Subsidy cut for NEV bus impacts earnings outlook; down to ...

January 13, 2017

ACTION Removed from Asia Pacific Buy List

BYD Co. (1211.HK)

Equity Research

Subsidy cut for NEV bus impacts earnings outlook; down to Neutral

What happened

We lower our TP and downgrade BYD to Neutral (from Buy) following the

reduced 2017 subsidies for new energy vehicles (particularly NEV bus),

announced on Dec 30. Our revised TP implies 2% upside vs. -1% coverage

avg. and we find current valuation fair given (1) its 1.9X 12m forward P/B is

within historical median -1std; (2) the NEV business (incl. EV battery) trades

at 1.4X P/S and 14.4X P/E 2020E, vs. Tesla’s 1.5X and 25.0X; and (3) weaker

growth outlook post 2017 NEV policy announcement. Since reinstating

coverage of BYD at Buy on Aug 31, 2016, the stock is -20% vs. the HSCEI

+2% as a result of uncertainties surrounding the NEV subsidy policy.

Current view

As per the latest NEV subsidy policy for 2017: (1) maximum central

government subsidy for NEV bus is to be cut by 25%-70%; (2) local

government subsidy not to exceed 50% of central government subsidy;

(3) NEV passenger car subsidy to be cut by 20% as expected, maximum

NEV truck/special purpose vehicle subsidy to be increased, and fuel cell

vehicle subsidy to stay unchanged; (4) technology qualification standard to

be hiked (battery energy density, mileage, fast charge ratio, etc.).

We lower our 2017E-2019E EPS by 15%/9%/9% respectively. We estimate

that BYD’s NEV bus OPM will fall from 25.7% in 2016E to 16.2% in 2017E,

and its overall NEV OPM will decline from 18.5% to 14.9%, with the

subsidy cut partly offset by NEV credit income (estimated at 4.0%/ 3.5%/

3.0% of 2018-2020 NEV passenger car revenues).

Valuation: Our 12-month target price for BYD of HK$44.52 (down 25%

from HK$59.45) is based on a sum-of-the-parts valuation methodology.

Key risks: Higher/lower total NEV market size/BYD market share in the

NEV space; higher/lower NEV credit income; higher/lower cost saving esp.

on the battery side; higher ASP/OPM for NEV bus if BYD is able to pass on

some subsidy reduction to the buyers; quicker/slower sales ramp-up in the

new monorail business.

INVESTMENT LIST MEMBERSHIP

Neutral

Coverage View: Neutral

Yipeng Yang +86(10)6627-3189 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies

covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Yuqian Ding +86(10)6627-3327 [email protected] Beijing Gao Hua Securities Company LimitedLongjin Li +65-6654-5141 [email protected] Goldman Sachs (Singapore) Pte

The Goldman Sachs Group, Inc. Global Investment Research

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

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Investment Profile

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Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

BYD Co. (1211.HK)

Asia Pacific Autos & Autoparts Peer Group Average

Key data Current

Price (HK$) 43.45

12 month price target (HK$) 44.52

Market cap (HK$ mn / US$ mn) 89,076.8 / 11,487.2

Foreign ownership (%) --

12/15 12/16E 12/17E 12/18E

EPS (Rmb) New 1.14 2.00 2.13 2.91

EPS revision (%) 0.0 1.0 (14.8) (9.1)

EPS growth (%) 537.9 75.4 6.3 37.0

EPS (dil) (Rmb) New 1.14 2.00 2.13 2.91

P/E (X) 28.7 19.3 18.2 13.3

P/B (X) 2.5 2.1 1.9 1.7

EV/EBITDA (X) 12.9 8.5 8.5 7.7

Dividend yield (%) 0.0 1.6 1.4 1.9

ROE (%) 9.8 12.5 11.1 13.8

CROCI (%) 14.1 13.2 12.9 13.4

Price performance chart

7,500

8,000

8,500

9,000

9,500

10,000

10,500

30

35

40

45

50

55

60

Jan-16 Apr-16 Jul-16 Oct-16

BYD Co. (L) Hang Seng China Ent. Index (R)

Share price performance (%) 3 month 6 month 12 monthAbsolute (14.4) (8.9) 19.2

Rel. to Hang Seng China Ent. Index (14.8) (17.0) 3.5

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 1/12/2017 close.

