BYD Company (1211, $34.0): Rich valuation hard to justify - Maintain SELL

Share price of BYD Company surged by 41% in the past month, outperformed HSI by 32%. We believe this is due to the following reasons:

1. Business is under recovery. The company announced financial results for 1Q13 on April 25. Net profit increased by 316% yoy to RMB112mn due to increased auto sales volume and reduced losses on solar business. It also offers the guidance for 1H13 earning growth of 2,359% - 2,973% yoy.

2. New energy vehicle (NEV) policy is about to be announced. According to media, China’s central government is reviewing the subsidy guidance for NEVs, which will be issued in mid-2013. Most of BYD’s electric vehicles are currently targeting public transportation and management expects to enter into more cities by the end of this year, such as Beijing, Shanghai and Guangzhou. The company has also launched its electric vehicles in the U.S and Hong Kong markets in the past month. However, we believe EV development is only at an initial stage and should have minimal impact on earnings in near term.

3. Mr Warren Buffett visited China in the past week. Stock with Buffett concept recorded large gains. He told media he has never thought of offloading shares of BYD Company (9.56% of total issued share capital) and expressed his interest in solar industry, led to a new round of chasing by investors.

BYD Company is under earnings recovery, but we believe the good news has been fully priced in. Based on our EPS estimation at RMB0.43, the counter is now trading at demanding FY13 PER of 63.1x which is hard to justify. Technically, 9-days RSI reached an overbought level of 83. We reiterate SELL with target price at $16.93, implying 31.5x FY13E PER.