Back in 2008, Warren Buffett (Trades, Portfolio), at the behest of his long-time friend and partner Charlie Munger (Trades, Portfolio), acquired a 9.9% stake in China’s battery and electric car company BYD Co. Ltd. (HKSE:01211). The stock abruptly soared but, unlike most of his investments, promptly plunged back down as trouble hit the company. Five years later, BYD appears to be showing signs of progress and Buffett’s investment is beginning to multiply.
Buffett first addressed his BYD holding in his 2008 shareholder letter, casually mentioning that at his annual shareholder meeting, “The future will be represented by a new plug-in electric car developed by BYD, an amazing Chinese company in which we have a 10% interest.” The following year, his shareholder letter reported he owned 225 million shares of the company, purchased for $232 million and already worth $1.986 billion – a 756% gain.
The good times gradually halted for the stock, however. It fell so far that by 2011, it did not even appear on Buffett’s list of holdings valued over $1 billion. Despite the precipitous drop off, Buffett chose a perfect entry point for BYD, as the share price has never gone below his purchase price before or since. The company’s IPO price was HK$10.95.
“What BYD has already done is ridiculously difficult to do, and they’ve done it anyway,” Charlie Munger (Trades, Portfolio) said in an interview in 2009. “It’s a very remarkable company and Warren could see that from the numbers.”
Part of the drop off in 2011 was caused by plummeting earnings results from the company. BYD’s earnings in the fourth quarter of 2011 fell 94% from the previous year, due to intense competition and China’s repeal of government incentives for auto sales. For the full year, sales increased by about 10% to more than 500,000.
The next year, 2012, did not fare well either. Operating revenue fell 4.29%, and basic earnings per share collapsed by 95%. The company explained the results in its 2012 preliminary results announcement:
“The pace of growth in demand in the automobile market in the PRC continued to slowdown in 2012 having hampered by the uncertainties of its macro-economic conditions. Despite the substantial quarter-on-quarter growth in the fourth quarter income of the Company’s automobile business, driven by the rapid increase in the sales volume of new models, the growth for the year was relatively steady as compared with last year. The year-on-year operating results of the handset components and assembly services of the Company slightly deteriorated in 2012 attributable to the decrease in the marketshare of the major customer.”
But results released last week for full-year 2013 indicated important turnarounds at the company. BYD posted 14.38% year-over-year automobiles sales growth, to approximately 470,000 cars sold. Profit for the year also jumped to RMB0.23 from RMB0.03 the previous year, and revenue increased by 12.1%.
The company said that its car sales increased as China’s economic growth stabilized at 7.7%, the same as the previous year, and increasing competitiveness of their products.
For the first quarter of 2014, however, BYD forecast a decline in earnings due to weaker demand for some of its vehicles.
The company set forth its goals for the full year in its earnings announcement:
“The Group believes that, 2014 will be an important year for the development of new energy vehicles, during which the development of automobile industry will evolve with a new generation of technological transformation and technological innovation will become the key driving force for the development of industry. The Group will seize this historic opportunity to achieve breakthroughs and innovation in the new energy vehicle business. The Group will strive to become the leader in the global new energy vehicle industry by capitalizing on its leading technological edges, strong vertical integration capability, synergy from various industries and first-mover advantage in commercialization to further consolidate and strengthen the core competitive advantages of new energy vehicles.”
BYD also plans to launch a new high-end SUV model s7 and new A+class automobile model in 2014, continue to work with its home city of Shenzhen to electrify its public transportation system, and duplicate that system for other countries around the world.
Another future bright spot of growth is the company’s newly released second-generation, Dual-Mode, Plug-in Hybrid Electric sedan, the QIN, which launched in December. The model has already been selling at such record numbers that the company has had difficulty meeting demand. It sold 6,000 cars in the first six weeks of 2014, comprising half of China’s entire new-energy vehicle market. In February, it had a second record month of sales, becoming China’s best-selling electric vehicle.
New government incentives could help boost sales for the vehicle. “Analysts are not expecting sales to slow down any time soon as both Shanghai and Beijing announced earlier this month that they will now permit BYD new energy vehicles to qualify for local municipality green-vehicle incentives and be licensed in those regions. These signals along with the Chinese government’s new fund committed for clean-air and fuel-efficient technologies in the form of consumer and government purchasing incentives are launching a new era in the China domestic automobile industry,” the company said in a statement released March 21.
Buffett, true to form as a long-term investor, has held onto his shares through the stock’s plunge and now subsequent rebound. As of 2013, Berkshire Hathaway (BRK.A)(BRK.B) continues to hold 225 million shares, though the holding shrank to 9.56% of the company. The price in the past year has jumped more than 91%, and 25.4% year to date. This gives Buffett a 496% gain on the holding based on its Monday share price of HK$47.65.
Buffett also received his first dividend from the company. In light of its more robust profits, BYD declared its first dividend of RMB0.05 per share for the year ended Dec. 31, 2013.