Electric reaction

What’s that old proverb about being measured by the company that you keep?

In the case of BYD Auto, the saying has seemed like something of a mixed blessing this month after China’s biggest manufacturer of electric vehicles (EV) made headlines in two stories that featured Tesla and Berkshire Hathaway.

In the first case at the start of July, there was fanfare in the media when BYD powered past Tesla into pole position in global EV sales, selling more than 640,000 vehicles in the first six months of this year compared to Tesla’s nearly 570,000.

At first glance, it seemed like a landmark moment. Sales growth of more than 300% year-on-year was definitely worth celebrating as well. But BYD can’t really be said to have seized Tesla’s electric crown quite yet. Although all of its cars are classed as “zero emission” vehicles under Chinese rules, just under half of this year’s sales have actually been plug-in hybrids, so they are not fully electric in the same way as Tesla’s fleet. For now, at least, Elon Musk’s firm still rules the EV roost.

Of course, the fact that BYD is even being talked about as a serious challenger to Tesla is good news for the carmaker. And soon afterwards BYD was being mentioned in rarefied circles once again, this time in relation to Warren Buffett’s investment flagship.

On this occasion the association wasn’t quite so beneficial, however, as BYD’s shares dipped dramatically on speculation that the fabled investor was selling the stake that he bought in the battery producer and carmaker almost 14 years ago.

Buffett’s stake has always been brandished as a badge of honour by investors in BYD, helping it to stand out in an increasingly crowded market. But the flip side of that situation wreaked havoc last week when the stock dropped more than 10% in Hong Kong on concerns that Buffett was heading for the exit.

What happened was that the bourse’s clearing system recorded a massive 225-million-share increase in the BYD holdings of one of the brokerages. That was an identical number of shares to Berkshire’s most recently reported position in BYD’s Hong Kong-listed shares, sparking fears Buffett was preparing for a block trade with a new buyer or even dumping the stock in the open market.

Few would have blamed Buffett for cashing in his stake. BYD’s shares have been on a heady ascent, posting gains of nearly 300% over the two years to the beginning of July. The 225 million BYD shares Berkshire Hathaway bought in 2008 were worth only $230 million. The stake’s value had inflated to nearly $9.3 billion before the recent slide in share price.

Buffett has only invested in two Chinese firms. The other was the oil major PetroChina, in which he bought a $500 million stake in 2003 and sold at a profit of $3.5 billion four years later. Presciently, his divestment came two months before PetroChina’s share price hit an all-time high, and the value of the oil producer has slumped more than 80% since.

No wonder investors were soon panicking that if Buffett felt it was time to depart, they should be doing the same, despite reports in the Securities Times that BYD was saying that the exchange in Hong Kong hadn’t received any notifications on insider selling.

CBN, a local business newspaper, then did more digging into the sudden drop in the share price before deciding it was all the result of a misunderstanding in the market.

In a change of approach the Hong Kong stock exchange was requiring that physical shares be replaced by electronic ones, it explained. But before getting into the clearing and settlement system the shares first had to pass through brokerage channels – the process that had caused all the panic.

The reports helped BYD’s shares to pare back some of their losses, although the stock was still more than 8% down at the end of the week after a sell-off that wiped out about HK$78 billion ($9.9 billion) of its market value.

HSBC’s Yuqian Ding was still very positive on BYD’s prospects in a new research piece this week, noting that sales of new energy vehicles in China (pure electric and hybrids) raced to 27% of the total market in June, reaching a record high of 531,000 units. BYD is well positioned to profit, HSBC’s head of China Auto Research added, with a continuous rollout of new products this year and next.

Other have applauded the company for avoiding the worst of this year’s supply chain sclerosis (helped by the fact that, unlike Tesla, its Chinese operations aren’t based in Shanghai, admittedly). Also in BYD’s favour, commentators say, is its vertically integrated business model in which it produces its own semiconductors and batteries for its vehicles.

Another reason for confidence in its prospects is that its battery business is starting to sign bigger contracts to supply other carmakers, meaning that it isn’t wholly reliant on sales of its own EVs for revenues. It is even reported to have a deal in place to supply Tesla with battery technology from later this year, which could spur further orders from other customers, Ding reckons.

BYD certainly seems ready to seize the moment, with reports in Jiemian that it has plans to ramp up output to as many as 300,000 plug-in cars a month over the remainder of the year. That’s spectacularly ambitious, given that it sold fewer than 600,000 units across the entirety of last year.

As of now, the company operates six manufacturing plants in China. BYD is also building three more production bases in Zhengzhou, Jinan and Xiangyang, two of which are expected to be operational by the end of this year.

There was a voice of caution on the plans to go into overdrive, however, from Anjani Trivedi, a columnist at Bloomberg. One major risk that could be emerging is a crunch in lithium supply as demand soars from battery makers across the sector, she warned.

“Whether it’s Buffett’s stake or someone else’s, investors are skittish around raw material supplies and costs, no matter how vertically integrated a company is, or how good sales forecasts look,” she concluded.

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