Macquarie upgrades BYD Electronic on AI infrastructure growth outlook

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Macquarie upgraded BYD Electronic to "Outperform" from "Underperform" on Monday, citing an expected earnings recovery from the second half of 2026 as server manufacturing and liquid-cooling businesses ramp up. The brokerage raised its 12-month target price by 18% to HK$29.22 from HK$24.70. BYD Electronic reported a weak first half, with revenue rising 2% year-on-year to 82.2 billion yuan while net profit plunged 75.4% to 426 million yuan, due to weakness in smart-terminal components, product-specification changes at major overseas customers, foreign-exchange losses, and heavy upfront investment in AI infrastructure. Macquarie expects the earnings trough to give way to a recovery in the second half, with the fourth quarter marking a more meaningful inflection, driven by smartphone launches, higher utilisation, liquid-cooling mass production, and a ramp-up in server shipments. The biggest growth opportunity is AI infrastructure, with management guiding 2026 server revenue of 3 billion yuan to 5 billion yuan and liquid-cooling revenue of about 300 million yuan to 500 million yuan; Macquarie forecasts AI infrastructure revenue of 3.7 billion yuan in 2026 and 6.6 billion yuan in 2027. Server production deliveries to one of China's top three internet companies are expected to begin in the fourth quarter of 2026, and the company is preparing for volume production of liquid-cooling products for next-generation Vera Rubin systems from September. The automotive business provides another growth driver, with NEV component revenue up 6.4% in the first half and expected to grow 37% year-on-year in the second half. Smart terminals remain a drag, with component revenue down about 13% in the first half, but Android flagship launches from September to November should improve utilisation and fourth-quarter profitability. Macquarie expects net profit to rise 83% year-on-year in 2027 after two years of declines, and it cut its 2026 net profit forecast by 33% and 2027 by 1% while raising its 2028 estimate by 4%. The new target is based on a sum-of-the-parts valuation, applying 12 times 2027 earnings to smart terminals, 15 times to NEV components, and 25 times to AI computing infrastructure, implying an expected total shareholder return of 18.6% from the Aug. 28 price of HK$24.76. Key catalysts include the September iPhone launch and third-quarter results, while risks include weaker-than-expected iPhone and iPad sales, dependence on BYD for about 80% of its NEV component business, and a potential slowdown in Chinese AI capital spending.

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