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BYD still has Warren Buffet’s confidence

“Our investment in BYD isn’t over,” said business tycoon Warren Buffett at a press conference, part of Berkshire Hathaway’s annual shareholders meeting held in Omaha in early May.

Buffett’s remarks responded to the rumor that he was planning to withdraw investment from BYD, a leading Chinese battery and electric vehicle maker based in Shenzhen which failed to meet expectations for its earnings report over the past year.

Buffett said it was wise for him to invest in Chinese stocks like China National Petroleum Corp. (CNPC) and BYD, adding that he was optimistic about the outlook of those stocks.

“We didn’t use to look at Chinese stocks that much, because we usually pay attention to companies that have huge capital and asset scales,” Buffett said. “The CNPC case was very successful, and then we bought BYD’s shares two years go – we’re not done with them yet.”

Buffett revealed he has made $3.5 billion from CNPC stocks and was looking to find a similar company to invest in.

Some analysts believe Buffett is sending a message that he will not sell the shares of BYD in the short term. But others have warned that for all his confidence, Buffett may end his investment in BYD earlier than expected if the company’s financial reports keep worsening.

Earlier reports said that the Capital Research Global Investors, which used to hold 6-7 percent position in BYD, pulled out early this year, buying 5 percent of General Motors.

Rental services come first

Shares of BYD had declined by 12 percent for two consecutive days after the news of Buffett’s prostate cancer diagnosis broke out. But BYD stocks rebounded immediately upon Buffett’s firm remarks at the press conference.

Berkshire Hathaway has bought 225 million shares of BYD, with a shareholding ratio of 9.56 percent. It is reported Buffett’s company is sitting on paper profits of more than 3 billion Hong Kong dollars made from its BYD investment.

Charlie Munger, vice chairman of Berkshire Hathaway who recommended Buffett invest in BYD, said at last year’s shareholders meeting that he would help the company enter the U.S. market. Recently, Munger hinted at the first practical steps to such a move, suggesting BYD join the car rental market in California as a way of marking its entry in the States.

But when asked about the projected sales of BYD electric cars in the U.S., Munger said they will be “very limited.”

Munger added that the U.S. government should subsidize BYD and its zero-emission products just like it does with the wind power sector and other green technologies. The investor also disclosed that he had test driven BYD’s latest plug-in hybrid electric car Qin, which had amazed him with its improved performance.

Addressing the North American market, Stella Li, senior vice president of BYD, said the company will approach this market first with taxi and electric bus products. However, plans do not yet exist for entry into the private consumer market.

BYD’s chairman Wang Chuanfu had claimed to introduce the company’s e6 electric car to the U.S. market as early as 2010, but that goal has not been actualized. According to BYD America vice president Michael Austin, the delay is caused by BYD’s U.S. sales license, which will not be granted until end of the year. Austin said first deliveries will go to fleet operators such as Hertz. 

Focus on products

“Buffett and Munger have even more confidence than we do, which relieves some of the pressure on BYD. We just have to focus on providing good products,” said Stella Li, when she was interviewed by one of China’s biggest news portals sina.com after the Berkshire Hathaway annual meeting.

BYD’s earnings had declined by 40 percent in the first quarter of 2012 and now its stocks are only worth 29 percent of their peak values. But confidence from decision makers in Berkshire Hathaway has calmed BYD’s other investors as well as the company’s own management.

“BYD’s good management and core technologies, which caught the interest of our investors in the first place, have not changed,” said Li, adding she has received much encouragement from Buffett and Munger at their personal meetings. “Munger told us he doesn’t care much about the temporary stock fluctuation, and he believes we are a great company and we are doing a great thing.”

As a China-based pioneer looking to tap the American market, Li said BYD’s competitiveness comes from the quality of its product. “BYD is no longer boasting a cheap price as its competitive edge.”

 

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