We maintain TP at HK$38.70 and the investment rating as "Buy". Since we expect BYD Electronic's (the "Company") main business lines will be growing this year, and we expect net profit to increase by over 30% yoy in 2024, coupled with the new opportunities that AI will bring to the Company, we maintain TP at HK$38.70 and the investment rating as "Buy". The TP represents 15.1x/ 12.0x/ 10.4 2024-2026 PER.
BYD Electronic's 1Q2024 earnings were in line with market expectations. Revenue and shareholders' net profit in 1Q2024 were RMB36,480 million (+38.3% yoy) and RMB610 million (+33.0% yoy), respectively, thanks to revenue contribution from Jabil plants, recovery of Android business as well as the further development of vehicle electronics business. Gross margin decreased by 0.8 ppts yoy to 6.9%, due to the change in product mix.
We expect earnings to keep achieving strong growth. Due to the contribution of acquisition of Jabil plant, recovery of Android business, especially in components and parts, as well as start of massive production of more intelligent driving and intelligent suspension products, we expect revenue to still record remarkable growth higher than 30% in 2024 and afterwards. Moreover, the Company is copying its own automation and lean management concepts and tools to Jabil factories currently, which we believe will significantly improving the profitability level of the business. Last but not least, given the acquisition incurred a large amount of loans, the Company started to repay the loans and replace USD loans to RMB loans, and by the end of 2Q2024, USD loans are expected to be basically gone, and interest expenses in each quarter to gradually decline.
We expect the Company's future expansion in AI field to exceed market expectations. The Company has cooperated with NVIDIA for a long time and has been in the graphics card business since 2010. Therefore, they are very familiar with the R&D and marketing at NVIDIA. Last year, the Company became a partner of NVIDIA AI server, and the products are expected to start shipping from 2Q this year. Besides, the Company is cooperating with NVIDIA in AMR robot. We believe many underlying technologies of many companies' existing businesses are similar to these new businesses. For instance, BYD Electronic has a long-time experience of assembly, components and parts, and industrial chain management in PC industry, which is transferable to server industry. Besides, the power consumption of AI computing is increasing, and traditional air-cooled cooling is no longer sufficient to cope with it, thus It is necessary to introduce liquid cooling technology, while BYD Electronics has accumulated a lot of experience in automotive liquid cooling (the environment that automotive liquid cooling needs to deal with is more complex). Therefore, we believe that the Company can effectively replicate its experience and technology in liquid cooling to the server business. For another example, due to the fact that the underlying AI technology and image recognition technology required by robots are essentially similar to the underlying technology of intelligent driving, while the environment faced by intelligent driving is relatively more complex than that of AMR robot, thus we believe that the Company's extensive accumulation in intelligent driving can help it quickly enter the robotics field. Relying on these underlying technology and experiences, we believe the Company's expansion in the server and robotics field will exceed market expectations.
Catalysts: Improvement of production efficiency at Jabil plants may result in higher gross margin; Quicker-than-expected mass production of AI servers and AMR robots.
Risk warning: Market competition may be more intense than expected; product line expansion may be slower-than-expected.