比亚迪(002594)

Disposing the seating business into a 30%-owned new JV

On 31 October, BYD announced that the company signed a JV agreement withFaurecia (EPED.PA, EUR61.72, Hold) to establish a JV for the development of autoseating business in China. The registered capital of the JV will be RMB760m, withRMB228m and RMB532m to be contributed by BYD and Faurecia, respectively,in cash within one month after a successful JV establishment. Once established,BYD will hold a 30% stake of the JV with the rest being held by Faurecia, andthe JV will acquire the auto seating business from BYD. The Faurecia-BYD JV willeventually become a seating product supplier of BYD. At the moment, the twoparties are finalizing the terms.

According to BYD in the announcement, the JV set-up is BYD's first attemptto spin off its auto parts business. The company expects the JV structure canhelp BYD to become more asset-light, stay focused on its auto manufacturingbusiness, and enhance the quality and cost control of BYD's car seats, thushelping the auto sales. Furthermore, BYD also expects the sale of the auto seatingbusiness to generate some one-off disposal gain and expects some return oninvestment in the JV.

Deutsche Bank view - a small positive

Putting aside the unquantifiable one-off disposal gain amount at the moment,we still think that the JV formation is a small positive to BYD considering 1)the streamlining of the auto operation with more focus in core auto R&D and2) improved quality of its components to enhance BYD cars' appeal. That beingsaid, investors should not expect much external sales from the JV, if any, since itis Faurecia's strategy to set up JVs in China with OEMs in order to secure salesfrom those OEMs. Indeed, Faurecia also have set up other auto seating JVs withChinese auto OEMs.

We have a Buy rating on BYD-H on a positive earnings outlook, mainly drivenby robust new energy vehicle (NEV) demand and potential NEV battery sales tothird parties. We maintain Hold on BYD-A, given the valuation premium to the Hshares.Our SOTP-derived target prices imply target FY18E P/E of 29.8x, whichwe believe is justified by its unique exposure to China's NEV market and its 37%FY17-19E two-year EPS CAGR. Key upside risk is rapid auto sales and margin improvement, driven by successful new models. Key downside risk is weakeningin NEV sales and margin pressure