Maintain BUY. Although BYD’s 1Q24 net profit of RMB 4.6bn missed our prior forecast on a massive R&D spending of RMB10.6bn, we believe the automaker is still on track to achieve our FY24E net profit forecast of RMB33bn. BYD’s 1Q24 GPM also underscored our prior argument that its price cuts in Feb 2024 could be largely absorbed by cost reduction from suppliers. Nevertheless, we expect BYD to be more self-disciplined in SG&A and R&D expenses in the following quarters, should it put earnings at a higher priority.
　　1Q24 R&D beat our forecast. BYD’s 1Q24 revenue beat our prior forecast by 4%, largely due to BYDE. Its GPM was 1.3ppts higher than our estimates, which was offset by its larger-than-expected selling expenses. We did expect a possible wide range of 1Q24 net profit due to uncertainties from R&D expenses and impairment. These two expenses combined in 1Q24 were about RMB4.1bn higher than our estimates, as the R&D ratio reached 8.5% last quarter, the highest in history. The 1Q24 net profit would have been RMB6.9bn (vs. the actual RMB4.6bn), if the R&D ratio was the same as FY23 (6.6%), which would be in line with our prior net profit forecast.
　　20% sales volume growth in FY24 still achievable with resilient margins. We are of the view that our FY24E sales volume forecast of 3.6mn units is still achievable, especially given the recent stimulus measures and overseas ramp-up. Such potential topline growth, along with the stimulus measures, could make its gross margin resilient, in our view. Even including its rising selling expenses, its 1Q24 margin (GPM-selling exp ratio) was close to that in 4Q23 when the sales volume was 51% higher (0.63mn units in 1Q24 vs. 0.94mn units in 4Q23). BYD’s net profit per vehicle of RMB7,300 in 1Q24 was about RMB1,900 lower than that in 4Q23, while the automaker cut prices of most models by RMB20,000-30,000 in mid-Feb 2024.
　　Earnings/Valuation. It appears to us that BYD did not prioritize its 1Q24 earnings as it did not utilize its flexibility to lift its net profit amid its previous high earnings quality. We expect BYD to be more self-disciplined in SG&A and R&D expenses in the following quarters. We keep our FY24-25E net profit estimates largely unchanged, although we revise up both GPM and SG&A. Therefore, we maintain our BUY rating and target price of HK$262, still based on 20x our FY24E EPS. Key risks to our rating and target price include lower sales and/or margins than expected, as well as a sector de- rating.