Kandi Technolgies Corp (KNDI)

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August 25, 2014, 9:44 P.M. ET

Why Nomura Believes BYD Is Worth 64 HKD?




Nomura Securities maintained its price target of 64 Hong Kong dollars after BYD (1211.HK) reported its second-quarter earnings. Shares of BYD reversed earlier losses and closed 2.2% higher at HKD50.3 yesterday even as its conventional car sales slumped. The broker’s price target implies another 28% upside.

BYD is not about conventional cars, but the takeoff of electric vehicles in China, contended Nomura analysts Leping Huang and David Hao:

According to CAAM, BYD’s EV shipment volume increased 8x y-y to 6.7k units in 1H14 and took ~35% market share (based on d1EV data) in the fastgrowing China EV market, vs ~2.2% market share in gasoline cars. EVs are no longer a dream, and were the most important revenue driver for BYD in 1H14.

As such, the analysts’ price target reflects their view of the company. According to their sum-of-the-parts analysis, the conventional gasoline business is worth only HKD7, or 11% of their target price, whereas the electric vehicle business should be valued at HKD50.4, or 78% of their target price. Nomura derived the HKD50.4 valuation assuming 8.2 times enterprise value-to-2014-sales ratio, in line with the valuation of U.S.-based Telsa (TSLA) – without imposing any valuation discounts even though China’s charging infrastructure is behind the US. By comparison, the conventional car business is valued at only 0.56 times.

Year-to-date, Tesla has risen 74.5%, BYD gained 32.6% and Kandi (KNDI) advanced 55%.

Readers should know that Nomura Securities is on the very high-end of the street. Other analysts are a lot more cautious. Morgan Stanley, for instance, has a Hold rating on BYD and HKD43 price target, derived using a discounted cash flow model instead of peer multiple comparisons.