BYD: don’t fight Warren Buffett

“Don’t fight the Fed” is a familiar mantra. In Hong Kong, a new adage may now emerge as investors learn not to combat Warren Buffett. Share price moves of Chinese electric car maker BYD have managed to ignore all the good news and focus solely on whether Berkshire Hathaway, a key stakeholder, will make an exit.

On the surface, things have never been better at BYD. On Monday, it overtook LG Energy Solution to win its position as the world’s second biggest electric-car battery supplier. It is taking a larger part of the pie just as global battery demand expands rapidly, with sales up 80 per cent in July. Sales of BYD’s electric cars, its other core business, in August nearly tripled. Normally this would have given its shares a big boost.

Instead they fell 5 per cent on Monday, as investors focused on a filing that showed Warren Buffett’s Berkshire Hathaway had further cut its stake in BYD, which has been one of its bigger equity holdings. That brings share price losses down to nearly a quarter from its July peak — when a BYD stake the same size as Berkshire’s stake appeared in Hong Kong’s clearing and settlement system.

The sell-off comes despite Berkshire having offloaded just 18mn shares, a small fraction of the 207mn it still holds, as of last Thursday. Concerns remain about the possibility of a complete exit. Berkshire already has achieved fat returns on BYD. In February the group valued its stake at nearly $8bn, a 34-fold gain from the $232mn it invested in 2008.

The outlook is challenging. Rising prices of raw materials for batteries such as lithium have squeezed BYD’s margins; operating margins fell below 2 per cent last year, compared with more than 7 per cent in 2020.

Even after the recent stock price declines, BYD shares trade at 40 times forward earnings. That is a premium to bigger battery rival CATL, which has held on to margins of more than 12 per cent. It may be a good time for investors to follow Buffett.