Warren Buffett looks to electric car in BYD stake
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HONG KONG Oct. 10, 2008 - According to Chris Oliver, writing for MarketWatch, Warren Buffett's recent purchase of a $232 million stake in China's BYD Co. represents an unusual move for the value investor who professes to favor companies with simple business models.
Based in the southern Chinese city of Shenzhen, BYD Co. has risen from obscurity in a few short years to become the world's biggest producer of rechargeable batteries for cellular handsets. Another business line makes handsets for companies such as Nokia Corp. (NOK), while another makes gasoline-powered compact sedans and subcompacts, in addition to automobile parts.
Its most attractive asset, some analysts say, and the one believed to have garnered the most attention from Buffett, is the development of green automotive technologies, including lithium-ion batteries and a related line of hybrid and all-electric vehicles.
What's unusual, especially for someone with Buffett's track record in investing in the likes of Coca-Cola (KO) and Gillette, is that BYD represents a growth story based on as-yet unproven technologies.
The company plans to unveil it first green cars in China before the end of the year, and in the U.S. and Europe in 2010. Both the vehicles, and batteries that will power them, have never been put into mass production. The firm is also attempting another first by moving into the production of notebook batteries, stretching beyond its handset-based experience.
"This investment is a bit unique," said Daniel Kim, a research analyst at Merrill Lynch in Hong Kong, adding the company doesn't fall within Buffett's usual value-oriented investment philopsohy. "The company has to prove itself; the company is facing a few challenges."
BYD was established in 1995 and listed in Hong Kong in 1992. The company has seven production facilities located in different regions around China.
MidAmerican, which is 87.4%-held by Berkshire Hathaway (BRKA)(BRKB), said on Sept. 27 it would buy 225 million shares of BYD, equivalent to a 10% stake, for HK$1.8 billion ($231.6 million). Berkshire Hathaway is the Omaha investment run by Buffett, holding stakes in insurance and finance, utilities and energy, manufacturing retailing and services.
MidAmerican chairman David Sokol cited BYD's management and strengths in research and development as benefits that made sense in moving ahead with the deal. Sokol will take a seat on the board of BYD as a non-executive director.
"As worldwide discussions relating to global climate change and environmental respect continue, the technologies being developed by BYD will be an integral part of that future."
What's emerging could be a super growth story. BYD's green vehicles may strike a chord with China authorities eager to promote alternative-fuel platforms to reduce the nation's growing dependence on imported oil. With much of the highway and related infrastructure yet to be built, there are also fewer legacy costs, such as mothballing gasoline stations and refineries to consider. Also, Chinese consumers upgrading from bicycles and scooters might be more receptive to electric vehicles than their counterparts in the West.
Chinese sales of BYD's gasoline-powered vehicles nearly doubled in the half of this year and climbed nearly 24% in the first two months of the July to September quarter. Analysts caution the firm still has an uphill battle to win over consumers in the rest of the world. It could be especially tough displacing Japanese powerhouses in electric-vehicle technology such as Toyota Motor Corp. (TM)
"There is still skepticism in the market regarding the safety and reliability of electric vehicles, especially ones produced by a new Chinese automobile manufacturer that was previously unknown outside the country," Marco Mak, head of research at Hong Kong's Tai Fook Securities, said in a research note
Mak said Buffett's endorsement is crucial in helping to alleviate the firm's reliance on short-term debt to fund research and development in its automobile business. The firm will face capital expenditure outlays of about 8 billion yuan ($1.2 billion) through the end of next year.
"Having the endorsement of one of the world's most successful investors undoubtedly provides BYD immediate added capital, credibility and a higher profile," Mak said.
Buffett's purchase was also well timed to take advantage of the recent fallout in China shares. Hong Kong-listed shares of BYD, up about 65% since the MidAmerican stake purchase was announced, are still down about 30% from their highs last October.
BYD Electric the unit which makes parts for handsets, has seen its shares rally about 54% since the acquisition, but are down 80% from highs since listing last December.
Falling shares price might also reflect the company changing fortunes. Net profit for the first half amounted to 596 million yuan, down 7% from the year-earlier period. The slump was related to higher material costs and a weaker performance among its nickel-battery products, historically the firm's biggest revenue source, because of the global slowdown and weaker power tool sales.
There also could be synergies in Buffett's recent acquisitions. Berkshire's investments in BYD were made about a week after acquiring Constellation Energy Group, whose assets include three nuclear power stations. Berkshire followed that move with a $3 billion purchase of preferred shares of General Electric (GE)