January 13, 2017 BYD Co. (1211.HK)

Goldman Sachs Global Investment Research 2

BYD Co.: Summary Financials

Analyst Contributors

Yipeng Yang

[email protected]

Yuqian Ding

[email protected]

Longjin Li

[email protected]

Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E

Total revenue 77,612.0 101,672.3 115,852.9 137,286.3 Cash & equivalents 6,010.9 16,042.5 16,047.1 15,474.3

Cost of goods sold (60,439.1) (76,125.6) (87,612.0) (104,507.1) Accounts receivable 27,164.7 34,750.4 38,644.9 45,794.4

SG&A (8,659.2) (11,343.6) (13,215.4) (16,346.7) Inventory 15,750.6 19,838.5 22,831.8 27,234.7

R&D -- -- -- -- Other current assets 5,592.9 6,152.2 6,459.8 6,782.8

Other operating profit/(expense) 499.7 654.7 630.1 746.7 Total current assets 54,519.1 76,783.5 83,983.7 95,286.3

EBITDA 9,013.4 14,857.8 15,655.7 17,179.2 Net PP&E 39,039.0 43,457.8 46,069.0 48,292.2

Depreciation & amortization (5,313.6) (6,475.7) (6,726.9) (6,945.3) Net intangibles 7,168.7 5,927.7 4,686.8 3,445.8

EBIT 3,699.8 8,382.0 8,928.7 10,233.9 Total investments 4,960.1 4,834.3 4,720.2 4,643.0

Interest income 53.4 120.2 320.8 320.9 Other long-term assets 9,798.8 10,778.7 11,317.7 11,883.5

Interest expense (1,517.0) (1,595.5) (1,471.0) (1,411.7) Total assets 115,485.8 141,782.0 150,777.3 163,550.7

Income/(loss) from uncons. subs. 3.0 0.0 0.0 0.0

Others 1,555.8 (151.1) (139.4) 1,233.3 Accounts payable 30,655.8 35,483.8 39,637.7 45,849.9

Pretax profits 3,795.0 6,755.6 7,639.2 10,376.5 Short-term debt 26,412.9 27,412.9 27,212.9 26,512.9

Income tax (656.8) (1,183.6) (1,376.6) (1,921.8) Other current liabilities 9,041.4 10,770.5 10,492.1 11,028.5

Minorities (314.8) (400.8) (460.1) (506.5) Total current liabilities 66,110.1 73,667.2 77,342.6 83,391.2

Long-term debt 11,229.9 11,229.9 11,229.9 11,029.9

Net income pre-preferred dividends 2,823.4 5,171.2 5,802.5 7,948.2 Other long-term liabilities 2,116.5 2,539.8 3,047.7 3,504.9

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 13,346.4 13,769.7 14,277.6 14,534.8

Net income (pre-exceptionals) 2,823.4 5,171.2 5,802.5 7,948.2 Total liabilities 79,456.5 87,436.9 91,620.3 97,926.0

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income 2,823.4 5,171.2 5,802.5 7,948.2 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 32,294.4 50,209.5 54,561.3 60,522.5

EPS (basic, pre-except) (Rmb) 1.14 2.00 2.13 2.91 Minority interest 3,734.8 4,135.7 4,595.7 5,102.2

EPS (basic, post-except) (Rmb) 1.14 2.00 2.13 2.91

EPS (diluted, post-except) (Rmb) 1.14 2.00 2.13 2.91 Total liabilities & equity 115,485.8 141,782.0 150,777.3 163,550.7

DPS (Rmb) 0.00 0.63 0.53 0.73

Dividend payout ratio (%) 0.0 31.7 25.0 25.0 BVPS (Rmb) 13.04 18.40 20.00 22.18

Free cash flow yield (%) (2.6) (5.6) 1.9 2.1

Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E

Sales growth 40.2 31.0 13.9 18.5 CROCI (%) 14.1 13.2 12.9 13.4

EBITDA growth 46.8 64.8 5.4 9.7 ROE (%) 9.8 12.5 11.1 13.8

EBIT growth 91.8 126.6 6.5 14.6 ROA (%) 2.7 4.0 4.0 5.1

Net income growth 551.3 83.2 12.2 37.0 ROACE (%) 7.1 9.4 9.1 11.0

EPS growth 537.9 75.4 6.3 37.0 Inventory days 77.7 85.3 88.9 87.4

Gross margin 22.1 25.1 24.4 23.9 Receivables days 117.3 111.1 115.6 112.2

EBITDA margin 11.6 14.6 13.5 12.5 Payable days 170.6 158.6 156.5 149.3

EBIT margin 4.8 8.2 7.7 7.5 Net debt/equity (%) 87.8 41.6 37.9 33.6

Interest cover - EBIT (X) 2.5 5.7 7.8 9.4

Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E

Net income pre-preferred dividends 2,823.4 5,171.2 5,802.5 7,948.2

D&A add-back 5,313.6 6,475.7 6,726.9 6,945.3 P/E (analyst) (X) 28.7 19.3 18.2 13.3

