Economy, Talking Point

Sage words on China

Why Warren Buffett’s Chinese devotees are watching his every move


Eye on China? Warren Buffett’s trip to Beijing has investors speculating about what he might buy

After cajoling Warren Buffett to make his first-ever trip to China in 1995, Bill Gates asked his old pal what he would like to eat during the 17-day jaunt.

“I don’t eat any Chinese food,” Buffett responded. “If necessary, serve me rice and I’ll just move it around on my plate, and I’ll go back to my room afterwards and eat peanuts.”

The Microsoft chairman then sent people ahead to ensure that hamburgers and french fries were made for the Sage of Omaha on his Chinese travels. But 18 years later, has Buffett evolved more of a taste for China? This was the hotly discussed topic in recent days following the recent annual meeting of Berkshire Hathaway, as well as a trip by Buffett to Beijing.

Were Chinese fans at the Berkshire gathering?

Known affectionately as ‘Woodstock for Capitalists’, the Buffett-fest attracted a record turnout of fans from China this year. The 21CN Business Herald reported that more than 400 Chinese investors were among the crowd of 40,000 faithful at the event in Nebraska. Most of the Chinese attendees were fund managers, together with some photo-taking ‘study groups’ organised by Chinese business schools. Nearly every major Chinese financial media group sent reporters too.

Buffett and his business partner Charlie Munger took nearly 60 questions in a six-hour session this year. But of these, only one Chinese shareholder was able to ask a question. He wanted to know more about Berkshire’s emerging markets strategy, particularly in China.

Chinese whispers from Warren?

“If you told me we could only invest in the United States for the rest of our lives, we would not regard that as a huge hardship,” Buffett replied. Berkshire doesn’t start out looking to particular countries, he went on, be it China or India, as “our strength isn’t there in market evaluation”.

He then suggested that he had “no edge” when it came to analysing China.

Typical Buffett simplicity. But when Chinese reporters took the same message home, something seems to have got (totally) lost in translation. Many newspapers ran headlines along the lines of “Buffett sees China has no competitive advantage”. The Beijing News, for instance, reported that Buffett had no plans to invest in China as he sees no “competitive advantage for the world’s second largest economy”.

Puzzled, the Securities Daily ran a front-page article asking whether “Buffett has joined the chorus badmouthing China?”

So the biggest Chinese takeaway from the Berkshire meeting this year seems to have been a misquote and a general sense of misunderstanding.

His early bets on China?

In 2003, when Buffet started making his first serious punts on foreign stocks, his first move was in China.

Back then, what led Buffett away from his famed idea of a “circle of confidence” (avoiding investments in unfamiliar areas) was the risk of a declining US dollar. So he started moving further afield, beginning by looking at Yukos of Russia and PetroChina.

He opted for the PetroChina investment (just as well: Mikhail Khodorkovsky, the owner of Yukos, was jailed four months after Buffett met him). Another explanation for the PetroChina investment was the company’s valuation at $35 billion, only a quarter of Exxon’s market capitalisation despite profits equal to 80% of the US oil giant. Better still, Buffett learned from a PetroChina annual report that the company had promised to return 45% of profits to shareholders as dividends. He invested $450 million in the Chinese oil major and walked away in 2007 with a $3.5 billion profit.

Reflecting on Buffett’s landmark stake in PetroChina a decade ago, the Hong Kong Economic Times described it as a “defining moment” that helped reshape foreign investor perception of China’s state-owned enterprises.

Why would Berkshire then invest in BYD?

Berkshire’s only other Chinese equity deal so far also fell outside Buffett’s comfort zone. BYD Auto’s ambitions in electric cars and rechargeable batteries make it the sort of high-tech firm that Buffett would normally shun. But the conviction this time came from his business partner Munger, who talked Buffett into buying a stake in BYD’s Hong Kong-listed shares for $230 million in 2008.

Before the deal, Munger had personally invested in BYD with his money manager Li Lu. Munger then sent David Sokol, at the time the head of Berkshire’s energy business, to scout BYD and meet its founder Wang Chuanfu. According to Forbes magazine, to show Sokol how BYD was making 100% recyclable batteries, Wang poured battery fluid into a glass and drank it (see WiC25). Sokol was impressed and persuaded Buffett to meet Wang personally.

