BYD Profit Plunges 90%, Warren Buffett Gives Back Most Gains
Chinese car and battery manufacturer BYD has not been Warren Buffett ’s most successful investment, and another poor earnings report came out on Friday.
The company announced that its net profit decreased almost 90% year over year to RMB27 million. The news sent shares down almost 3%, bringing the stock down almost 74% for the last five years.
Buffett’s history with the company began in 2009, when he bought 10% of the company for $230 million, or slightly over $1 per share, on an idea from his partner, Charlie Munger. As recently as the second quarter of 2012, Berkshire Hathaway ( BRK.A )( BRK.B ) subsidiary MidAmerican Energy is the company’s second-largest shareholder.
His incredibly low purchase price placed Buffett in a virtually can’t-lose situation. Even with the share price drop since then, he still has a profit on the investment. Today the stock is trading for HKG13.36, or $1.71 U.S. dollars. Consequently, his investment is still worth more than $385 million.
It is unclear whether the company could lose more value in the future, however. BYD attributed its second-quarter results to weak demand in the domestic automobile market, resulting from a mild domestic macros economy and five consecutive months of declining GDP growth in the first quarter.
Overall sales of automobiles in China were 4.8 million units in the first quarter, a 3.4% decrease year over year, according to the China Association of Automobile Manufacturers. In the second quarter, sales declined 1.25% year over year. BYD’s vehicle sales in the second quarter declined 8% year over year.
“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,” the company said in a statement.
A decline in headset sales negatively impacted sales to a greater extent in the second quarter, as its largest customers lost market share. Solar-energy cell sales also fell due to weak demand in Europe amid its financial crisis.
Buffett’s investment could inch closer to a loss or breakeven as the company predicts earnings from handset and solar-cell units will continue to decline in the third quarter due to macroeconomic uncertainty, weak auto demand in China and intensified competition.
One of BYD’s brightest spots is its S6 SUV model, which sold 100,000 units after one year on the market, making it the fastest-seller in the SUV market. The company will debut its minivan C3 model at an auto show in November. Wang Chuanfu, BYD chairman, expects one out of every five Chinese alternative-energy vehicles sold around the world to be a BYD, he said at the improved F3 compact car launch in Beijing in August.
The overall electric car market has seen increased demand, with electric and hybrid car sales increasing 164% in June 2012 compared to June 2011. Alternative-energy car sales tend to fall rapidly after fuel prices peak, according to Kelly Blue Book. But though it predicts a decline in gas prices it says it appears the sales decline will be relatively mild.
Before Buffett initially invested in the company, it was growing rapidly. Gross profit leaped from $1.7 RMB in 2004 to $5.2 billion RMB in 2008. Buffett also mentioned his admiration for chairman Wang Chuanfu as a reason he invested in a technology he did not fully understand, and has expressed his belief in the need for alternative sources of energy. “Land can get more productive,” he said on NBC in December , “but oil is finite.” “Most fields are depleting at a pretty good rate,” he added.
At the time, BYD’s F3 was the best-selling sedan in China. By July of 2012, the vehicle had dropped to the 27 th spot.
The broader Chinese stock market is down 2.1% on Monday, its worst loss in almost two months and its lowest since March 2009. The market was hit by non-banking financials “on deflated hopes of more ‘formal’ monetary easing after the Chinese premier’s latest comments did not allude to that possibility,” according to Reuters.
Though he has not lost yet, at one point in 2010, Buffett’s investment in BYD was worth more than $1 billion. He has not mentioned whether he will continue holding the company or sell in the future.