BYD Co. Sell Rating Justified by Declining Margins and Stagnant Earnings Outlook

UOB Kay Hian analyst Ken Lee maintained a Sell rating on BYD Co (BYDDF – Research Report) yesterday and set a price target of HK$140.00.

Ken Lee has given his Sell rating due to a combination of factors impacting BYD Co’s financial performance and future earnings projections. In his assessment, Lee points to the company’s fourth-quarter earnings in 2023, which showcased a decline of 17% quarter-over-quarter, aligning with the forecast range but signaling potential challenges ahead. The drop in earnings is attributed mainly to a squeeze in margins, partly due to strategic price reductions. These price cuts have led to a contraction in both gross and EBIT margins and a significant decrease in net profit per vehicle, raising concerns about profitability sustainability.

Looking forward, Lee is not optimistic about BYD’s financial outlook, noting that the company itself is targeting flat earnings for 2024. This stagnation is expected despite anticipated sales volume growth, as margin erosion is likely to negate any potential gains from increased sales. Lee also adjusted the earnings per share (EPS) forecasts downwards for the next two years, reinforcing the Sell recommendation. The decision to maintain a price war over the next three years is a further reason for concern, implying that the margin pressures experienced are not only immediate but may persist, affecting long-term profitability.

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BYD Co (BYDDF) Company Description:

BYD Co. Ltd. engages in the research, development, manufacture and sale of rechargeable batteries and photovoltaic business. It operates its business through four segments: Rechargeable Battery and Other Products; Mobile Handset Components and Assembly Service; Automobiles and Related Products; and Corporate and Others. The Rechargeable Battery and Other Products segment manufactures and sells lithium-ion and nickel batteries principally for mobile phones, electric tool, and other portable electronic instruments and new energy products. The Mobile Handset Components and Assembly Service segment consists of mobile handset components such as housings, keypads, and the provision of assembly services. The Automobiles and Related Products segment comprises of automobiles, auto-related moulds and components, automobiles leasing, after sales service, and skyrail related business. The company was founded on February 10, 1995 and is headquartered in Shenzhen, China.