At current value, Berkshire’s BYD stake is worth about $1 billion, or still four times that of its entry price. That’s not a bad return, considering that BYD is widely perceived as one of Buffett’s worst investments. But again, the beneficiaries of the deal extend far beyond Berkshire’s immediate shareholders. The real “Buffett premium”, the Apple Daily says, isn’t embedded in BYD’s share price, but in the intangibles of the international spotlight and brand value that Buffett’s investment has delivered.

So Buffett has a ‘halo effect’ in China?

In 2009, a short video showing Buffett praising Dayang Trands’ suits sent the menswear firm’s share price surging by the daily limit for four straight days (see WiC32).

Similarly, early last week Buffett reiterated that he won’t exit his BYD investment. It wasn’t the first time that he’s said that he wants to keep the shares for good (see WiC81). But the BYD share price still climbed 10% on the news.

Even rumours of interest from Buffett can help. Last month, unconfirmed reports that Berkshire might be interested in buying Suntech Power out of bankruptcy sent the solar firm’s shares up 50% in two days. In interviews with Chinese media this week, Buffett then denied he is interested in Suntech’s stock.

That leads to a tantalising parlour game about where Buffett might best invest in China. WiC’s favourite prospect? Who better than the Sage of Omaha to take a pre-IPO stake in telecoms equipment maker Huawei? Assuming that Buffett could complete the due diligence to his own requirements, he would be buying into a fast-growing global champion. And given how much Huawei is in need of his ‘halo effect’ in the US – where the firm is regularly bashed by Congressmen – he’d be able to negotiate hard-nosed terms. Wishful thinking? Perhaps. But if it helped the Shenzhen-based multinational win US orders for its networking equipment, it would make a great deal of sense.

It’s the sort of deal only Buffett could pull off…

And he was back in town again this week…

Anticipation that Buffett may be looking at another China deal was fuelled by his arrival in Beijing on Monday. Xinhua reported that he had met with Vice Premier Wang Yang, although there were few details of the purpose of the meeting. Nevertheless, the headline read “The ‘God of Stocks’ frenzy may hit A-shares again” and there was some immediate excitement in the market. BYD’s shares climbed by the 10% daily limit once more on Tuesday and solar firms and new energy stocks surged across-the-board (Buffett has invested previously in solar power stocks in the US).

In fact, Buffett’s comments on Chinese stocks were restrained, warning that the A-share market was in a restructuring phase and would need more time before another major upswing could begin. But his arrival soon had netizens buzzing with wilder speculation.

“Buffett is finally sizing up Chinese firms,” one prominent financial commentator wrote on his weibo. “He must be here for a reason or else the old man wouldn’t brave the toxic Beijing air,” thought another. Some were more specific, guessing that Berkshire is interested in buying a slice of Ping An Insurance or grabbing a share of a Chinese railway firm. Calmer heads demurred, pointing out that Wang Yang’s duties in the Chinese cabinet include overseeing poverty relief, so there is a good chance that Buffett is in town for philanthropic purposes.

Regardless, investors in China seem to have taken heart from the fact Buffett showed up at all – in the words of his biographer he is one of the “least peripatetic people imaginable”. And although this was only his fourth trip, Buffett has always been ready to play to the Chinese audience. For example, he delighted Chinese viewers during last year’s CCTV’s Spring Festival Gala by playing a ukulele. And in an interview this week, he spoke about how he thinks that Bill Gates and his wife could become good friends of China’s First Lady, Peng Liyuan. He also answered questions from ordinary Chinese that were posted online. “Perhaps Buffett is just a great marketing guy but at least he is doing his marketing in China,” one user told CCTV.

Keeping track: we reported in WiC193 that Chinese investors adore Warren Buffett as the “God of Stocks” and his meeting with Vice Premier Wang Yang in May was greeted with much excitement, fuelling speculation that Berkshire Hathaway was sizing up another Chinese acquisition.

But the real reason for Buffett’s low-key Beijing trip was revealed this week. As we reported in WiC190, China’s antitrust watchdog is now becoming a key regulatory hurdle in international M&A. And citing unnamed sources, the Financial Times suggested this week that Buffett’s visit was to secure China’s support for his $28 billion bid for Heinz. “Dealmaking is growing more complex, with companies needing to win approval from regulators in up to 100 countries,” the FT said. China eventually approved the deal to buy the famous US food firm at the end of May. (August 30, 2013)

© 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.