Key Takeaways:
Goldman Sachs initiated coverage on BYD Co. (01211.HK) with a Buy rating, after the automaker’s first-quarter operating profit beat the bank’s estimate by 82 percent.
"The broker believes BYD COMPANY is well positioned to capture domestic mass-market demand while accelerating overseas expansion," Goldman Sachs said in a research report published Tuesday.
The bank set a price target of HKD 134, representing a 29% potential upside from the stock's Tuesday close of HK$103.70. The bullish call comes despite a 55% year-over-year drop in net profit to 4.08 billion yuan ($598 million) and a 12% revenue decline to 150.2 billion yuan, according to the company's filing.
The diverging results highlight a split between BYD's booming export business and a fiercely competitive domestic market. The company's performance was supported by a higher contribution from overseas sales, which reached 46% in the quarter, and stringent cost controls that helped lift its gross margin to 18.8%, according to the Goldman report.
While Goldman Sachs sees a strong growth trajectory, the headline numbers reflect a difficult environment in BYD's home market. Pressure from competitors such as Xiaomi and Geely has forced BYD into a price war, leading to four consecutive quarters of falling profit, according to data compiled by Bloomberg.
BYD sold 700,463 total vehicles in the first quarter. While total sales were down, international shipments continued to accelerate, climbing by more than half compared with the same period last year and making up roughly 45% of total deliveries. Nomura analysts estimate that overseas sales will make up nearly 50% of BYD's auto revenue this year.
To combat domestic weakness, BYD is banking on new technology. The company recently launched a new version of its blade battery that it claims can be fully charged in nine minutes. It also debuted its new flagship SUV, the Great Tang, which reportedly secured over 30,000 orders on its first day of availability.
The upgrade from Goldman Sachs suggests the bank believes the international growth and new technology can outweigh the domestic margin compression. Investors will watch second-quarter results, expected in July, to see if the company can return to consolidated revenue growth as its CEO has forecast.
This article is for informational purposes only and does not constitute investment advice.
