When rumors first began surfacing last year that Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) was trimming some of its stake in Chinese electric vehicle maker BYD Co. Ltd. (HKSE:01211, Financial), some investors worried that Charlie Munger (Trades, Portfolio) or Warren Buffett (Trades, Portfolio) might be turning bearish on the stock.
However, Munger blew that speculation out of the water at Wednesday’s virtual Daily Journal (DJCO, Financial) annual meeting, calling BYD his “favorite stock ever.”
“I have never helped do anything at Berkshire [Hathaway] that was as good as BYD and I only did it once,” the 99-year-old investor said. Berkshire’s initial investment is now “worth about $8 billion or maybe $9 [billion]. That’s a pretty good rate of return.”
Berkshire’s BYD investment
Berkshire started building a position in BYD back in 2008, when it acquired 225 million of the stock’s Hong Kong-listed shares, giving it a 7.73% stake in the company. Since the firm bought the Hong Kong listing, this holding does not show up on the 13F filings, but we do get info on it from Berkshire’s communications with investors as well as the Securities and Futures Commission (SFC) of Hong Kong.
It was Munger who convinced Buffett that the investment was a good idea, calling BYD’s founder Wang Chuanfu “a combination of Thomas Edison and Jack Welch” and heaping praise on his ability to innovate and solve technical problems.
Unlike Tesla (TSLA, Financial), which only became profitable recently, BYD has been in the green for most quarters of the past couple of decades, which is due in part to how it transitioned from a traditional automaker and diversified its business rather than starting out as a pure-play EV company.
From a failing state car manufacturer to Tesla’s biggest rival
BYD, which stands for “build your dreams,” got its start 20 years ago when Wang hatched a plan to buy a failing state car manufacturer and exchange its internal combustion engines for batteries.
EVs have been around for longer than many people realize. According to the U.S. Department of Energy's timeline on the history of the electric car, the first practical EVs gained popularity in the 1890s, and early EVs peaked around 1900 to 1912. They were mainly popular with urban residents due to their quietness and lack of smelly emissions. However, the high cost, low top speed and low range made them impractical and also unprofitable to produce at scale compared to internal combustion engine vehicles. These were problems that BYD set out to solve at about the same time as Tesla (2002-03).
Taking a diversified approach to battery technology, BYD’s batteries can be found in a variety of cell phones, laptops and consumer goods as well as cars, which was key to the company’s early profitability. The company also embraced hybrid vehicles, kept producing some combustion engine vehicles until early 2022 and even makes electric trains and buses.
Over the years, BYD’s evolving battery technology and the stylish designs of its newer EV models have made it the top EV company in China. Including plug-in hybrids, BYD actually surpassed Tesla in terms of the number of new energy vehicles sold in 2022, though Tesla still wins for now in the pure EV market, having delivered 1.25 million EVs in 2022 vs. BYD’s 911,000.
In its home market, though, BYD is still the clear leader, with Tesla not making as much of a dent in its market share as originally hoped. BYD’s guidance projects record adjusted annual profit for 2022 of 16.3 billion yuan ($2.4 billion), which would be a 1,200% increase from 2021.
Munger pointed out in the Daily Journal meeting, “If you count all the manufacturing space they [BYD] have in China to make cars, it would amount to a big percentage of the Manhattan island, and nobody had ever heard of them a few years ago.” That is important because all of the manufacturing space used for hybrids could eventually be transitioned to manufacture pure electric vehicles instead.
Is BYD overvalued?
In August 2022, the news broke that Berkshire had trimmed its stake in BYD for the first time, selling 1.33 million of the shares for roughly $47 million. In January 2023, Berkshire sold another 1 million BYD shares.
That may seem like a lot at first glance, but it is really a drop in the bucket compared to the over 220 million shares that Berkshire continues to own. Neither Buffett nor Munger have made any comments on why they have trimmed the position, only praising the company when asked about it.
However, the sales follow the huge price spike that BYD has seen beginning in 2020 as the EV market really began to take off, not just in terms of vehicles sold but also in terms of popularity with investors, who for the most part have lost their past skepticism that EVs would ever be viable. Even before then, the return on Berkshire’s BYD investment was solid – it has just been overshadowed on the price chart thanks to more recent gains.
This begs the question: after the stock’s considerable bull run, is BYD overvalued? It is certainly not as cheap as it used to be, but just like with other growth stocks, the valuation really depends on whether its growth can keep up with or surpass investors’ expectations.
According to the GuruFocus discounted cash flow calculator, the company will need to increase its earnings per share by 41% per year for the next decade in order to justify its current valuation of 237.80 Hong Kong dollars ($30.30) per share. If the company’s 2022 growth projects turn out to be accurate, this actually seems within the realm of possibility. Analysts from Morningstar (MORN, Financial) estimate a three-to-five-year earnings per share growth rate of 55% for BYD.
The GF Value chart also rates the stock as significantly undervalued based on a combination of past growth, historical valuation multiples and analysts’ estimates.