Minorities interests add-back 314.8 400.8 460.1 506.5 P/B (X) 2.5 2.1 1.9 1.7

Net (inc)/dec working capital (5,915.3) (6,845.5) (2,734.0) (5,340.3) EV/EBITDA (X) 12.9 8.5 8.5 7.7

Other operating cash flow 1,305.6 (864.7) (99.2) (229.1) EV/GCI (X) 1.3 1.2 1.2 1.1

Cash flow from operations 3,842.1 4,337.4 10,156.3 9,830.6 Dividend yield (%) 0.0 1.6 1.4 1.9

Capital expenditures (6,072.5) (10,167.2) (8,109.7) (7,550.7)

Acquisitions 0.0 0.0 0.0 0.0

Divestitures 1,808.6 904.3 452.1 0.0

Others (6,472.5) (514.9) (618.7) (620.7)

Cash flow from investments (10,736.5) (9,777.8) (8,276.3) (8,171.5)

Dividends paid (common & pref) 0.0 0.0 (1,729.1) (1,450.6)

Inc/(dec) in debt 10,465.6 1,000.0 (200.0) (900.0)

Common stock issuance (repurchase) 0.0 14,473.0 0.0 0.0

Other financing cash flows (1,510.7) (1.1) 53.8 118.7

Cash flow from financing 8,954.9 15,471.9 (1,875.3) (2,231.9)

Total cash flow 2,060.5 10,031.5 4.7 (572.8) Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



New NEV policy to cut bus subsidy by up to 70%

Passenger Car: subsidy cut by 20%, as expected; technology

qualification standards raised further

On Dec. 30, the Ministry of Finance (MoF) announced that the 2017-2018 NEV subsidy for

passenger cars will be cut by 20% vs. the 2016 level. This is in line with the 2016-2020 NEV

subsidy policy guidance announced on April 22, 2015 by the MoF, Ministry of Technology

(MoT), Ministry of Industry & Information Technology (MIIT), and National Development &

Reform Commission (NDRC). The technological qualification standards (for maximum

speed, battery energy density, electrification consumption, etc.) have also been raised.

However, what’s new is that EV car models equipped with batteries of energy density

higher than 120Wh/kg will be subsidized at 1.1X the standard subsidy, thus granting

qualified companies 10% higher government subsidy than under the previous policy.

Exhibit 1: NEV passenger car subsidy to be cut by 20% in 2017 vs. 2016; technological qualification standards raised NEV passenger cars subsidy (RMB’000) and new technology requirements summary

Source: Ministry of Finance (MoF).

Exhibit 2 shows that, although the government has raised the bar on maximum electricity

consumption, almost all top-selling EV models meet this requirement.

Exhibit 2: Almost all top-selling EV models can meet electricity consumption requirements Maximum electricity consumption requirement for different EV models with different levels of

vehicle weight

Source: MoF, Autohome.com, Gao Hua Securities Research.

Passenger cars-Subsidy (Rmb '000) 2016 2017-old 2017-new Chg New technology requirementsNEV Type Mileage under EV mode (km)

100≤R<150 25 20 20 0% 1. Maximum speed within 30 mins should be no less than 100km/h

150≤R<250 45 36 36 0%2. Battery energy density should be no less than 90Wh/kg, and 1.1X subsidy is granted for those higher than 120Wh/kg

R≥250 55 44 44 0%3. Electricity consumption per 100km should be lower than maximum levels for different vehicle weights

PHEV R≥50 30 24 24 0%Electricity consumption per 100km: 1) mileage≥80km: same to EV; 2) mileage<80km: fuel consumption (excl. electricity consumption) should be less than 70% of national fuel consumption standard

Maximum Local government subsidy N/A N/A0.5X of central

subsidy

EV

0

5

10

15

20

25

30

0 500 1000 1500 2000 2500

BYD e6

BYD e5

BYD Qin EVBAIC EV seriesBAIC EU series

BAIC EX series

JAC iEV6SJAC iEV

DenzaGeely Emgrand EV

Changan Eado

Roewe E50

Chery eQ

BMW i3

Zoyte 100

BAIC ES210

Tesla Model S

DF‐Nissan Venucia

Vehicle weight (kg)

Electricity consumption (kWh/100km)

m<=1000kg, Y<=0.014*m + 0.5

1000<m<=1600kg, Y<=0.012*m + 2.5

m>1600kg, Y<=0.005*m + 13.7



NEV Bus: maximum subsidy from central government to be

reduced by 25%-70% vs. previous proposal

Exhibit 3 shows that the new scheme will subsidize NEV bus makers/buyers according to

the battery size installed, with adjustments based on technology performance (battery

energy density, mileage, fast charge ratio, etc.). While we believe the new system will favor

the technology leaders in the bus sector due to the rising technology requirement, we also

foresee the NEV bus segment will be hurt the most due to the sharp decline in government

subsidy.

