Electric Driving: West Meets East

 | May 01, 2013 | 9:00 AM EDT  | Comments
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Looking at the Berkshire Hathaway (BRK.A) (BRK.B) portfolio as we did Monday, one name that generated a lot of interest at the time was BYD Company Ltd. (Build Your Dream), the Shenzen, China-based maker of batteries and hybrid electric vehicles.

The name attracted a lot of attention at the time, if for no other reason than it ran up 8x during Berkshire's holding period. This was one of BRK's early forays into foreign stocks, which they had mostly ignored. Despite the accolades for the management team from Chairman Warren Buffett and Vice-Chairman Charlie Munger and their praise for BYD's work ethic and long-term prospects, BRK was in and out in two years. The trade was clearly profitable and BYD subsequently declined 88% from the peak, confirming Buffett's trading acumen.

I just returned from a week in China. Being there got me wondering about BYD. I observed the booming economy, the pollution in Beijing that cries for more electric vehicles, and was aware that BYD was a washed-out, "yesterday's story". Or is it? The stock is up to $30 now, off the $10 bottom, once again reminding us that washed out can also sometimes mean buying opportunity. Is BYD worth a second look now, ignoring whether Buffett cares?

 The company has a $21 billion market cap and is traded in Hong Kong, although Americans can buy it domestically under the symbol (BYDDF). (Be careful because there is not great liquidity on the OTC, so only buy and sell using a limit order.) The company did $8.6 billion in revenue in 2012, with analysts estimating slight growth in 2013. The company is profitable and generating cash, with analyst estimates for 2013 earnings before interest, taxes, depreciation and amortization of $922 million. With flattish growth, most of the analysts have turned on the name; of the 16 analysts covering it, 11 rate it "underperform" or "sell".

For BYD, the problem boils down to sentiment around electric vehicles. The sector has been a disaster in the U.S. Although Tesla Motors (TSLA) is slowly succeeding on the strength of its technology and sexy factor associated with Elon Musk, all the other independents are drawing their last breath. Fisker is about to go Chapter 11 and Coda quietly disappeared off the map. The offerings from the majors -- such as the Chevy Volt and Nissan Leaf -- can go for a while on subsidies from the parent companies, but their absolute sales numbers are unimpressive. The Leaf is only selling in the hundreds of units per month.

Although BYD sells electric vehicles into China and not the U.S. -- and China certainly needs to clean up its air – the company is constrained by its focus on low end sedans for government and fleets. The technology is still pretty expensive, and without the volume at the low end -- and it is not here yet in electric vehicles -- profitability could be elusive in that segment.  

Other "cash cow" segments for BYD, such as conventional vehicles, are struggling due to lack of attractive products and the low-end focus. This does not play into the burgeoning middle-class desire for more upscale automobiles. Competition in China is strong from Great Wall Motors and the Zhejiang Geely Holding Group Co. Ltd.  Other segments such as handset components, suffer because of a losing customer base. Nokia is one of their major customers for components.

Evaluating the landscape, I am not as bearish as The Street, but I am taking a wait-and-see position. If everyone hates the name and it is up 3x from the low, perhaps we are seeing that the business will turn before the sentiment does. The company has overcome great odds to become one of the giants of Chinese industry. The fact that it attracted the attention of Berkshire is testament to the quality of management.

At a minimum, put BYD on your radar screen and track it closely. The first indications of a turn in business and a return to growth could be the start of a multi-quarter ride that can put a fistful of yuan in your pocket.

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