Auto Industry

Buy – and hold for life

Warren Buffett reaffirms his commitment to BYD despite flagging sales

Buy – and hold for life

In it for the long haul: Buffett

Before Warren Buffett visited BYD’s operations last week, there was some speculation that he might ditch some of his 10% stake in the carmaker. After all, the value of his initial investment was worth more than six times what he paid to buy into the company two years ago. It’s the kind of quick return that investors dream about. But Buffett isn’t interesting in cashing out just yet. He told state-broadcaster CCTV that he would be keep ing his BYD shares for “many years” and “probably past my lifetime”.

Not all investors have his patience. Although BYD shares are currently much higher than in September 2008 (the date Buffett bought into BYD), they were doing even better this time last year. The stock price is down about 20% from the start of the year.

No company could live up to the hype that BYD got after Buffett’s initial investment, John Casesa, managing partner of a New York auto industry advisory firm, told Bloomberg. “BYD would have to do everything absolutely perfectly to live up to the expectations of the market at the peak stock price, and no company does everything perfectly.”

Indeed, the news in recent months has made BYD look less than stellar. The company’s second quarter profit of Rmb717 million ($107 million) fell well below the forecasts of analysts surveyed by Bloomberg. And third-quarter earnings are “going to look ugly” another analyst told the newswire, though things should start to pick up at the end of the year.

Disappointing profits are mostly due to poor sales: in August, the company reduced its 2010 sales outlook by 25% to 600,000.

This is partly due to poor sales of a key model, the F3, a compact car which was China’s bestselling vehicle last year. Competition from other manufacturers has heated up, and the car has started to look outdated. CBN Weekly reports that while Wang Chuanfu’s company is often praised for its R&D expertise, the F3’s reliability has also been questioned – some drivers have seen their car batteries explode.

Slower sales then hit forward distribution, with a number of BYD’s nearly 1,000 dealers pulling out of the sales network, reports Reuters. CBN Weekly adds that it is an “open secret” among BYD dealers that they’ve had to resort to rebates to get surplus F3s off their forecourts.

When Buffett bought his stake in BYD, much was made of the company’s potential as a manufacturer of electric and hybrid cars, exploiting its background as a battery maker. But conventional cars still make up most of BYD sales. The company says it has plans to export its E6 electric car to the US by the end of the year, although it has been saying something similar for a while. Some analysts think second half of 2011 is the earliest possible launch date. Its hybrid F3DM has sold poorly in the company’s Shenzhen home base too, in spite of government subsidies and a 33% price cut to Rmb100,000. Potential buyers are also being put off by the lack of battery-recharging facilities.

One announcement last week does suggest that BYD is working towards fulfilling its green promise. The company revealed the K-9 e-bus, an environmentally-friendly vehicle that can go 190 miles on a single charge. A contract has been signed to supply 1,000 buses to the Hunan provincial government.

There have been other difficulties this year, in the form of legal action. BYD has been named in a lawsuit by the Ministry of Land and Resources, which is looking into whether the company built factories illegally on farmland. Electronics assembler Foxconn is also suing BYD, accusing it of stealing trade secrets.

Despite all of this, Buffett professed confidence in BYD’s future last week. The company’s stock ended the day up 6%, pushing it to a three month high. Forget the brave new world of zero-emission engines. Sometimes its just as good to have an old-school investor as powerful as Buffett on board.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.