BYD Electronic preannounced its attributable net profit (ANP) in 1-3Q23 at Rmb2.836bn-3.116bn (+129%~+152% YoY). In the consumer electronics business, we expect the Company to continue to focus on mid-/high-end products after capacity adjustments at the Android end to improve profitability; its share in the assembly and component business of its North American client will keep growing, while the proposed acquisition of Jabil's Chengdu & Wuxi factories may further create headroom for growth. Meanwhile, its revenue from new intelligent products and new energy vehicles (NEVs) will likely maintain rapid growth. We are optimistic about the Company's competitiveness as an intelligent manufacturing platform in the long term and reiterate the "BUY" rating with a target price of HK$48.
Expecting a sharp increase in 1-3Q23 earnings.
On Oct 17, 2023, the Company released an earnings preannouncement, expecting its ANP in 1-3Q23 to reach Rmb2.836bn-3.116bn (+129%~+152% YoY). For 3Q23 alone, ANP would come in at Rmb1.320bn-1.600bn (vs Rmb0.459bn/1.057bn in 1Q23/2Q23), implying growth of +119%~+165% YoY and +25%~+51% QoQ. This mainly benefited from an increase in the share with the major overseas customer and a rebound in demand at the end of Android clients, as well as sustained rapid growth in NEVs, new intelligent products and others, while the parent group's capacity utilization continues to improve, and the business structure is further optimized, pushing profitability to continue to improve.
We are optimistic that the full-year profitability will continue to improve, given rosy growth prospects for the North American client, household energy storage, and the NEV business.
(1) Consumer electronics: Profitability trended upward at the Android end, while the share with the North American client continued to expand. For Android clients, the Company has actively improved the comprehensive capacity utilization level through capacity adjustments, driving profitability upward. In addition, the Company has cooperated closely with domestic customers, leading to the gradual ramp-up of the frame business and others. For the North American client, the Company's share in assembly has continued to improve, which has hedged the impact of a downturn in the industry, and with the rise in shipments, economies of scale are starting to kick in to improve profitability. (2) New intelligent products: Household energy storage is growing rapidly on the back of cooperation with top-notch clients in various industries. The Company has continued to expand in household energy storage, smart homes, game hardware, drones, and other business segments and promote cooperation with customers in various industries. As a result, product shipments continue to grow. For household storage, the Company has been exploring overseas markets for many years, and its business network has continued to improve, leading us to expect the full-year revenue to maintain a high growth rate. (3) NEVs: A top domestic tier-1 manufacturer is in the making on the back of the parent company. Benefiting from the accelerated development of automotive intelligence and networking and the parent company's robust NEV sales growth, the Company's intelligent cabin and intelligent network product shipments have grown significantly. At present, the Company is the core supplier of the parent company's intelligent center console modules and invests in fields including advanced driver-assistance system (ADAS) (across platforms with low, medium, and high computing power), intelligent cabins, the internet of vehicles (IoV), intelligent suspension systems, thermal management, domain controller and internal and external decorative parts. Accompanied by the parent company's improving automobile sales and its own category expansion, the overall revenue of the NEV business is likely to maintain high growth.
The proposed acquisition of Jabil's Chengdu & Wuxi factories will continue to strengthen its cooperation with the North American client. On Aug 26, 2023, the Company issued a framework agreement for the acquisition of Jabil Singapore's smartphone business in Chengdu and Wuxi for approximately Rmb15.8bn. On Sep 26, the two parties formally signed the agreement, the announcement of which showed that as of the end of Aug 2021/2022, target assets generated annual revenue of US$4.45bn/4.26bn and net profit after tax of US$240mn/140mn, respectively. The main business of Jabil Inc, one of the core suppliers of structural components for smart terminals to the Company's major North American client, includes electronic manufacturing services (EMS), design engineering for the consumer industry, manufacturing and supply chain services, and materials technology services. We believe that the Company's acquisition, if completed, will strengthen the cooperation with its North American client and is likely to form synergies with the legacy business, helping the Company continue to enhance its share in the structural component and assembly business of its North American client and create headroom for growth.
Potential risks:
Lower-than-expected sales of its North American client; increased competition in the industry; lower-than-expected progress in the R&D of the Company's key projects; lower-than-expected NEV sales of its parent company; delays in or failure of the Company's acquisition of Jabil's related businesses.
Investment recommendation:
We are optimistic that the Company's share in the assembly and component business of its major customer in North America will keep growing, and it will continue to focus on mid-/high-end products after capacity adjustments at the Android end to improve profitability; its revenue from new intelligent products and NEVs will likely maintain rapid growth. Considering that the Company's 1-3Q23 earnings exceeded expectations per the preannouncement and the proposed acquisition of Jabil's Chengdu & Wuxi factories will further create headroom for growth, we are optimistic about the Company's future earnings. Without considering the acquisition of Jabil's related businesses, we raise our 2023E/24E/25E net profit forecast to Rmb4.000bn/5.057bn/6.662bn (vs Rmb3.346bn/4.758bn/6.086bn previously), corresponding to EPS forecast of Rmb1.78/2.24/2.96, respectively. For valuation, A-share comparable peers along the value chain of the North American customer, such as Everwin Precision (300115.SZ), Luxshare Precision (002475.SZ), and Lingyi iTech (002600.SZ), are on average trading at 15x 2024E PE based on Wind consensus estimates. Considering that the Company's business expansion at the end of domestic customers and the North American customer may warrant sustained growth, we assign 20x 2024E PE to derive a target price of HK$48 and reiterate the "BUY" rating.