BYD Electronic Upgraded by Macquarie on AI Server Growth Prospects

Macquarie has upgraded its rating on BYD Electronic (0285.HK) to “Outperform” from “Underperform,” anticipating a significant earnings recovery fueled by the company's growing presence in the artificial intelligence infrastructure market. The brokerage also increased its 12-month price target for the company by 18% to HK$29.22.

AI Infrastructure to Drive Recovery

The upgrade comes despite a weak first-half 2026 performance, where BYD Electronic's net profit plummeted 75.4% to 426 million yuan, which Macquarie attributed to weakness in smart-terminal components and heavy upfront investment in AI. However, the brokerage sees an earnings trough giving way to a recovery in the second half, with the fourth quarter marking a key inflection point.

Macquarie identifies AI infrastructure as the most significant growth opportunity. The firm forecasts BYD Electronic's AI-related revenue will reach 3.7 billion yuan in 2026 and grow to 6.6 billion yuan in 2027. Key developments supporting this outlook include:

• Server production deliveries to one of China's top three internet companies are expected to begin in the fourth quarter of 2026.
• Volume production of liquid-cooling products for next-generation systems is slated to start in September.

Mixed Outlook for Core Segments

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While AI provides a strong growth catalyst, the performance of the company's other divisions is mixed. The automotive business remains a bright spot, with New Energy Vehicle (NEV) component revenue rising 6.4% in the first half. Macquarie expects this segment to accelerate, forecasting 37% year-on-year growth in the second half of 2026.

Conversely, the smart terminals segment continues to be a near-term drag, with component revenue falling 13% in the first half due to specification changes at a major overseas customer. Macquarie expects a further 5% decline in the second half, though profitability may improve in the fourth quarter on the back of new Android flagship launches.

Valuation and Forecasts

Reflecting the shifting business mix, Macquarie has adjusted its financial forecasts, cutting its 2026 net profit estimate by 33% but projecting an 83% year-on-year increase in net profit for 2027. The new price target is based on a sum-of-the-parts valuation, applying higher multiples to the high-growth AI and NEV businesses compared to the legacy smart terminals division.

Macquarie noted that key risks to its thesis include weaker-than-expected demand for major smartphone models, a potential slowdown in Chinese AI capital spending, and the company's high dependence on parent company BYD for its NEV component business.