Although BYD's 4Q23 gross margin narrowed 0.9ppt QoQ, its earnings quality remained high. We revise down our FY24E sales volume by 3% to 3.6mn units and net profit by 16% to RMB33.0bn amid stiffer-than-expected competition.

Nevertheless, we are of the view that BYD's FY24E earnings could be resilient aided by overseas expansion, more premium products and little financial burden from FY23. We believe that investors are likely to prefer EV makers with solid earnings, as they are more likely to withstand the rising competition.

Earnings quality remains high. BYD's FY23 net profit was in the middle range of its previous preliminary earnings of RMB29-31bn. 4Q23 gross margin of 21.2% was about 0.5ppt lower than our prior forecast. FY23 R&D expenses of RMB40bn was about 6.6% of revenue, the highest in history.

BYD only capitalized 1% of its total R&D investment in FY23. BYD also accelerated depreciation for its fixed assets. Such earnings quality has laid out the foundation for FY24E earnings, in our view.

FY24E outlook. We revise down our FY24E sales volume forecast by 0.1mn units to 3.6mn units and GPM by 0.6ppt to 19.5%. Accordingly, we cut our FY24E net profit by 16% to RMB33.0bn, which implies a net profit per vehicle of RMB9,200. We are of the view that BYD's FY24E earnings could be more resilient than some investors expect, as it has little financial burden from FY23. The pace of capex on fixed assets in FY24-25 is worth watching, as BYD should be aware of potential overcapacity risk.

Overseas expansion, upmarket and AD are still key to margins and

share price. We are still of the view that BYD is likely to catch up with peers in autonomous driving (AD). Trade barriers always exit throughout the history of global auto industry. BYD is on the right track to expand in overseas markets without strong domestic brands, in our view, and it takes time for any automakers to penetrate the markets with strong domestic brands.

Earnings/Valuation. We maintain our BUY rating but cut our target price from HK$290 to HK$262, still based on 20x our revised FY24E EPS. We are of the view that investors are likely to prefer profitable EV makers in China, as they are more likely to survive in the long term with the competition that rises faster than ever. Key risks to our rating and target price include lower sales volume and margins, as well as sector de-rating.