Maintain "Buy" with TP at HK$34.30. We have a positive outlook on the Company's 2H2024 performance, driven by Apple share gains, AI server business and new NEV orders. Considering the short-term drag from the Jabil integration, we revise down the Company's 2024F-2026F EPS by 18.1%/ 14.6%/ 12.6% to RMB1.950/ RMB2.548/ RMB3.024, respectively, which represents a CAGR of 19.0% during 2023-2026F. We revise down our TP to HK$34.30 by applying 16.0x 2024F PER.
1H2024 profit missed market and our expectations due to lower GPM and higher Jabil-related expenses. Revenue in 1H2024 was RMB78.6 bn, up 39.9% YoY. Revenue growth was in-line, mainly driven by Apple share gains and further product expansion in the NEV supply chain. However, due to the changes in sales structure (eg. shrinkage in household energy storage business), the Company's GPM declined by 1.0 ppts to 7.85% in 1H2024. In addition, due to the Jabil integration, the Company recorded around RMB467 mn in intangible asset amortization in 1H2024, which resulted in weak 1H2024 shareholders' profit at RMB1,518 mn, only up by 0.14% YoY. The management guided that in 2H2024: 1) the GPM will improve due to the iPhone upgrade cycle; and 2) the intangible asset amortization will continue for the next five years.
We expect upside surprise from the Company's AI server business and NEV orders in 2H2024. We believe AI server will be a profitable next-generation ODM product for the Company. BYD Electronic is cooperating with NVIDA in AI server development. We have become more positive on the shipment of AI server products in 4Q2024, and believe it will become a strong growth driver for the next three years, given the increasing AI server product demand. BYD Electronic has accumulated a lot of experience in automotive liquid cooling, which should provide it unique competitive advantages for its AI server business.
In addition, the management also guided that in the second half of this year, the intelligent suspension systems will be equipped on more mid-end NEVs of BYD.
In the past, the Company's intelligent suspension systems were only used on some high-end NEV models of BYD. We believe the intelligent suspension is gaining greater market penetration, which should help the Company to gain more market share beyond its parent company.
Catalysts: 1) Improvement of production efficiency at Jabil plants; 2) shipment of AI server products; and 3) mass production of more new energy vehicle products. Downside risks: 1) market competition may be more intense than expected; and 2) product line expansion may be slower-than-expected.