Taking profit

Will he dump all his BYD shares?

When Warren Buffett buys shares in a company, it is terrific news for the other shareholders. The broader market immediately takes note, bidding up the price for the stock.

The reverse can be true when the Sage of Omaha decides to sell his holdings. Other investors then take fright, figuring that they should be heading for the exit with Buffett.

That’s the dilemma facing some of the shareholders in BYD Auto this month, following confirmation that Berkshire Hathaway has begun to sell down its holdings in China’s leading electric vehicle maker.

Investors have been watching closely since the end of June, when 225 million shares in BYD appeared in the clearing and system at Hong Kong’s stock exchange – that’s because that was the exact same amount Berkshire first bought in the EV firm in 2008. Selling started almost immediately on fears that Buffett was preparing to exit. The shares dropped sharply again last week, when there was confirmation of the first actual sales, and the price has continued to decline on news of further divestments from Berkshire.

In total, BYD’s stock is now down about 30% on its peak in May.

Company executives have called for calm, with an unnamed insider telling the 21CN Business Herald last week that there was “no need to over-interpret” the share sales. It’s also the case that Berkshire has only trimmed its position – selling less than 10% of its 225 million shareholding. That hasn’t stopped the speculation about why Buffett wants to reduce his position at a time when BYD has emerged as China’s largest maker of electric cars with a share approaching 30% of the market.

Indeed, the company has just reported record profits of Rmb3.5 billion ($500 million) for the first half of the year, more than triple the levels of a year earlier, and there were further celebrations this week when it leapfrogged South Korea’s LG Energy in battery sales, trailing only local rival CATL in market share as demand for clean cars goes mainstream.

The surge in BYD’s share price had been impressive, with its stock jumping 31% last year and a massive 423% in 2020. Berkshire’s long-term gains on the stock are even more fantastic. But of course, in this kind of context BYD may simply be a victim of its own success, with Berkshire deciding that it is time to reinvest its profits in more attractive opportunities.

“Berkshire has benefited greatly from what BYD’s done – they’ve made wonderful money,” Cole Smead at investment firm Smead Capital Management told Bloomberg of Buffett’s decision to trim his position. “He’s watched it grow and now based on the price the open market is giving right now, he’s saying: I’m willing to take money off the table to go elsewhere.”

There could be other reasons for caution, analysts claim. One concern is that the company hasn’t been able to absorb higher materials costs in price hikes for its vehicles, with gross profit margins in the automotive segment showing a meaningful decline. The fear is also that margins could shrink again as BYD broadens its sales push into markets outside China, where it is yet to make significant progress.

Another warning is that the costs of manufacturing BYD’s batteries are notably higher than those of its main rival CATL, even though some believe that BYD’s battery design is better positioned to meet longer-term demand.

A pullback in state subsidies for purchases of new energy vehicles in its home market could constrain profits in the nearer future as well – another concern when the company benefited from more than Rmb5 billion in subsidies last year.

Other commentators are convinced that BYD is superbly positioned as the rest of the market starts to transition to new energy vehicles. They praise the vertical integration across BYD’s business model, which has helped it to boost production at a time when competitors have been scrabbling for parts and supplies. And they have also nicknamed the company as the “Huawei of autos” for the way that its business covers consumer products, key components and emerging technologies. More riches await, they hope, even if Buffett isn’t around to share them.

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