Edited by China International Capital Corporation's "BYD-New car cycle is strong; profit is expected to exceed expectations"

Editor's note:BYD's profitability in the first half of this year has been significantly dragged down by the decline in subsidies for new energy vehicles and increased competitive pressure in the industry when BYD reports its results for the third quarter of 2018 next Tuesday. Byd Company Limited's share price has fallen nearly 25 per cent so far. CICC optimistically predicts that BYD will improve its performance in the second half of the year, and the auto business is expected to exceed 75 billion yuan for the whole year.

1. BYD's three small changes and great leaps

• Original Dragon Face design language to improve appearance to make up for deficiency

Appearance design has always been the weakness of BYD models, 17 years, Audi's former design director Wolfgang Iger officially settled in BYD, its first model Song MAX, sales exceeded 15000 in the fourth month on the market. Iger created the Dragon Face family front face for BYD, inspired by the Chinese element of "dragon", using matrix LED headlights and large-size horizontal front grille to greatly improve the appearance.

• Open the supply chain and enhance the ability of interior design

In October 17, the company announced the establishment of a joint venture with Foggia, spun off the seat business, and officially began the de-verticalization strategy. Focus on core components such as Sandian, while opening the supply chain in areas such as internal and external decoration that you are not good at will help the company to improve the performance-to-price ratio of parts. As a global leading supplier of seats and interiors, Foggia has high-end customers such as Audi, Mercedes-Benz and Cadillac. Through cooperation with Foggia, the interior design of new models is expected to be improved.

• Launch of DiLink open intelligent car couplet system

At the 18-year Beijing Auto Show, BYD launched DiLink Smart Internet system and automatic rotating large screen DiPad for the first time. Previously, the industry usually only opened on-board information systems, while DiLink will gradually open up the car's 341sensors and 66 items of control, by creating an open ecology, improving the functions of automotive software, and creating a real intelligent Internet connection.

2. New energy passenger cars: the new models are fully developed, and sales continue to exceed expectations.

In the first half of 18 years, the revenue of automobile-related business reached 29.2 billion, an increase of 12% over the same period last year, of which the revenue of new energy vehicles was 18.4 billion, an increase of 17% over the same period last year.

However, affected by the decline of subsidies, the profitability of new energy vehicle business has been significantly dragged down. The net profit of the auto-related business is only 140 million. Excluding the investment gain of 400m from the sale of a 70 per cent stake in BYD components (300m after tax), the auto business actually lost a small amount in the first half of the year.

From the perspective of sales volume, since the end of May, Yuan 360, the new generation of Tang, Song and Qin Pro have been listed one after another, driving the sales of new energy passenger cars to rise quarter by quarter. In September, the company sold 25000 new energy passenger cars.

CICC expects that with the launch of the new generation dynasty series, its new energy passenger car sales will exceed 200000 and 300000 respectively in 18 and 19 years.

After the transition period on June 12, the subsidy for pure electric and plug-in hybrid models with high energy density and high mileage will be significantly higher than that during the transition period. In terms of vehicle models, the subsidy for each dual-mode car will be increased by 11000 over the transitional period, while models with mileage above 400km, such as Song EV and E5, will be 45000 higher than that during the transitional period. Combined with the profit-driven effect of sales growth, the profitability of new energy passenger vehicles in the second half of the year is expected to be higher than that of the same period last year.

3. Fuel vehicle business: hot sales of Song MAX bring the structure up.

The company's fuel vehicles have also achieved excellent sales by virtue of improved appearance and sincere pricing: for example, the MPV Song MAX launched in 17 years, the monthly sales are stable between 1-15000 units; and the second month of the launch of Tang fuel version models, sales have exceeded 5000; the subsequent listing of Song fuel version and Qin Pro fuel version will help fuel vehicle sales rise steadily.

4. Summary

CICC believes that in the second half of 18 years, the gross profit margin of new energy passenger vehicles is expected to increase by about 7 points compared with the first half of the year, thanks to higher subsidies and higher sales of new energy passenger vehicles.

For commercial vehicles, although the gross profit margin may further decline slightly, the volume of new energy mud trucks, cleaning vehicles and other products will bring a certain amount of revenue and gross profit increment, which is expected to alleviate the impact of compensation on commercial vehicle business. In terms of fuel car business, due to the hot sales of Song MAX, the structure of the model will be improved to a certain extent, resulting in an improvement in ASP and gross profit margin.

To sum up, CICC believes that the company's automobile business is expected to exceed 75 billion yuan for the whole year, and its contribution gross profit is expected to exceed 16 billion yuan.In 2019, under the assumption that the subsidies for new energy passenger cars and new energy buses will decline by 20 per cent and 30 per cent respectively, the company's auto business revenue and gross profit are still expected to reach 97.5 billion and 21 billion.