Exhibit 3: New subsidy scheme introduced to subsidize NEV bus makers/buyers according to battery size installed, with

adjustments based on technology performance NEV bus subsidy (RMB’000) and new technology requirements summary

Note: subsidy = battery size (kWh) X subsidy per unit of battery size (RMB/kWh) X adjustment factors (adjustment factors=system energy density/fast

charge ratio/fuel-saving rate).

Source: MoF.

In 2017, the maximum NEV bus subsidy from the central government will be cut by 25%-

70% vs. the previous version.

Exhibit 4: Central government subsidy for NEV bus to be cut by 25%-70%, much higher

than the expected 20%.

NEV bus subsidy (RMB’000) summary

Source: MoF.

If we include local government subsidy, the total subsidy per bus reduces further. Taking

BYD K9 bus (with length >10 meter) as an example, the previous plan was to cut the

maximum total subsidy from RMB 1mn in 2016 (RMB 500K each from central and local

Central government

subsidy

6<L≤8m 8＜L≤10m L>10m

85－95 95－115 115+

0.8 1 1.2

3C－5C 5C－15C 15C+

0.8 1 1.4

40%－45% 45%－60%　 60%+

0.8 1 1.2

Adjustment factors

Maxmium central government subsidy per vehicle

(RMB'000)Vehicle type

(RMB/kWh)

Local government

subsidy

Non-fast charging EV bus

1800

System energy density (Wh/kg)

90 200 300

Less than 0.5X of central

government subsidy

Fast charging EV bus

3000

Fast charge ratio

60 120 200

PHEV bus 3000

Fuel-saving rate

45 90 150

New technology requirements

1. Energy consumption per unit carriage (Ekg) should be lower than 0.24Wh/km·kg

2. EV bus mileage should be higher than 200km

3. Battery systems total weight should be lower than 20% of vehicle weight

4. Battery energy density of non-fast charging EV bus should be higher than 85Wh/kg, fast charge ratio of fast charging EV bus should be higher than 3C, and fuel-saving rate of PHEV bus should be higher than 40%

Bus-Maximum subsidy (Rmb'000) 2016 2017-old 2017-new ChgNEV Bus type Length (m)

6<L≤8 250 200 90 -55%

8<L≤10 400 320 200 -38%

L>10 500 400 300 -25%

6<L≤8 250 200 60 -70%

8<L≤10 400 320 120 -63%

L>10 500 400 200 -50%

6<L≤8 125 100 45 -55%

8<L≤10 200 160 90 -44%

L>10 250 200 150 -25%

Fast charging EV bus

PHEV bus

Non-fast charging EV bus



governments) by 20% to RMB 800k in 2017 (RMB 400K each from central and local

governments); under the new scheme however, the maximum subsidy in 2017 would be

RMB 450K (RMB 300k/150k from central/local government respectively), representing a 55%

decrease vs. 2016 and a 44% decrease vs. previous 2017 subsidy plan.

Trucks and Special Purpose Vehicles: changed to a progressive

scheme, maximum subsidy increased in general with technology

requirements also higher

In the truck and SPV sector, the 2017 subsidy calculation method has been changed to a

progressive scheme, based on the size of the battery. We can see from Exhibits 5-6 that

the maximum subsidy amount has risen in general with technology requirements also

higher now.

Exhibit 5: Truck and SPV: changed to progressive scheme, raising maximum subsidy as well as technology requirement

Trucks and Special Purpose Vehicles subsidy (RMB/kWh) and new technology requirements summary

Note: The maximum central government subsidy per vehicle is RMB150K in 2017, vs. old version of RMB135K*0.8=RMB108K (although there is no max

subsidy mentioned in official 2016 subsidy policy, we assume the number is equal to that of 2015, i.e. RMB135K; and per the policy, we assume that the

max subsidy under the old 2017 version was a 20% cut from the 2016 number), representing nearly a 40% increase.

Source: MoF.

