Warren Buffett's China car investment recharges

Berkshire Hathaway's profit on BYD climbs to 200%.

By GuruFocus.com Apr 26, 2013 2:32PM
Electrical plug copyright Jupiterimages, Getty Images, Getty ImagesInitially enthusiastic about Chinese electric car maker BYD Co. Ltd. (BYDDF), Warren Buffett has been silent about his investment in the company more recently. But BYD's first quarter results showed drastic improvement, and Buffett's stake has become more profitable after languishing several years.

BYD's first quarter earnings tripled from a year ago, on the release of new automobile models. The company's net profit increased to 112 million yuan from 27 million 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% year over year, to 142,851 in the first quarter.

Buffett purchased a 10% stake in BYD for about $232 million in 2008 through Berkshire Hathaway (BRK.A)(BRK.B) subsidiary MidAmerican. The purchase made MidAmerican the fourth largest shareholder in the company.

By the end of 2008, 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's net profit decreased 89% to 275 million yuan in the first half of 2011. For the full year, the total number of cars sold 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%.



(data by GuruFocus.com)

The company fared worse in 2012, when net profit fell by 94% to 81 million yuan, and revenues fell by 4.29% to 46.73 billion yuan. Auto sales were flat due to continued weak demand.

New 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.

While other segments have been weighing on results, automobile sales increased to 51% of BYD's sales in 2012, from 32% of total sales in 2008.

Another bright spot for the company is the expected return of government subsidies. The previous subsidies extended from 2010 through 2012, Reuters reported.

Buffett's profit
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%.

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