• BYD reported 2019Q1 profit of RMB749.73M, up from RMB102.4M a year earlier.

• Substantial surge of profit was buoyed by strong demand for its new energy vehicles (NEV).

• NEVs are expected to continue to sell well in the second quarter, and NEV sales and revenues continue to maintain strong growth.

• China's market for electric cars is booming, but profits in the sector have been squeezed by fierce competition between established firms and rival start-ups, as well as moves by the government plans to cut subsidies for the market to improve product quality and standards.

• BYD sold over 117K vehicles in the first three months in 2019, up 5.2% y.o.y.

• BYD popular models include its Tang-series electric cars – the company aims to sell 650K vehicles in 2019.

• Margin pressure remains. The profitability of BYD's traditional vehicle segment faced pressure in 2018, given weakening consumer sentiment since the 2^nd half of 2018.

• Margin contraction for the handset business sets to continue, as we expect no great improvement in weak market demand and intensified market competition.

• In the light of potential subsidy cut for NEV models in 2019, we expect the NEV segment's gross margin to fall below 20% to estimated 19% this year.

• Based upon the above assumptions and forecast, we expect BYD's blended gross margin to narrow from 16.2% in 2018 to 15.8% in 2019.

• BYD's shares closed at HK$47.25 on 21^st June 2019.

• PE Ratio = 44.533x.

• PB Ratio = 2.207.

• Dividend yield = 0.504.

• Looking at BYD's daily price chart, BYD is making higher lows since 23 May (Low = HK$44.3), 6 June Low = HK$44.9 and 18 June Low = HK$45.1; after making successive lows, a solid base + support level has been formed.

• BUY at support trend line = HK$45.3; target = HK$50.5, representing upside = 11.5%; cut-loss price = HK$43.5 (3% below the low of 6 June).

I, Michael Fung, am a licensed person under the Securities and Futures Commission. Until the date this commentary was published, neither I and/or my affiliates are the beneficiary of the securities mentioned herein or are entitled to any financial interests in relation thereto.

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