Exhibit 6: New subsidy above old version for battery sizes below 30kWh or above 90kWh

Trucks and Special Purpose Vehicles subsidy (RMB’000) and battery size (kWh)

Source: MoF.

Trucks/Special Purpose Vehicles-Subsidy (Rmb/kWh) 2016 2017-old 2017-new New technology requirementsBattery size

≤30kWh 1500 1. Battery energy density should be no less than 90Wh/kg

30kWh-50kWh 1200

>50kWh 1000


subsidy

Trucks/Special Purpose Vehicles

2. Power consumption of EV trucks and logistics vehicles should be lower than 0.5 Wh/km·kg; power consumption per ton per 100km of other types of pure electric vehicles should be less than 13kWh

1800 1440

‐20%

‐10%

0%

10%

20%

30%

40%

50%

0

20

40

60

80

100

120

140

160

10 20 30 40 50 60 70 80 90 100 110 120 130 140 150

2017‐old 2017‐new Chg (RHS)

Total subsidy (RMB'000)

Battery size (kWh)



Meanwhile, we expect electric logistics trucks to shift up a gear with the rising maximum

subsidy amount as well as increasing number of qualified models. On December 29, 2016,

the MIIT announced the fifth batch of qualified NEV models, and 181 out of total 498

qualified models are electric logistics truck models.

Exhibit 7: We see that an increasing number of electric logistics truck models have

qualified for NEV subsidy and are included in the latest NEV models promotion catalog Mix of different NEV types, first five batches of NEV models promotion catalog

Source: Ministry of Industry and Information Technology (MIIT).

Fuel cell vehicles: subsidy remains unchanged, technology

requirement raised

Exhibit 8: The maximum subsidy amount remains the same for fuel cell vehicles, with technology requirements rising

Fuel cell vehicles subsidy (RMB’000) and new technology requirements summary

Source: MoF.

244 181

898

371 289

124 63 28

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

First three batchs 4th batch 5th batch

Trucks and Special Purpose Vehicles NEV bus NEV passenger car

Fuel cell vehicles-Subsidy (Rmb '000) 2016 2017-old 2017-new Chg New technology requirements

Passenger car 200 200 200 0% 1. Mileage should be no less than 300km

Small 300 300 300 0%

Medium/Big 500 500 500 0%


subsidy

2. Rated power of fuel cell systems should be higher than 30% of that of drive motor (and no less than 30KW); fuel cell vehicles with rated power between 10kW and 3kW are subsidized by RMB6000/kW

Bus & Freigt wagon



OPM likely to decline; we lower 2017E-19E EPS by 15%/9%/9%

We lower our 2017-19 EPS estimates by 15%/9%/9%, respectively,

mainly due to the decline in NEV subsidy

Exhibit 9: Summary of earnings estimate changes

Source: Gao Hua Securities Research.

NEV bus OPM to decline 9.5 percentage points in 2017E vs. 2016E

on lower subsidies

In Exhibit 10 we estimate that BYD K9 OPM will decline from 25% in 2016E to 15.5% in

2017E based on the following assumptions:

BYD is unable to pass on the subsidy decline to bus buyers (i.e., it is unable to

increase the selling price);

There is a 38% reduction in the battery size installed per BYD bus, from current

324KWh (can ran ~300km per charge) to 200KWh, to meet the minimum 200km

mileage requirement;

15% battery cost saving and 10% other cost saving in 2017E vs. 2016E due to

economies of scale.

As a result, we forecast BYD’s NEV bus OPM will decline from 25.7% to 16.2%, and its

blended OPM for the overall auto business (NEV bus and car, plus ICE car) will decline from

12.0% in 2016E to 10.6% in 2017E.

(Rmb mn) New Old Diff. New Old Diff. New Old Diff. New Old Diff.

Revenue 101,672 101,229 0% 115,853 129,867 ‐11% 137,286 156,997 ‐13% 152,879 179,060 ‐15%

Gross profit 25,547 25,435 0% 28,241 31,657 ‐11% 32,779 37,956 ‐14% 35,585 43,559 ‐18%

EBIT 8,382 8,322 1% 8,929 10,260 ‐13% 10,234 12,718 ‐20% 10,787 15,010 ‐28%

Pretax profit 6,756 6,694 1% 7,639 8,925 ‐14% 10,376 11,488 ‐10% 12,477 13,955 ‐11%

Reported net profit 5,171 5,121 1% 5,802 6,814 ‐15% 7,948 8,741 ‐9% 9,557 10,547 ‐9%

Reported EPS (Rmb) 2.00 1.98 1% 2.13 2.50 ‐15% 2.91 3.20 ‐9% 3.50 3.87 ‐9%

2019E2018E2016E 2017E



Exhibit 10: We expect OPM of BYD NEV bus to decline 9.5ppt in 2017E vs. 2016E

Source: Company data; Gao Hua Research estimates.

