Key takeaways from results briefing:

New models to boost sales. BYD plans to launch several new models in 2H23 such as Seal DM-I, Denza N7 & Denza N8, as well as two other new models from BYD’s new premium off-road brand Yangwang and personalized brand Fang Cheng Bao (Formula Leopard), Yangwang U9 and Bao 5. The company is confident of a stronger sales momentum in 2H23 vs 1H23’s sales (delivered c.1.2m units). In our view, its target of 3m unit sales should be achievable.

Products from new brands have higher margins than existing vehicles. BYD is building a comprehensive product portfolio with each brand covering various customer segments. Its ASP ranges from <Rmb100k to about Rmb1m under the multi-brand strategy. Management believes this is positive for its long-term development.

Impact of market competition and price war on margins. Management believes price competition is an on-going market phenomenon and will eliminate the weaker players from the market. The company is confident of its ability to meet market competition with its competitive products, especially the self-brand, which is gaining market share. For instance, its product margin remains healthy despite the keen market competition, with 1H23 segment margin of its auto & battery business improving 2.4ppts y-o-y to 5.9%. The company believes it has scale benefits, strong brands, advanced technology and easing cost pressure to support profits growth.

Overseas market strategy. The company highlighted that overseas markets are an important growth pillar and will focus on Europe, Southeast Asia, Latin America etc. The company will establish its production base in Brazil and will open sales outlets in Europe to support growth. Besides, the overseas market provides better margins than domestic sales, hence, BYD will continue to grow the overseas business. BYD targets to achieve overseas sales of 200k units in 2023 and 400k units in 2024, positive to business growth.

Leveraging on advance technologies to enhance product safety and performance. BYD revealed its two new core technologies, quad-motor EV drivetrain and body control tech Yunnian (DiSus), enable users to have better control over the vehicles and there is a higher level of safety to prevent a collision. BYD is also partnering with other companies like NVIDIA to develop more advanced solutions for ADAS development, although management believes true autonomous driving requires change in regulations.

Expanding handset components and assembly services. The company is expanding its business with key phone makers like Apple and rides on China’s NEV trend on the provision of EV electronics.

Strong financial position. As of Jun-23, BYD had net cash balance of Rmb62bn, to support expansion. Strong vehicle sales have provided BYD with high liquidity, as reflected in 90% y-o-y increase in 1H23 net operating cash inflow of Rmb82bn.

Revised up FY23/24F net earnings. We revised up FY23/24 net earnings by 8%/5% on slightly higher margin assumptions from its overseas business. Our TPs of HK$410/Rmb350 are based on SOTP (16x/9x EV/EBITDA on auto & battery / handset assembly and 3x PB on its semiconductor unit). Maintain BUY on BYD (1211 HK/002594 CH). The auto sector was being derated recently, due to 1) broad market sell-off; 2) rising market competition and fear of price war; and 3) slowdown of the Chinese economy. The stock is now trading at 1SD below its historical average.

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