Nomura downgraded BYD to Reduce from Buy, pointing to a “growing disconnection” between electric vehicle (EV) volume growth and profit amid stiffer competition and “thriftier” government assistance.
“Despite a strong new model lineup and improving product quality in its EV business, we believe BYD is facing several headwinds that give rise to a more uncertain earnings outlook over 2018-19,” Nomura said in a note on Wednesday.
Among the headwinds, Nomura pointed to another 20 percent subsidy cut in 2019 and rising financing costs amid a longer lead time in subsidy reimbursement in the NEV bus business.
It also noted increased competition in the EV market from internal combustion engine carmakers and startups and China’s joint-venture liberalization for foreign players.
In April, China’s National Development and Reform Commission (NDRC) said it would remove foreign-ownership limits for manufacturers of alternative- or new-energy vehicles, such as electric or hybrids, this year.
Nomura also said it expected a lower monorail contribution, as government approval has been slow, leading it to reduce its 2018-19 monorail revenue forecast to 3 billion yuan and 6 billion yuan from 12 billion yuan and 20 billion yuan, respectively. That combined with a lower gross margin forecast for the auto business and higher finance costs spurred a target price cut to HK$46.10 from HK$89.50, Nomura said.
Shares of BYD ended Wednesday down 2.61 percent at HK$48.50.