Introducing NEV credit income forecasts for 2018-2020

The Chinese government plans to introduce a NEV credit trading system from 2018 (see

our report from October 5, 2016, New credits/quotas systems to boost NEV market; BYD

well placed). In Exhibits 11-12, we see that Tesla reported ZEV credit income at 4.5% of its

electric vehicle revenue in 2015. Given BYD’s high NEV volume mix, we believe it could

also gain NEV credit income. Referencing Tesla, we introduce NEV credit income at 4.0% /

3.5% / 3.0% of BYD’s NEV passenger car revenue in 2018-2020E respectively.

Exhibit 11: ZEV/other credits revenue accounted for 4.5%

of Tesla’s vehicle sales revenue in 2015 Tesla ZEV/other credits revenue and contribution

Exhibit 12: Credit revenues per vehicle USD33k in 2015

Tesla credit revenues per vehicle (USD)

Source: Tesla.

Source: Tesla.

K9 Bus OPM change

For domestic sales only

Unit 2016E 2017E Var Var% Notes

Revenue per unit (before VAT & rebate) Rmb'000/unit 2,000 1,450 (550) ‐28%

Price paid by buyers Rmb'000/unit 1,000 1,000 ‐ 0% Assuming bus buyers are paying same price

Government Subsidy Rmb'000/unit 1,000 450 (550) ‐55%

Revenue per unit (after VAT & rebate) Rmb'000/unit 1,667 1,208 (458) ‐28% Assuming 17% VAT + 3% rebate

Battery Costs (after VAT) Rmb'000/unit 277 145 (132) ‐48%

Cost of battery (before VAT) Rmb'000/KWh 1.00 0.85 (0.15) ‐15% Assuming 15% cost reduction in 2017E

Cost of battery (after VAT) Rmb'000/KWh 0.85 0.73 (0.13) ‐15%

Battery installed KWh/unit 324 200 (124) ‐38% Assuming BYD can use less battery

Other Costs Rmb'000/unit 973 876 (97) ‐10% Assuming 10% cost reduction in 2017E

OPM Rmb'000/unit 417 187 (229) ‐55%

OPM% % 25.0% 15.5% ‐9.5% ‐38%

NEV product mix and OPM assumptions

2016E 2017E Var Var%

Revenue (after VAT & Rebate) Rmb mn 56,601 65,705 9,104 16%

NEV ‐ Bus Rmb mn 18,177 19,492 1,315 7%

NEV ‐ car & truck Rmb mn 18,490 27,238 8,749 47%

ICE car & parts Rmb mn 19,934 18,975 (959) ‐5%

‐

OPM Rmb mn 6,798 6,971 173 3%

NEV ‐ Bus Rmb mn 4,671 3,158 (1,514) ‐32%

NEV ‐ car & truck Rmb mn 2,126 3,813 1,687 79%

ICE car & parts Rmb mn ‐ ‐ ‐

OPM % % 12.0% 10.6% ‐1.4% ‐12%

NEV ‐ Bus % 25.7% 16.2% ‐9.5% ‐37% Assuming export bus has slightly higher OPM

NEV ‐ car & truck % 11.5% 14.0% 2.5% 22% Assuming OPM gain on scale economy

ICE car & parts % 0.0% 0.0%

Blended NEV OPM% % 18.5% 14.9% ‐3.6% ‐20%

0%

2%

4%

6%

8%

10%

12%

14%

0

50

100

150

200

250

2009 2010 2011 2012 2013 2014 2015

ZEV and other credits revenue (USD mn)

As % of vehicle sales revenue (RHS)

‐

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2009 2010 2011 2012 2013 2014 2015

Credit revenues per vehicle (USD)



We reduce our target price by 25%, downgrade to Neutral

Reflecting lowered earnings estimates, our 12-month target price falls to HK$44.52 (down

25% from HK$59.45), based on our sum-of-the-parts valuation methodology.

Exhibit 13: 12-month target price cut by 25%...

Summary of valuation changes

Exhibit 14: … primarily driven by EV valuation cut

Waterfall chart for BYD valuation changes



The 25% reduction in our target price for BYD is attributed mainly to the 22.5% decline in

NEV valuation, which is driven by lowered NEV volume (as a result of higher competition

mainly in the NEV car space) together with lower ASP and OPM (due to the decline in NEV

bus subsidy), partly offset by new estimates for NEV credit income starting 2018E.

