Whenever Warren Buffett is bullish on something, we should take keen notice. Especially if it's reinforced by confidence from Charlie Munger, who only considers buying great business. At the peak of the financial crisis, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) poured more than $200 million into Chinese battery and automobiles manufacturer, BYD (BYDDF.HK), via its controlled subsidiary, MidAmerican Energy. This purchase was said to be influenced by Charlie Munger, introduced by a Chinese-origin fund manager who manages Munger's money, Li Lu. Charlie Munger once stated that his family holds a “little more” than half of the fund with the BYD investment.
In the first quarterly report of 2012, BYD has reported large decline in its profit comparing to the same quarter last year. Diluted earnings per share decreased nearly 92% of the previous quarter diluted EPS. Thus, the share price lost more than 42%, from $3.32 per share in the beginning of February 2012 to $1.9 now.
Correspondingly, in the Hong Kong Stock Exchange, BYD dropped from HK$26 to HK$15. The current price of HK$15 is only around 17% of its top price of HK$85.5 in October 2010.
Despite the severe fall in its profit, BYD posted the comparable revenue and operating cash flow along with its previous period. But the company experienced higher business tax and surcharge, financial expenses and impairments losses of assets. Several notable changes for those three items are disclosed in this quarterly reports:
- Business tax and additional expenses during the reporting period increased 93.35% as compared with the corresponding period last year mainly due to the increase in the provision for the sales tax
- Finance expenses during the reporting period increased 54.37% as compared with the corresponding period last year mainly due to increase in the financial interest during the reporting period
- Impairment loss of the assets during the reporting period increased 1302.49% as compared with the corresponding period last year mainly due to the increase in allowance provided for drop in inventory price
So subjectively, I think the fall in its profit of this quarter is very temporary. And it's the market factor which makes the company increase allowance for the drop in its inventory price.
Over the long run, Berkshire Hathaway's investment can be considered a bet mainly on its lieutenant, Wang ChuanFu. Munger has commented that Wang ChuanFu is “a combination of Thomas Edison and Jack Welch — something like Edison in solving technical problems, and something like Welch in getting done what he needs to do.”
Li Lu has mentioned about Wang ChuanFu in his 2010 lecture in Columbia University: “He got into battery manufacturing in that particular way because he really had no other option. He had no money, he only had $300,000 in venture capital funding before IPO and that was it. He raised money in an IPO and Buffett gave him $200M, now they have 160,000 employees. $6-7B in revenues, $500M in net profit. It is amazing. So he has this ability to adapt in a competitive environment. He has demonstrated that ability again and again. The way he does automation is far cheaper than anyone else and more reliable. He continues to surprise me with his ingenuity, to figure out ways to do something better than everyone else. What he is currently doing is very different than what everyone else has done. At the end of the day, you might look at what he has done.”
With the current drop in its current market price, investors might consider this to be the opportunity to accumulate the shares, even with the current challenges and critics that the company is facing right now. Last but not least, investors might be better off buying Charlie Munger's view: “My experience with great companies that have a little glitch is they come out stronger. “
Disclosure: Long BYD