Maintain BUY. Although we had expected a QoQ lift in gross margin, BYD's 3Q24 gross margin still beat our forecast. Such beat was offset by higher-than- expected SG&A and R&D expenses. The solid gross margin gives us more confidence in forecasting 4Q24 and FY25 sales volume, as BYD still has the best resources to withstand the prolonged price war.
3Q24 GPM beat, SG&A and R&D miss. BYD's gross margin rose by 3.2ppts QoQ to 21.9% in 3Q24, about 0.9ppts higher than our prior forecast. On the other hand, SG&A and R&D combined ratio (as % of revenue) was 2.2ppts higher than our estimates. Although government grants and VAT refunds rose faster than our projection, they were partially offset by an unexpected forex loss. Therefore, BYD's 3Q24 net profit of RMB11.6bn was 15% lower than our prior forecast.
Recent strong sales momentum could extend into FY25E. We revise up our FY24E sales volume forecast by 4% to 4.02mn units, as the DM-i 5.0 PHEV models are more competitive than we had expected. That also gives us more confidence about FY25E sales volume, as sales and new order growth in the last few months was not at the cost of lower gross margin. We project FY25E sales volume to rise 13% YoY to 4.55mn units with a gross margin of 20.3% (vs. 20.6% in FY24E on our estimates).
Solid earnings quality in the past three years lays a foundation for FY25E earnings. It appears to us that BYD still prioritizes market share, global expansion and earnings quality, rather than rapid earnings growth. That could make our forecasts for SG&A and R&D expenses more difficult. We project selling expenses to rise at the same rate as revenue growth in FY25E given its aggressive overseas expansion. We forecast BYD's R&D investments to increase to RMB51bn in FY25E, with 99% expensed. Should such number or ratio change slightly, the impact on net profit could be significant.
Valuation/Key risks. We cut our FY24E net profit by 0.6% to RMB36.0bn and raise FY25E net profit by 4% to RMB47.5bn. We maintain our BUY rating and raise target price from HK$262 to HK$350, based on 20x (prior 15x) our FY25E EPS to reflect the recently improving investor sentiment. Key risks to our rating and target price include lower sales and/or margins than our expectation, as well as a sector de-rating.
