A Shenzhen-based electric battery maker Warren Buffett (Trades, Portfolio) backed a decade ago has erased the gains it made since September in a tumultuous year that at one point saw the stock rise high enough to land it as one of his largest holdings.
Buffett invested $232 million into BYD Co. Ltd. (OTCPK:BYDDY, Financial) in September 2008, taking a 10% stake with 225 million shares for about HK$8, or US$1, each. In his shareholder letter that year, Buffett called it in passing, “an amazing Chinese company.” Slightly more than one year later, in October 2009, the company’s stock reached $10, and Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) listed it as one of the biggest stakes in his portfolio.
Started in 1995, BYD (SZSE:002594, Financial) has become China’s largest manufacturer of battery-powered automobiles, buses and other vehicles, with a robust handset business. Buffett, the company’s largest stakeholder, has praised its founder, Wang Chuanfu, comparing him to Thomas Edison and Bill Gates (Trades, Portfolio), and attributed the idea for the investment to his business partner, Charlie Munger (Trades, Portfolio).
“BYD, Charlie’s in love with the company,” Buffett said on CNBC in February. “And It’s done very well. And the fellow that runs it, does autos and batteries, but he’s got big, big ideas and he’s very good at executing.”
But BYD’s share price plunged in the following years to almost as low as Buffett’s purchase price, and it disappeared from Buffett’s top holdings after 2010. Then, in September and October, the price suddenly sprung by around 70% to above $10 for the first time since 2010.
Bringing the shares to life was the Chinese government’s Sept. 11 announcement that it was considering a ban on the manufacture and sale of fossil fuel-powered vehicles. The move would “boost new energy vehicles,” the country’s Xinhua newspaper reported, without giving details on a timetable. China would be following in the footsteps of other countries like France and Britain, who have also considered phasing out non-electric vehicles.
BYD Chairman Chuanfu said in September that he believes the ban will take effect by 2030, Reuters reported.
With no further news, the exuberance on the stock fizzled, dropping the price to $5.80 per share Wednesday afternoon, back to just below its early September level and down 35% year to date. Adding pressure to the stock is the reality that China will end subsidies for electric vehicle manufacturers, which started in 2010, by 2020. Reductions in subsidies already contributed to the company's expectation of a decline in earnings for the first half of 2018 between 71% and 83%.
As subsidies wane, the company faces the challenge of increasing profitability through other avenues. One of its most substantial recent moves is its $1.5 billion investment in what will become the world’s largest vehicle-battery factory, which is slated for completion in 2019 with a goal to quadruple the company's capacity for manufacturing batteries.
Assisting its transition is a burgeoning market in China, where demand for electric vehicles continues to strengthen. Sales of new energy vehicles in the country grew 53.3% in 2017 to 777,000 units, making it the world’s fastest growing market. BYD sold 110,000 units for the year, an increase of 15% year-over-year. The numbers leave significant room for expansion of electric vehicle sales, with Chinese consumers purchasing 28.9 million automobiles in 2017, an increase of 3% from the prior year.
BYD’s revenue rose 2.4% for 2017, with growth across its three segments: automobiles, handsets and rechargeable batteries. Earnings per share declined to 21 cents from 27 cents the prior year, primarily due to lower subsidies and stronger competition.
