Buffett Loses Most Of His Gains In BYD

BYD, a Chinese battery and car manufacturer, has not been the greatest investment that Warren Buffett has made throughout the years. They recently released a very poor earnings report just this past Friday. In that report we learned that the company’s net profit dropped about 90% year-over-year to the amount of RMB 27 million. The news of this poor earnings lowered the price of shares by about 3%. This brings the total loss of the stock down 74% during the last five years.

The Warren Buffett era with this company started in 2009. At that time, he actually bought 10% of this company for a total of $230 million. This works out to be slightly over one dollar per share. The idea for this purchase came from his longtime business partner Charlie Munger. Berkshire Hathaway owns this company through their subsidiary MidAmerican Energy, and as recently as the 2012 second quarter, they are the second largest shareholder of BYD.

Because Buffett was capable of purchasing the shares at an insanely low price, it put him in a position where he practically couldn’t lose on this deal. Even though there has been a tremendous drop in the share price, his investment in the company is still profitable. This stock is currently trading at HKG13.36, which is equivalent to $1.71 in US currency. So his investment is actually still worth more than $385 million.

It is very difficult to tell whether or not this company is going to drop in value again in the future. BYD said that the results for the second quarter were very weak because there isn’t much demand in the domestic automobile market. This results from a mild domestic macros economy, coupled with five months of consecutive declines in GDP growth during the first quarter. The overall sales of motor vehicles in China were a total of 4.8 million units during the first quarter. This is a 3.4% decrease in year-over-year figures, which we learned according to the Chinese Association of Automobile Manufacturers. There was also a drop in the second quarter numbers, and the sales declined 1.25% in year-over-year figures. BYD’s sales of vehicles actually dropped a total of 8% in year-over-year figures.

In a recent statement, the company said “during the third quarter of 2012, due to the impact of macro-economic uncertainties at home and abroad, China’s auto demand is expected to remain weak, while market competition will intensify.”

BYD also suffered from a decline in their handset sales, which made a bigger impact than originally expected. Its largest customers lost market share in this area. The financial crisis in Europe, coupled with weak demand, was the reason why the solar energy cell sales fell during this quarter.

The investment in this company that Warren Buffett made could slowly become closer to a losing proposition, or it might even hit a breakeven point since BYD is predicting that they will continue to decline in handset and solar cell sales during the third quarter due to the uncertainty in the marketplace. They also feel that weak auto demand will continue in China, as well as intensified competition bringing sales numbers down.

One of the best areas that BYD has going for them right now is the S6 SUV model. This automobile model has sold over 100,000 units after only being on the market for a total of one year. It is actually the fastest seller in the Chinese SUV market. The company also has a minivan, which is model C3, that they plan on debuting in November of 2012.

The chairman of BYD, Wang Chuanfu, currently believes that out of every five Chinese alternative energy vehicles bought around the world, one of them will be from BYD. He mentioned this at the launch of the improved F3 compact car during August in Beijing.

There has been an overall increase in demand in the electric car market, and the hybrid and electric car sales have increased a total of 164% during June of 2012, when you compare those numbers to the same time in June of 2011. The sales trend for alternative energy cars usually drops rapidly when fuel prices peak, which we learned according to Kelly blue book. Although Kelly blue book expects gas prices to decline, they do not think that there will be a major drop in sales in the hybrid/electric car market.

Prior to Warren Buffett and Berkshire Hathaway investing in this company, it was experiencing very rapid growth. The company’s gross profit jumped from $1.7 RMB in 2004 to a total of $5.2 billion RMB during 2008. Warren Buffett also said that he is a great admirer of the chairman of this company, and that was one of the main reasons why he invested his money in a technology company that he does not completely understand. He also expressed that he believes we have a major need for alternative sources of energy. He mentioned on NBC last December that “land can get more productive, but oil is finite. Most fields are depleting at a pretty good rate,” he also mentioned.

When Buffett initially made his investment, the F3 from BYD was actually the biggest selling sedan in China. But as of July of 2012, it is now in 27th place overall.

As of this past Monday, the overall stock market in China is down about 2.1% on the day. This is the worst loss this market has seen in about two months. It has not been down this low since March of 2009. According to Reuters, the market was negatively affected by nonbanking financials “on deflated hopes of more ‘formal’ monetary easing after the Chinese premier’s latest comments did not allude to that possibility.”

Even though Warren Buffett is not suffering a loss on this investment as of yet, there was a point during 2010 where his BYD shares were actually worth more than $1 billion. He hasn’t mentioned if he is going to sell the shares in the future, or if he’ll continue holding them for the long-term.

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