比亚迪(002594)

Potential extra subsidy cuts and competition are additional negatives

BYD has scarcity value and the potential to attract premium multiples because ofits thematic attraction, as China’s leading NEV company with 40-50% of earningsfrom the segment. However, at the same time as the share price has surged by70% YTD against the HSCEI's 22%, the company has in fact been losing marketshare. Sales have actually declined, while the total market has risen by 45%.Looking ahead, it is now vulnerable to changes to the subsidy regime and marginswill likely come under pressure. We have revised our forecasts to reflect thesechanges and based on new estimates we now believe the shares are fully valued.We downgrade BYD-H's rating to Hold.

Opportunities are still there...

Year-to-October, China sold 490k units of NEVs, up 45% YoY. Government targetsstill point to 5m units on the road by 2020 and NEVs reaching 20% of all salesby 2025. There will likely be changes to the subsidy structure but we believe theemphasis will shift to incentives for car owners, not producers and we remainconfident in a forecast of 36% sales growth for the next three years. BYD is wellpositioned here and will also have extra revenue streams from potential NEVbattery sales to third parties, sales of their excess NEV credits and more monorailproject income recognition.

But headwinds are also strengthening

However, BYD’s NEV sales of 89k units, were down 5% in 10M17, as more OEMslaunch new products. We think that competition will further intensify with moreJVs launching products in 2018-19E, amid the rollout of the fuel economy/NEVdual credit system. The bus business is also vulnerable and can lose more than20% of its subsidy revenue in FY18E with the potential subsidy cuts. What is more,as OEMs will try to squeeze battery suppliers on pricing, the chances are that BYDmay need to budget a lower price when selling to third parties. Last but not least,BYD's monorail's growth outlook could also be hindered by recent governmenttightening of the standards of Public Private Partnership (PPP) projects.

Earnings downgrades mainly due to subsidy cut

We lower our FY17-19E earnings by 1-12%, mainly on lower NEV subsidy incomeand battery sales income, and the subsequent margin squeeze. Our SOTP-derivedtarget prices imply a target FY18E P/E of 32x, which we believe is still wellsupported by BYD's meaningful exposure to China's NEV market