According to the preliminary results, BYD’s 4Q23 net profit arrived at RMB7.6bn-9.6bn, below our prior estimates due to weaker vehicle margin and BYDE’s earnings miss. We estimate 4Q23 core earnings per unit for businesses excl. BYDE may erode from c.RMB11k in 3Q23 to c.RMB8.5k in 4Q23, dented by wider end-user discounts and dealer rewards, against stronger economies of scale and battery cost reduction. In the near term, we reckon BYD may face pressure from destocking needs before the rollouts of revamped models amid the escalating price competition domestically. Yet, we would like to emphasise the structural bright spots this year from brand upscale and overseas market expansion, which are key factors to mitigate the ASP/margin pressure caused by domestic price competition and extend long-term growth narrative. Despite short-term sales and margin pressure may weigh on its valuation, we see chances for valuation to recover after 1Q24 if the company could present positive signals in terms of go-global expansion, premiumisation and AD catch- up progress. Maintain BUY with lower TP of HK$245 (20x 2024E P/E).
　　Key Factors for Rating
　　Preliminary results indicated both BYD and BYDE posted QoQ decline of net profit in 4Q23. BYD disclosed its net profit for 2023 to reach RMB29bn- 31bn with 74%-86% YoY growth and recurring net profit to surge 75%-90% YoY to RMB27.4bn-29.7bn, implying a net profit of RMB7.6bn-RMB9.6bn for 4Q23, down from RMB10.4bn in prior quarter. At the same time, BYDE previewed its net income for 2023 to reach RMB3.9bn-4.1bn with 110%-123% YoY growth, suggesting net income of RMB850m-RMB1.1bn for 4Q23, against RMB1.5bn in 3Q23.
　　4Q23 core earnings per vehicle slightly missed on wider-than- expected end-user discounts and dealer rewards. Assuming 2023 net profit of both BYDE and BYD at mid-point of profit range (i.e. RMB30bn and RMB4.0bn), we estimate earnings of automobile business & others could decline from RMB9.4bn in 3Q23 to RMB8bn in 4Q23, with earnings per unit down from c.RMB11k in 3Q23 to c.RMB8.5k in 4Q23. In the context of stronger advantages of scale on the back of record-breaking sales volume and constant cost savings from raw materials of battery, the QoQ decline of core earnings per vehicle slightly fell short of our prior estimates, which we essentially attribute to the end-user discounts to stoke sales volume, the rollout of dealer rewards by RMB2bn.
　　Earnings forecast and valuation
　　We slightly trimmed our vehicle shipments forecasts for 2024E from 3.6m units to 3.5m units to reflect our lower growth projection for domestic sales given the weakening end-user demand for aging flagships within Dynasty Network (incl. Han, Tang) before the rollouts of revamped editions in 4Q24, and unfavourable competition landscape in the market with prices between RMB200k-300k. Accordingly, we reduced our revenue forecast for 2023-24E by 2%-3% to RMB598bn/728bn. To reflect lower profit per vehicle assumption amid the escalating price competition domestically, we tweaked our net profit forecasts for 2023-24E by 5%-8% to RMB30.3bn/32.7bn.
　　Currently, its H-shares are trading at 15.2x 2024E P/E, which stays at low level and looks undemanding. In the near term, we believe that the company could face sales pressure from destocking needs before the rollouts of refresh models within Dynasty Network in 1Q24 and the incomplete sales contribution of all- new models during the early phase of ramp-up. From 2024 onwards, we admit its growth slowdown following explosive growth over the past three years is inescapable, but we would like to emphasise certain bright spots from exports ramp-up and brand upscale, both are able to mitigate the overall potential ASP and vehicle margin pressure caused by domestic price war. Thus, we maintain BUY rating and revise down our TP to HK$245.00 by adopting 20x 2024E P/E (vs. 25x 2024E P/E before). We reckon if the company could present positive signals in terms of go-global expansion, premiumisation and AD catch-up progress, then valuation may see chances to recover.