Exhibit 15: Reduction in BYD NEV valuation mainly on lowered NEV volume/ASP/OPM, partly offset by new estimates

for NEV credit income starting 2018E


New valuation Previous valuation Var (%)

1. Handset components & assembly services 6.25 6.41 -2.5%

1.1 BYDE 5.05 5.18 -2.6%

1.2 Others 1.20 1.23 -2.5%

2. Automobiles-ICE 0.26 4.16 -93.6%

3. Automobiles-EV 41.48 53.51 -22.5%

4. Rechargeable batteries and others 5.03 5.09 -1.2%

4.1 Handset batteries 3.60 3.67 -2.0%

4.2 Storage batteries 1.42 1.41 0.6%

4.3 Solar power system - -

Total before Financing cost, MI and others 53.02 69.16 -23.3%

5. Financing cost MI and others (8.50) (9.71) -12.5%

5.1 MI - BYDE (1.77) (1.81) -2.6%

5.2 Other MI and Financing costs (6.73) (7.90) -14.8%

Total (HK$) 44.52 59.45 -25.1%

59.45

44.52

0.16 3.89

12.03

0.06 1.21

0

10

20

30

40

50

60

70

Previousvaluation

Handsetcomponents &

assembly services

Automobiles‐ICE Automobiles‐EV Rechargeablebatteries and

others

Financing cost MIand others

New valuation

NEV business DCF

Unit 2016E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E Note

NEV Volume (unit) Unit 111,357 168,875 223,913 294,048 359,636 115,607 196,125 264,050 319,059 396,483 ‐4% ‐14% ‐15% ‐8% ‐9% Lower Nev car sales estimation on higher competition

ASP (RMB) Rmb/unit 329,271 276,715 262,884 236,447 225,943 313,474 307,069 294,760 296,838 292,641 5% ‐10% ‐11% ‐20% ‐23% Higher NEV bus price erosion on subsidy decline

Total Revenue (RMB mn) Rmb mn 36,667 46,730 58,863 69,527 81,257 36,240 60,224 77,831 94,709 116,027 1% ‐22% ‐24% ‐27% ‐30%

OP Rmb mn 6,792 6,981 8,036 8,170 8,716 6,382 9,042 10,823 12,380 14,381 6% ‐23% ‐26% ‐34% ‐39% Lower bus subsidy partly offset by battery cost saving

OPM% % 18.5% 14.9% 13.7% 11.8% 10.7% 17.6% 15.0% 13.9% 13.1% 12.4%

NEV credit income (RMB mn) Rmb mn ‐ ‐ 1,316 1,355 1,301 ‐ ‐ ‐ ‐ ‐

as % of NEV car revenue % 0.0% 0.0% 4.0% 3.5% 3.0% 0.0% 0.0% 0.0% 0.0% 0.0% Newly introduced, with reference to Tesla

OP+Credit income (RMB mn) Rmb mn 6,792 6,981 9,351 9,524 10,017 6,382 9,042 10,823 12,380 14,381 6% ‐23% ‐14% ‐23% ‐30%

D&A as % of revenue % ‐5.1% ‐4.7% ‐4.2% ‐3.9% ‐3.7% ‐5.2% ‐4.4% ‐4.0% ‐3.8% ‐3.6%

D&A (RMB mn) Rmb mn 1,888 2,213 2,446 2,743 3,036 1,872 2,654 3,076 3,616 4,218 1% ‐17% ‐20% ‐24% ‐28%

Tax% % 17.5% 18.0% 18.5% 19.0% 19.5% 17.5% 18.5% 19.5% 20.5% 20.5%

Net Income (RMB mn) Rmb mn 5,602 5,723 7,619 7,713 8,062 5,264 7,368 8,710 9,840 11,430 6% ‐22% ‐13% ‐22% ‐29%

As % of total company % 108% 99% 90% 76% 67% 103% 108% 100% 93% 88%

Share count (mn shares) mn share 2,724 2,725 2,726 2,727 2,728 2,724 2,725 2,726 2,727 2,728 0% 0% 0% 0% 0%

EPS (RMB/share) Rmb/share 2.053 2.098 2.793 2.827 2.955 1.929 2.701 3.193 3.607 4.190 6% ‐22% ‐13% ‐22% ‐29%

