Initially enthusiastic about Chinese electric car maker BYD Co. Ltd. (HKSE:01211), Warren Buffett has been silent about his investment in the company more recently. But the company's first quarter results showed drastic improvement, and Buffett's holding in the company has become more profitable after languishing several years.
BYD for the first quarter of 2013 announced that earnings tripled from the third quarter of 2012, on the release of new automobile models. The company’s net profit increased to 112 million yuan for the January-to-March quarter, from 27 yuan a year previously. BYD was expecting net profit of 100 million to 140 million yuan.
The number of cars sold also increased 25.1 percent year over year, to 142,851 in the first quarter.
Buffett purchased a 10% stake in BYD for about $1.02 per share in 2008. In total, he paid $232 million for the 225 million shares, according to his 2010 annual letter, through Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) subsidiary, MidAmerican. The purchase placed MidAmerican as the fourth largest shareholder in the company.
“MidAmerican is pleased to make an investment in BYD – a high-caliber organization, committed to making a dramatic environmental impact with their products,” said then-chairman of MidAmerican, David Sokol. “As worldwide discussions relating to global climate change and environmental respect continue, the technologies being developed by BYD will be an integral part of the future.”
Specifically, BYD is dedicated to “researching, developing, manufacturing and selling rechargeable batteries (Li-ion, Nickel batteries), automobiles, electric automobiles and related products.”
By the end of 2008, the year Buffett invested in the company, BYD had launched the first dual mode vehicle with no reliance on specialized charging stations. BYD also looked forward to multi-million yuan government subsidies in coming years.
The next few years, however, proved challenging. BYD net profit decreased 89% to 275 million yuan in the first half of 2011. For the full year, the total number of cars sold at the company slipped 13.3% from 2010, which the company attributed to a downturn in the domestic automobile market and a decline in the overall market share of domestic brands. The year ended with revenue down 0.8% and profit down 44%.
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The company fared worse in 2012, as net profit fell by 94% year over year to 81 million yuan, and revenues fell by 4.29% to 46.73 billion yuan. Auto sales were flat due to continued weak demand, while sales at its solar cell and mobile phone fell.
New car models boosted sales in the first quarter 2013, as BYD released the Suri compact car and S6 SUV in the second half of 2012. Sales in its solar cells business, which hampered full-year 2012 result, continued but narrowed, due mainly to less competition in the global photovoltaics market and rapid growth in the rechargeable battery business. The company reported that it also saw new orders for smart phones from existing customers and new smart phone projects with handset manufacturers expanded, along with new tablets and other products, which drove increase and profit in the assembly services and handset business.
While other segments have been weighing on results, automobile sales have increased to 51% of BYD’s sales in 2012, from 32% of total sales in 2008.
Another bright spot for the company is a return of government subsidies, which should begin as early as April or May, BYD chairman Wang Chan fu announced in March. The previous subsidy extended from 2010 to 2012, and ended on Dec. 31, 2012, Reuters reported.
Buffett is finally enjoying a return to substantial gains on his BYD holding. Having bought his shares for around $8 Hong Kong dollars in 2008, the stock quickly went as high as more than $85 in 2009, giving his $225 million U.S. dollar investment a market value of $1.986 billion at year-end. The stock soon plunged to slightly more than $12 in 2011 and 2012, taking it under the $1 billion value reporting threshold for his annual letters.
BYD shares year to date, however, have gained 7.94%, pushing the price to $24.15 Hong Kong dollars, and Buffett’s profit to slightly over 200%.
Buffett’s other auto holdings are General Motors (NYSE:GM) and Wabco Holdings Inc. (NYSE:WBC). He also owns energy companies National Oilwell Varco Inc. (NYSE:NOV), ConocoPhillips (NYSE:COP) and Phillips 66 (NYSE:PSX).
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