BYD(1211.HK)：1Q EARNINGS BEAT ON STRONGER GROSS MARGIN EXPANSION;DISTINCT COST AND SCALE ADVANTAGE TO MITIGATE MARGIN HEADWIND-格隆汇

机构：中银国际
研究员：LOU Jia/Olivia NIU/Catherine Sun

　　In 1Q24, BYD’s total revenue edged up 4% YoY, while net profit increased 10.6% YoY to RMB4.6bn with core earnings (excluding BYDE) per vehicle at RMB6.9k, above expectations. Despite shrinking sales scale QoQ and drastic price cuts, BYD’s gross margin beat consensus by expanding 0.7ppt QoQ to 21.9%, mainly driven by cost savings from battery price plunge since 4Q23 and stringent supply- chain cost reduction, which together led to the QoQ reduction in COGS per vehicle by RMB11k, against vehicle ASP decline of c.RMB9k in 1Q24. Despite BYD’s growth deceleration with persistent pricing pressure, we acknowledge its absolute NEV leadership position and cost reduction prowess. Moreover, we deem its overseas push is a bright spot with greater potential than other Chinese counterparts which mostly sell gasoline cars abroad. Thus, we maintain BUY rating and leave TP at HK$245.00.
　　Key Factors for Rating
　　1Q24 total revenue growth driven by higher-than-expected BYDE contribution while vehicle ASP dropped substantially on wider price cuts. In 1Q24, total revenue grew 4% YoY to RMB125bn, with the revenue of BYDE (285 HK, BUY) beating our estimates with 38.3% YoY growth spurred by stronger consumers’ electronics demand and the consolidation of Jabil Mobility from Dec 2023. If excluding BYDE, the remainder dropped 5.7% YoY against the 13.4% YoY increase in sales volume, due to the pullback of vehicle ASP by 16.9%/6.2% YoY/QoQ. The QoQ decline of vehicle ASP by c.RMB9k could be largely attributed to wider price cuts for substantially cheaper Honor editions after CNY holiday, which was partly offset by improved product mix led by higher-priced exports and trio luxury brands which together generated c.22% of 1Q24 sales volume vs. 15% in 4Q23 .
1Q24 gross margin expanded at a surprisingly strong pace against shrinking delivery scale and drastic price cuts. If excluding BYDE, gross margin of automobiles and other businesses jumped from 25.1% in 4Q23 to 28.1% in 1Q24, well above our prior forecast mainly thanks to the bigger QoQ decrease of RMB11k in COGS per vehicle. This could be explained by two factors in our view: i). cost savings from battery raw materials price reduction and stringent supply-chain cost control for other components. Per our estimate, the lithium carbonate price plunge in 4Q23/1Q24 could lower COGS per vehicle for BYD by c.RMB7k/1k, respectively. But considering lithium carbonate inventory and its accounting recognition method, as well as the time lag, we deem most of the cost-reduction effects from lithium carbonate price plunge since 4Q23 may be reflected in 1Q24; ii). BYD should recognise dealer rebates in selling expenses, instead of COGS as most OEM do. In fact, the variances between gross margin and selling expense ratio dipped 0.4ppt QoQ in 1Q24, against the QoQ expansion of 0.7ppt for gross margin .
　　Core earnings outstripped estimates in spite of significant OPEX outlays. In 1Q24, overall OPEX ratio spiked from 11.9% in 1Q23 to an high- time high of 17.0% in 1Q24, as the selling expense ratio surged to 5.4% and R&D ratio climbed to 8.5%. By absolute value, the R&D outlay in 1Q24 remained at above RMB10bn, almost surpassing the full-year R&D expenses of major counterparts. If removing BYDE and non-recurring items, the core earnings stayed steady at c.RMB4.5bn in 1Q24 vs. RMB4.1bn in 1Q23, outstripping our original estimates thanks to gross expansion in spite of record- high OPEX outlays. 1Q24 core earnings per vehicle came at RMB6,898, slightly down from RMB7,219 in 1Q23.
　　New model pipeline. For BYD brand, the company plans to roll out Qin L next month to enrich the Dynasty Network offerings, and launch Seal 06 DM- i/Sea Lion 07 EV in 2Q24 to broaden the Ocean Network lineups. Technically, both Qin L DM-i and Seal 06 DM-i are featured with BYD’s fifth-generation DM-i hybrid powertrain system, kicking off a new-round PHEV model updates going forward. Separately for Ocean Network, the company pledges to continue to streamline the product lineups with four major arrays, integrating all sedans into Seal lineups and all SUVs into Sea Lion lineups while maintaining current Seagull/Dolphin arrays for entry-level/affordable market. For FCB brand, the company will launch Bao 8 model that possibly rivals Toyota Land Cruiser 300 series and GWM Tank 700 model in 2H24. For Denza brand, the company unveiled Denza Z9 GT at Beijing Auto show, which is expected to hit the market in mid-2024. For ultra-premium Yangwang brand, the company will release Yangwang U7 in 2H24.
　　Earnings Forecast and Valuation
　　We revise down our revenue forecast for 2024-25E by 3%-4% to RMB706bn/773bn, to reflect persistent pricing pressures in China market yet partly offset by better sales mix with larger proportion of trio premium brands and exports models. We trim our net profit forecasts for 2024/25 by 4%-9% to RMB31.3bn/32.5bn, respectively, to reflect aggressive R&D outlays and higher SG&A ratios.
　　Regardless the unfavorable demand environment and heightening competition dynamics in 1Q24, the company demonstrated stronger resilience to maintain its dominance in NEV market at above 30% with price levers decisively. Moreover, it has proved distinct cost control prowess with the customary scale edge and deep vertical integration in NEV supply chain, in contrast to major counterparts that suffer from greater margin volatility amid the price war. However, on the other hand, we notice a significant decrease in vehicle ASP on both YoY/QoQ basis, suggesting weaker end-user demand and heavier destocking pressures across the board of existing lineups under BYD brand.
　　Moving forward, we render the company is quite determined to prioritise on capturing market share from gasoline cars in domestic mainstream segment, with a marketing campaign declaring "electricity is cheaper than oil." The comparative affordability edges could be realised through either direct price cuts or technological upgrade (i.e. the model updates featuring next-gen DM-i powertrain system).
　　For overseas market, the company has intensified overseas push in multiple markets against escalating protectionism. The Thailand factory is about to start production around mid-2024 with designed annual capacity of 150k units. The Brazil factory is expected to commence operation from 2H25, while the Hungary plant is likely to start operation from 2H25 as the key to tackle possible EU anti-subsidy duties. The company aims to double overseas sales volume to 500k units in 2024, and further double to 1m units in 2025. Though it is yet to verify whether BYD could break through 1m units in overseas sales next year, we reckon its great potentials with pure NEV line-ups in overseas market, compared with other Chinese counterparts that mostly sell gasoline cars abroad.
　　Currently, its shares trade at c.19x 2024E P/E, which seems fairly valued given its slower earnings growth outlook. Nonetheless, we acknowledge its absolute NEV leadership position and vertical integration in NEV supply chain. In addition, we would like to emphasise certain bright spots from export ramp-up and brand upscale, both are able to mitigate the overall margin pressure amid prolonged price war domestically. Thus, we maintain BUY rating and leave TP at HK$245.00.