EV business DCF

Cash inflow per year (OPM after Tax + D&A) Rmb mn 7,490 7,936 10,065 10,456 11,098 7,136 10,022 11,787 13,455 15,649 5% ‐21% ‐15% ‐22% ‐29%

Cash outflow per year (CAPEX) Rmb mn (7,625) (6,082) (5,663) (6,306) (6,356) (7,592) (7,792) (7,654) (8,729) (9,255) 0% ‐22% ‐26% ‐28% ‐31%

Discount factor X ‐ 1.00 1.09 1.18 1.29 1.00 1.09 1.18 1.29 1.40

Discount year year ‐ 1.00 2.00 3.00 4.00 ‐ 1.00 2.00 3.00 4.00

DCF Rmb mn (135) 1,705 3,724 3,228 3,392 (456) 2,051 3,496 3,676 4,574 ‐70% ‐17% 7% ‐12% ‐26%

Sum DCF Rmb mn 98,399 126,933 ‐22%

Valuation per share HK$ 41.48 53.51 ‐22%

New estimation Previous estimation Var%



We downgrade BYD to Neutral from Buy, as we see its current valuations as fair in the light

of the following: (1) its 1.9X 12-month forward P/B is within the historical median -1std;

(2) the NEV business (including EV battery) trades at 1.4X 2020E P/S and 14.4X 2020E P/E,

vs. Tesla’s 1.5X and 25.0X, respectively; and (3) a weaker growth outlook post 2017 NEV

policy announcement.

Key risks include: (1) higher/lower total NEV market size/BYD market share in the NEV

space; (2) higher/lower NEV credit income; (3) higher/lower cost savings especially on the

battery side; (4) higher ASP/OPM for NEV bus if BYD can pass on some subsidy reduction

to the buyers; and (5) quicker/slower sales ramp-up in the new monorail business

(currently not in our estimates due to a lack of earnings visibility).

Exhibit 16: BYD H is trading at 17.5X 12-month forward

P/E vs. 3-year historical P/E median at 21.8X 12M forward P/E

Exhibit 17: BYD H is trading at 1.9X 12-month forward

P/B vs. 3-year historical P/B median level at 2.3X 12M forward P/B vs. ROE

Source: Datastream, Gao Hua Securities Research.

Source: Datastream, Gao Hua Securities Research.

0

10

20

30

40

50

60

70

Dec-13 Dec-14 Dec-15 Dec-16

12m Fwd P/E Median P/E

Median P/E = 21.8 X

0%

2%

4%

6%

8%

10%

12%

14%

0.0X

0.5X

1.0X

1.5X

2.0X

2.5X

3.0X

3.5X

4.0X

4.5X

Dec-13 Dec-14 Dec-15 Dec-16

12m Fwd P/B (LHS) Median P/B ROE (RHS)

Median P/B = 2.3 X



Disclosure Appendix

Reg AC

We, Yipeng Yang and Yuqian Ding, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject

company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to

the specific recommendations or views expressed in this report.

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Disclosures

Coverage group(s) of stocks by primary analyst(s)

Yipeng Yang: A-Share Autos, China Autos. Yuqian Ding: A-Share Autos, China Autos.

A-Share Autos: Anhui Jianghuai Automobile Co., Chongqing Changan Auto (A), FAW Car, Fuyao Glass Industry Group (A), Great Wall Motor Co.(A),

Huayu Automotive Systems, SAIC Motor, Weichai Power (A), Weifu High-Technology Group (A).

China Autos: Baoxin Auto Group, Brilliance China Automotive, BYD Co., China Harmony New Energy Auto, Dongfeng Motor, Fuyao Glass Industry

Group (H), Geely Automobile Holdings, Great Wall Motor Co. (H), Guangzhou Automobile Group, Minth Group, Nexteer Automotive Group, Sinotruk

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Goldman Sachs had an investment banking services client relationship during the past 12 months with: BYD Co. (HK$43.45)

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Price target and rating history chart(s)

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42.0444.75

44.47

46.6950.82

36.2

39.71

61.15

61.66

61.93

62.0259.45

6,0007,0008,0009,00010,00011,00012,00013,00014,00015,00016,000

2025303540455055606570

BYD Co. (1211.HK)

Goldman Sachs rating and stock price target history

Stock Price Currency : Hong Kong Dollar

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2016.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

Rating

Price target

Price target at removal

Covered by Yipeng Yang

Not covered by current analyst

Hang Seng China Ent. Index

Inde

xPr

ice

Sto

ckPr

ice Feb 10 Aug 13 Aug 31

N B RSF

BM A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

2014 2015 2016



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