more positive news

Year-to-August, China sold 320k units of NEVs, up 30% YoY. With the continuousroll-out of more local government subsidy policies and more NEV modelsavailable, the negative impact of subsidy reduction on sales volume has abated.Together with China's latest vow to ban sales of pure conventional fuel vehicles inthe long run and global/local OEMs' recent announcements of more R&D effortsin NEVs, we remain optimistic that we could see a 33% China NEV sales volumefive-year CAGR in 2015-20E. BYD should benefit with its ~20% market share,even if this is dropping amid competition. What is more, BYD is also consideringsupplying EV batteries to third parties, with the first contract possibly being signedby yearend, according to the company.

Upside also for conventional cars, monorail, handset, solar and power storage

BYD has launched the new Song Max MPV with the new "Dragon Face" design.We think the new design philosophy will enhance its future models' appearance,and thus demand. The company has also unveiled its first commercial monorailsystem in Yinchuan, with expectations of another 20 project rollouts in FY18.While we are still uncertain about this business's profitability, we think the marketwill start to give a valuation when more revenue is realized in FY18E. Meanwhile,we also see more handset component revenue with the addition of 3D glassmaterial. For the solar module business, we foresee sales improvement driven byoverseas orders such as the recent 170MW orders from the US's NextEra (NEE.N,USD146.55, Hold). Lastly, we see additional lithium ion battery sales potential viathe B-Box energy storage system.

Earnings upgrades on multiple revenue drivers; higher implied target P/E

We raise our FY17-19E revenue and earnings on a better sales outlook for variousbusinesses. Our SOTP-derived target prices imply a target FY18E P/E of 28.1x,which we believe is justified by BYD's exposure to China's NEV market.