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Is it Time to Partner With Buffett on BYD ?

October 06, 2010 | About:
CanadianValue

CanadianValue

210 followers


I've long been interested in investing. My parents did me a great favor by presenting me with a book called "The Wealthy Barber" 20 years ago in which I discovered the power of compound interest.

I was hooked immediately.

My first few years were more focused on mutual funds and real estate. As I spoke to my investment advisor about mutual funds I was constantly disappointed in his lack of knowledge. So I started trying to learn more for myself and somehow ended up (as most value investors do) finding the Berkshire Hathaway annual letter to shareholders. I read them all. Made notes. And read them again. So I'm very interested in Buffett.

And I'm also very interested in the concept of peak oil production which I have been writing about regularly. I feel like it is an obvious supply demand imbalance that has no short term solution.

So put Buffett together with high oil prices and naturally you get to.....BYD of course.

As the share price has come off considerably in recent months I think it is time to take a deeper dive and try and determine what a reasonable entry price might be for BYD shares if a person were to hope to make a profit.

On CNBC last week Buffett made the statement that any decision to purchase additional BYD shares would be determined by price. This doesn't sound like he is thinking it is a steal at current prices.

Buffett has also made it clear that Berkshire wouldn't try to increase its current 10 percent stake in the electric car maker without the support of BYD's management.

Reuters also reported that Buffett met with BYD officials in private last night, and a "major topic" was the possibility of Berkshire raising its stake.

And as you would expect Buffett also reportedly told China's CCTV that he would "probably hold BYD stakes 10 years from now."

Unbelievable to me, there has been speculation that Buffett had gone to China to reduce his stake in BYD because the stock was off its highs of the year and because of delays to export electric cars to the United States.

Are you kidding ? Is Buffett a short term investor ? Does he sell when the price drops ? Would he get on a plane and go to China in order to sell his shares ?

With how much public info there is on Buffett, how can people be so clueless ?

Here is a link to an interview with Buffett on BYD:

http://www.cnbc.com/id/39418582?__source=RSS*blog*&par=RSS%20(24)

I envision BYD as a high quality company with a serious tailwind behind it and a hugely strong friend in Berkshire Hathaway.

I'll dig into BYD in the coming weeks and share what I find.

About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 3.1/5 (15 votes)

Comments

energywonk
Energywonk - 3 years ago
i am a trading analyst and long time value investor, i purchased 1211 (BYD) 6 weeks after buffett (or rather mid american energy) purchased them. i have a good understanding of this business and also a peak oiler. send me an email if you would like any assistance writing follow up articles
anders
Anders - 3 years ago
WBuffett did say that brk will add their position if the price is right..

Brk bought 225 000 000 shares, 27sept-08, @ HK$8.00 (US$1.03)..

I like to keep it simple so I have put BYD @ 8-12 on my purchase list and will buy the stock if it lands around that territory once again..

Arpan
Arpan - 3 years ago
Hi Energywonk,

Congrats on your BYD investment. I think I understand the business fairly well but I'm having a hard time understanding the capital structure. I know it seems simple, but I'm confused as to what the company's market cap, EPS, etc. is converted into BYDDF shares. Do you have more information on that, or can you direct me as to where I can figure it all out? Its very frustrating for me. Thank you very much.
energywonk
Energywonk - 3 years ago
well the first thing i would say is buy 1211 on HKSE. i think you want to avoid USD exposure or some derivative pink slip held by a dodgy US bank! BYD's annual report is pretty informative available on their website, you should find all the info you need there. it has been generating accelerating cashflows, and only concern is around a 50:50 debt equity ratio. but this is not a problem for a business that can probably pay debt to zero with 2 years of net cash.

anders i agree that 8-12 bucks is a good target price and as you mention thats what BRK bought in at, but you should also consider currency volatility (ie the australian dollar has appreciated 30% since i bought my 1211 shares in december 2008 for around 11.48-11.54) i would argue P/E is a better measure and according to buffett you should buy around 4-8 P/E, which is exactly what they did. from an australian dollar perspective, a good price for me would be around $22HKD/share nowadays. this puts the P/E around 8.5 which is reasonable and good value investing strategy.
energywonk
Energywonk - 3 years ago
ps. anders. you are right brk did say if the price was right they would increase holdings. however in initial negotiations wang chuanfu also said he would not sell sokol more than 10% of the company. they took that as a great sign. wang wants mid american/brk brand networks, distribution channels, cashflow etc! i think its very difficult to say whether brk will get more or not. when they buy 10% of a business they are usually serious and want the rest and this could be the case, but who knows
anders
Anders - 3 years ago
Energywonk,

Geat posts.. I agree.. p/e is a better measure.. , what Ive red, wb doesnt go under 13% earnings yeild which puts the 'highest purchase price p/e ratio for byd' to about 7.7.. but, i dont think the share ever gonna come down to the levels we speak about unless we have another crisis at our hands... what is the p/e of the 1211 stock now -- 30? Will the price ever come down to the 22HKD region ever again ?

Ive just taken a look at the company and changed my original purchase price -- under 20HKD, Im a buyer..

Finally, I would say there are about 35% floating shares of byd, you better stick to yours -- I think you made a great buy =) ... (sorry for a messy post)..

All the best,
prakash123
Prakash123 - 3 years ago
When you talk peak oil, US has abundance of shale natural gas. CNG for cars is more a practical option, than people lining to buy electric cars.

Electric cars have range and performance issues and we dont have a battery recharge infrastructure.
energywonk
Energywonk - 3 years ago
prakash. you are right natural gas should probably comprise a big part of the transport solution, but i believe many formats will exist in the short-medium term. i am not sure what performance issues you are referring to in regards to electric, but range is certainly a problem. in australia i believe natural gas is the key as we have abundance also
w1omega
W1omega - 3 years ago
I went the route of ADR and already purchased some BYDDF. I plan to add more as it comes down. Would anyone know the difference between BYDDF and BYDDY?

Does BYDDF include all divisions of BYD such as auto, (cellphone) battery, and battery for homes with solar panels, etc?

Energywonk, I hadn't considered issues with derivative pink slip owned by dodgy US Bank before. Has there been problems with ADR's? My brokerage doesn't have a global account and Etrade seems like it charges quite a bit for currency translation and also for commission in HK stock exchange.

Also, my friend's driver in China owns a gas powered BYD veh. The driver said he purchased it bc it won a MPG (maybe it's kilometer per liter over there) competition. It seems BYD can compete on gas powered vehicles too although I understand that profit margins would be fatter with success in EV industry.

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