Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) has recently sold another 3.297 million shares in Chinese electric vehicle maker BYD Co. Ltd. (HKSE:01211, Financial) (BYDDY, Financial), according to a Nov. 4 filing with the Hong Kong Stock Exchange. We won't find this holding on Berkshire's 13F because the firm invested in BYD's Hong Kong-listed shares under the HKSE:01211 ticker, though investors do have the option of choosing the stock's American depository receipts under the BYDDY ticker.
The value of the shares that Berkshire sold on Nov. 4 is estimated to be around 560.05 million Hong Kong dollars ($71.35 million). This lowered Berkshire Hathaway’s ownership in the stock from 18.22% to 17.92% of shares outstanding.
While not substantial in and of itself, this sale is just the latest of many as Berkshire has sold approximately $600 million worth of BYD stock since mid July 2022 according to trade data from the Hong Kong Stock Exchange. Since Berkshire began selling, shares of BYD stock have fallen by over 30%, though Buffett still has a stake worth approximately $5.6 billion that has multiplied many times since the original buy price.
How much has Berkshire made on BYD?
Berkshire Hathaway originally invested into BYD back in 2008, when Buffett purchased a stake worth approximately $230 million. Since that point, the value of the position ballooned to a high of $9.3 billion before correcting down to $7.7 billion and now ~$5.6 billion as of this writing, including the sale of parts of the holding over time. This has been one of Berkshire Hathaway’s most successful investments as it has made between 26 times and 35 times its initial investment based on my calculations (note, it's impossible to estimate the exact profit because we don't have complete trade history data). To put things in perspective, if you invested $50,000 into BYD's American depository receipts stock in 2008, you would have made approximately $1.5 million by today (at 30 times your money by mid-range estimates).
Why did Buffett begin selling?
We have no way to know why Berkshire Hathaway has sold some of its BYD stock, not unless Buffett makes public comments on the topic. But we do know Buffett has made tremendous gains on the position, so taking some profits would not be crazy.
Perhaps it was to free up cash for other investments. Berkshire Hathaway has been aggressively buying stocks in other companies. The most popular stock Warren Buffett (Trades, Portfolio) has been buying recently is Occidental Petroleum (OXY, Financial). Berkshire loaded up on shares aggressively in the second and third quarters of 2022, at an average price of between $57 and $64 per share. At the time of writing, the share price of Occidental is close to $73 and thus Buffett has already made a profit of between 20% and 30%. Berkshire Hathaway now owns nearly 30% of all outstanding shares of Occidental Petroleum, which makes Buffett the largest shareholder.
There also could be other factors that influenced the sale of BYD. The S&P 500 is down 20% from its all-time highs, so some might say there are now plenty of value opportunities in the U.S. stock market.
In addition, the increasing tensions between the U.S. and other countries, especially China, could also be a contributing factor. Buffett is known as a conservative investor who likes to keep a lot of cash on hand, so given the tough geopolitical environment, it certainly seems possible he might want to limit exposure to international stocks.
The U.S. inflation rate has risen from 2.6% in March 2021 to a high of 9.1% by June 2022. To respond to this, the Federal Reserve has raised interest rates in order to slow down an overheated economy, and a side effect of this is a strengthening U.S. dollar, which naturally devalues foreign earnings for U.S. investors who have to convert to the dollar. I think the stronger dollar is also a point in favor of reducing international exposure.
Buffett was originally hesitant to invest in BYD
Despite BYD being one of Berkshire Hathaway’s most successful investments, Buffett took some convincing to make the investment. In a video interview on my YouTube channel Motivation 2 Invest, Mohnish Pabrai (Trades, Portfolio), who is friends with Buffett's right-hand man Charlie Munger (Trades, Portfolio), told the story of the investment. Munger was the key instigator behind the investment into BYD after he was impressed by the company's founder, Wang Chuanfu. Munger described the founder to Buffett as a combination of “Thomas Edison, Henry Ford and Bill Gates (Trades, Portfolio)” all rolled into one. This convinced Buffett to invest, although he decided to purchase the stock through Mid-American Energy, of which Berkshire Hathaway owned ~80% of at the time. Therefore, as Buffett had to be convinced to invest into BYD by Munger, one could reason that he would have less of an issue selling the stock.
Strong financials
BYD surpassed Tesla (TSLA) in the first half of 2022 with the highest number of electric vehicles sold over the period. BYD sold 641,350 electric vehicles, up a rapid 315% year-over-year, vs. Tesla which sold 564,000 EVs.
In the third quarter of 2022, BYD continued to generate strong financial results. The company achieved $16.5 billion (or approximately 117 billion Chinese yuan) in revenue, which increased by 115% year-over-year. BYD is also massively profitable and generated $1 billion in operating income, up a blistering 350% year-over-year.
BYD did report its cost of revenue doubling to over $1 billion vs. the prior-year period. This is not a great sign and is likely driven by the high inflation environment and supply chain challenges.
BYD has a solid balance sheet with $6.7 billion in cash and short term investments and total debt of $3.6 billion. This is manageable as just $945 million of this debt is current (due within the next two years).
Valuation
BYD trades at a forward price-earnings ratio of 50 based on analysts' estimates for full year earnings, which isn’t exactly cheap (especially for Buffett). However, it does trade at a price-sales ratio of 1.53, which is 87% cheaper than its five-year average.
The GF Value calculator estimates a fair value of $77 per share for the American depository receipts. This means the stock is “significantly undervalued” relative to GF Value.
Final thoughts
BYD is a leading electric vehicle company that is still generating strong financial results despite a difficult economic and market backdrop. Thus, I think it's more likely that Buffett has been selling off some of his position in order to free up capital for other value investments, not because BYD is struggling. The decline in BYD’s share price since Buffett began selling has meant the stock is trading much cheaper at the time of writing. However, given the macroeconomic environment, there are many stocks that are trading much cheaper and don’t have the risks associated with EV stocks.
