I have a Buy investment rating for BYD Electronic (International) Company Limited (OTCPK:BYDIF) (OTCPK:BYDIY) [285:HK]. Previously, I touched on the risk relating to the company’s customer concentration, and BYDIF’s efforts to diversify its client mix in my June 1, 2020 article.
In its 1H 2023 interim report, BYD Electronic refers to itself as a company whose “primary business is the manufacture, assembly and sale of mobile handset components, modules and other products.” My focus is on BYDIF’s Q4 2023 preliminary earnings and its recent M&A deal in the current write-up.
BYD Electronic’s acquisition of Jabil’s (JBL) China production plants puts it in a good position to do more business with its key customer, Apple (AAPL). The company’s preliminary Q4 2023 results were strong, and BYDIF is expected to register robust bottom-line growth this year. As such, I upgrade my rating for BYD Electronic from a Hold to a Buy.
Investors can buy or sell BYD Electronic shares on both the Hong Kong equity market and the OTC market. The trading liquidity of the company’s Over-The-Counter shares is low. Readers have the choice of dealing in BYD Electronic’s liquid Hong Kong-listed shares (three-monthly mean daily trading value of roughly $15 million as per S&P Capital IQ) with U.S. stockbrokers like Interactive Brokers.
Preliminary Results Were Excellent
BYD Electronic is expected to reveal the company’s audited and finalized Q4 2023 and full-year FY 2023 financial results on March 28, 2024. With its primary listing in Hong Kong, the company only releases its complete financials twice every year, and it merely discloses key headline financial metrics (e.g., revenue, earnings) for the first and third quarters of every year.
Towards the end of last month, BYDIF issued an announcement disclosing its preliminary financial results for full-year fiscal 2023. In specific terms, BYD Electronic anticipates that its net income attributable to shareholders will grow by +116% from RMB1,858 million for FY 2022 to RMB4,019 million in FY 2023 as per the mid-point of its preliminary estimates. This also implies that the company’s bottom line is expected to have increased by +57% YoY to RMB975 million for the final quarter of the previous year.
In its January 29, 2024, announcement, BYD Electronic cited “the increase in the share of overseas major customers business” and “the rebound in demand from Android customers” as among the key factors contributing to its strong earnings growth for Q4 2023 and FY 2023.
The company’s solid preliminary Q4 2023 results are consistent with industry news flow and the smartphone sector’s statistics. Reuters reported at the end of last year that “Apple is working with China’s BYD (Electronic)” to “move new product introduction resources to Vietnam.” This piece of news supports BYID’s assertion that it is gaining market share with foreign clients like Apple. Separately, data from IDC suggests that the actual YoY growth in smartphone shipments on a global basis was +8.5% in Q4 2023 (versus a -0.1% YoY contraction for Q3 2023). In contrast, the market had previously anticipated a lower +7.3% YoY increase in fourth quarter smartphone shipments.
The analysts think that BYD Electronic can build on the company’s strong FY 2023 financial performance to deliver a good set of results for FY 2024 as well. As per the sell side’s consensus data taken from S&P Capital IQ, BYDIF’s net profit attributable to shareholders is projected to rise by +35% to RMB5,433 million this year.
The bullish expectations of the company’s 2024 performance appear to be realistic considering market forecasts and its key customer’s product plans. Canalys sees the worldwide smartphone industry turning around from a contraction last year to record a positive +4% growth for the current year. Also, a December 8, 2023, Nikkei Asia news article noted that BYD Electronic could potentially be collaborating Apple on the introduction of new “entry-level (iPad) models” in 2H 2024 based on the news publication’s sources.
New M&A Transaction Is A Key Growth Driver
In late August 2023, BYD Electronic disclosed that it planned to buy over “Juno Newco Target Holdco Singapore Pte. Ltd.,” which is Jabil’s “product manufacturing business in Chengdu and Wuxi,” for around $2 billion. BYDIF subsequently published an announcement on December 29, 2023 indicating that “all the conditions precedent of the acquisition had been satisfied.” This is a major deal for BYDIF in financial terms, as the acquisition consideration is almost four times the company’s preliminary FY 2023 earnings, and equivalent to over a quarter of its current market capitalization.
The transaction has significant implications for BYD Electronic’s growth prospects. At an investor event hosted by research firm CMB International late last year cited in its November 2023 report, BYDIF’s management team outlined the company’s expectations that this M&A deal “will create synergies with current component products and drive share gains in Apple product categories.”
Relevant third-party research seems to support the company’s claim of significant “synergies” relating to this particular acquisition.
The newly acquired business from Jabil is a leading iPhone supplier, accounting for more than a quarter of iPhone casing supply and boasting superior operating profitability than BYDIF as a whole, according to Bank of America’s (BAC) analysis published on financial news portal AAStocks. Therefore, there are good reasons to be optimistic about the potential of top-line growth acceleration and profitability improvement associated with this latest acquisition.
Also, market research firm TrendForce highlighted in its September 15, 2023 commentary piece that the China production facilities (bought over part of this recent deal) that are engaged in “iPhone aluminum frame manufacturing” could enable BYDIF to enter the “iPhone EMS (Electronics Manufacturing Services)” and “assembly” businesses in time to come. Prior to this latest M&A transaction, BYD Electronic was mainly involved with the manufacturing of AAPL’s iPad products, so there are opportunities for BYDIF to increase its revenue by playing a role in the production of other Apple products like the iPhone.
I view BYD Electronic (International) Company Limited’s shares as deserving of a Buy rating. The company grew its earnings by +57% YoY in Q4 2023 based on its preliminary numbers. Moving forward, the purchase of Jabil’s manufacturing facilities in China will boost BYDIF’s growth prospects, especially with respect to expanding its share of business with Apple. BYD Electronic is now valued by the market at a consensus next twelve months’ normalized P/E of 12.6 times, while the sell-side analysts forecast that the company can deliver a normalized EPS CAGR (in local currency or RMB terms) of +35.6% for FY 2024-2025 as per S&P Capital IQ data. This implies that the stock is currently trading at an undemanding PEG (Price-to-Earnings Growth) valuation multiple of just 0.35 times.
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