Maintain “buy” and raise the target price to HK$38.60. We lowered the 2024-2026 earnings forecast for BYD Electronics (the “Company”) by 27.6%, 16.0% and 14.9% to RMB 1.412, RMB 2.140, and RMB 2.574, respectively, reflecting a compound annual growth rate of 12.8%. However, considering higher market and industry valuations, we raised our target price from HK$34.30 to HK$38.60. Our target price is equivalent to 16.5 times the 2025 price-earnings ratio, a 10% premium over the current 15.0 times the market capitalization weighted average price-earnings ratio of our global peers.

Shareholders' net profit for January-September 2024 was slightly lower than expected, mainly due to lower gross margin than expected. The company announced unaudited results for the first nine months ended September 30, 2024. Revenue for January-September 2024 was RMB 122.1 billion, up 32.5% year over year. However, gross profit increased only 14.7% year over year to RMB 9.1 billion due to a slight decrease of 1.2 percentage points to 7.4% year on year during the period. Shareholders' net profit was almost flat, up 0.6% year over year to RMB 3.1 billion.

The decline in gross margin was not expected, as the company had anticipated that 2024 gross margin would benefit from the iPhone upgrade cycle.

Driven by the rapid development of artificial intelligence technology and the mobile phone replacement cycle, we expect market demand for the company's consumer electronics products to continue to rise in 2025. We also expect that sales of the company's mobile phone parts products will continue to rebound in 2025, mainly benefiting from strong performance in emerging markets and the trend of upgrading high-end mobile phone models.

Catalysts: 1) Increased production efficiency at the JP plant; 2) AI server product shipment; 3) Mass production of more NEV products.

Downside risks: 1) Market competition is more intense than expected; 2) Product line expansion is slower than expected.