Auto Industry

Stock driven down

Buffett’s BYD needs to rediscover fifth gear

Stock driven down

It all sounds a little counter-intuitive. On June 30, carmaker BYD Auto lists on the Shenzhen stock exchange and on its first day the stock jumps 41%. And that despite announcing the day before debut that first quarter profits were down 84%. As of yesterday it was trading at Rmb30, well up on the opening price of Rmb18.

In fact there was another bleak statement from BYD on Tuesday too: expect first half profit to drop 95% on last year.

The impact? Shares in Shenzhen did decline, by 3%. But compare that with the investor mood in Hong Kong, where BYD stock is down by almost half this year, and can be purchased for about a third less than its Shenzhen equivalent.

Or take the wider picture of slower growth in Chinese auto sales after a bumper 2010. In fact, last year was disappointing for BYD relative to its peers, with sales increasing by half the industry average. Company bosses slashed prices to clear backlogs of their erstwhile bestselling F3 model.

WiC first mentioned BYD in a Talking Point in issue 11 and the company, led by Wang Chuanfu, is quite well known internationally, largely thanks to a $232 million investment from Warren Buffett’s Berkshire Hathaway.

“I don’t understand the product, so I am betting on the man,” Buffett commented at the time.

The punt paid off spectacularly, as the stock soared from Buffett’s entry price. More recently, it has given back a chunk of that gain, with sales of its conventional, gasoline-engine cars missing targets.

But BYD is also struggling to deliver on its much-hyped clean tech pedigree, which was expected to translate into a leadership position in ‘green’ vehicles. Despite the early fanfare, the company has sold just 418 all-electric models, according to the prospectus for the Shenzhen share offering.

Company bosses insist that the technology for electric vehicles is ready. The problem, as Southern Weekly notes, is that drivers aren’t prepared to pay a price premium of almost Rm100,000. Without government subsidies, that is too much to recover in petrol savings.

No matter: Berkshire Hathaway has said it will be sticking with BYD, according to Charlie Munger, Buffett’s longtime colleague. “The stuff they’re doing is difficult. They have 20,000 engineers working on it,” the 87 year-old told an investor group at the start of this month. “I think I will hold my BYD stocks while it works out. All the way till the end.”

In the meantime BYD has been doubling down, reports Southern Weekly, with Rmb25.6 billion of investment ploughed into the business over the last three years. This is intensive stuff, the magazine says, as the company keeps its research and production in-house, rather than outsource. To do so, it has borrowed heavily from the banks, against the increasing land value of many of its factory locations.

So why has the stock price in Shenzhen done so much better than anticipated, especially when investor patience with BYD is running thin outside China (Warren and Charlie excepted)?

Blind faith, says Southern Metropolis Daily. Many of BYD’s new shareholders are only backing it because they know Buffett remains a big shareholder.

Others are second-guessing government plans for the sector, with speculation of an extra Rmb100 billion in policy support. The latest plan for new energy vehicles has been completed, and has gone to the State Council for approval. Details are yet to be confirmed but investors hope BYD could be a major beneficiary.

So too, it seems, do company executives, who have been begun a push into the electric bus market, primarily for sales to municipal governments. That makes sense, as the high cost of lithium battery technology will account for a much smaller percentage of the sales price. More importantly, bus purchasers will be spending government money, rather than their own.

BYD has also focused on bus and taxi sales in its hometown of Shenzhen, where it has signed deals to provide hundreds of electric vehicles to the local government. This seems to be a part of promoting its Shenzhen origins. Wang himself has been appearing in a high-profile billboard campaign in the city, plus there was the Rmb1.42 billion Shenzhen stock market debut, the majority of which the company says it will spend in its hometown.

If BYD is going to electrify the vehicle market, it looks like Shenzhen will have to lead the way.

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