Semi detached

Warren Buffett: new BYD payday?

When BYD listed on the Hong Kong Stock Exchange in 2002, its main focus was rechargeable batteries for mobile phones. Investor enthusiasm was limited and it was only when Warren Buffett bought into the company at the height of the global financial crisis in 2008 that its share price started to take off.

The Sage of Omaha has made a pretty spectacular profit on the 10% stake he acquired for HK$8.01 a share. Today BYD is trading at HK$151.3 level and the company is leading the charge in China’s transition to electric vehicles (EVs).

Equity investors will be hoping to emulate Buffett’s returns with the forthcoming spin-off of the company’s chipmaking arm, BYD Semiconductor. BYD Semi’s directors have just approved a listing on Shenzhen’s ChiNext board, no doubt inspired by their nearest domestic competitor StarPower, which has enjoyed a spectacular rally since listing on Shanghai’s Nasdaq-equivalent STAR Market in January last year.

It raised Rmb510 million ($74 million) from an IPO that was priced at Rmb12.74 per share. Quite a few STAR Market debuts have soared in the immediate aftermarket before crashing back in the weeks that follow. But not StarPower, which hit its daily 10% trading limit for almost a month. Its shares are currently trading at Rmb210.82 or a lagging price-to-earnings ratio of just under 200 times, according to S&P Global Market Intelligence data.

That might sound like a punchy valuation. However, BYD Semiconductor’s most recent pre-IPO funding round was priced at almost 300 times lagging earnings, based on 2020 net income of Rmb32 million.

S&P reports that BYD Semi sold a 28.055% stake for Rmb2.69 billion in May 2020 to a group of investors led by Sequoia China. Another prominent investor was Himalaya Capital run by Li Lu, the Chinese-born private equity investor famous for introducing Buffett to BYD.

Both BYD Semi and StarPower specialise in making the type of semiconductors used in electric vehicles ­ – a sector earning widespread attention, with two very important trends in its favour.

Firstly, there are supply constraints that have been buoying chip prices.

Secondly, the Chinese government is very keen to reduce its carmakers’ dependence on foreign chip manufacturers (on concerns that they could be held hostage to geopolitics in the same way that Huawei has been hampered by the US in smartphones).

In this instance, the leading international chip supplier is Germany’s Infineon, which enjoyed a 58% market share in IGBT chips (Insulated Gate Bipolar Transistors) in China in 2019, according to Citic Securities.

This type of power chip converts the energy produced by an EV battery from DC to AC current. IGBTs are sometimes described as the CPUs (or brain) of electric vehicles: each new technological iteration helps to reduce power losses and extend the driving ranges of cars before they need to be recharged.

There are signs that Chinese suppliers are securing a bigger share of the market. Guosen Securities estimated recently that the three domestic IGBT manufacturers (BYD, StarPower and CRRC Times) now have a combined 20.4% global market share. But until relatively recently, very few people even associated BYD with chip manufacturing. BYD Semi’s chief executive acknowledged this to the Science and Technology Innovation Board Daily, explaining that “the outside world has a certain perception about BYD involving cars and batteries”.

“We’ve only started to become known for chips in the last couple of years,” he added.

When BYD launched its new flagship sedan, the Han, last summer it did not heavily promote that the car was using a self-produced silicon carbide (SiC) transistor either.

This is a new type of technology, which is expected to displace IGBT in the years ahead (Infineon first introduced it in 2001, but the cost-to-yield ratio has not tipped in its favour).

Batteries and power chips are the two most costly components in production of EVs. And BYD is becoming a leader in both – although in the case of battery standards it is locked in a fierce struggle with its chief local rival CATL (see WiC499).

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