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Parsad
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looks like the hype is over and reality has started to set in....how low does this have to go before Buffett starts adding to his position? think he mentioned that he would be interested to increase his stake at the right price during his visit last year.....

 

Buffett's cost basis is around HK$ 8 so we are slowly getting there.....

 

$9 billion doesn't sound all that expensive for a company with an objective to be the number one car company in the world by 2025

 

 

there are some very compelling dynamics to invest in BYD:

-exposure to the (future) biggest and fastest growing low cost manufacturing economy in the world

-exposure to the economically ad socially desirable renewable energy sector

-buffett "certified" vs your average chinese reverse merger set up

-exposure to a currency with potential for appreciation

 

could this be a great company but a not so great investment?

 

do we need to wait until Buffett adds or is it about time to slowly start buying?

 

regards

rijk

 

 

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could this be a great company but a not so great investment?

 

do we need to wait until Buffett adds or is it about time to slowly start buying?

 

 

That's what I'm trying to figure out!  ;D  I never figured it out before, but I thought maybe this time it's different.  Cheers!

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looks like the hype is over and reality has started to set in....how low does this have to go before Buffett starts adding to his position? think he mentioned that he would be interested to increase his stake at the right price during his visit last year.....

 

Buffett's cost basis is around HK$ 8 so we are slowly getting there.....

 

$9 billion doesn't sound all that expensive for a company with an objective to be the number one car company in the world by 2025

 

there are some very compelling dynamics to invest in BYD:

-exposure to the (future) biggest and fastest growing low cost manufacturing economy in the world

-exposure to the economically ad socially desirable renewable energy sector

-buffett "certified" vs your average chinese reverse merger set up

-exposure to a currency with potential for appreciation

 

could this be a great company but a not so great investment?

 

do we need to wait until Buffett adds or is it about time to slowly start buying?

 

regards

rijk

 

I have a position in BYD, but I admit it's more speculation than investment. I share your concern about BYD turning out to be a great company, but not a great investment. Check out this recent interview with Wang Chuanfu, BYD's CEO: http://english.caing.com/2011-02-15/100225767.html. One thing that is clear from the interview is that all of BYD's new energy initiatives are very capital intensive, and BYD is planning to fund them at least in part with profits from their current operations. So the fact that their ICE car sales and profits have been much less than expected puts them in a bind. In order to go forward with their plans, BYD may have to issue more stock than they had planned on doing. Obviously this will not be good for current investors.

 

Of course there is also the risk that BYD just won't succeed in its new initiatives as it anticipates. But if they come close to their grand goals, I have a hard time seeing how this will be a bad investment even with all the likely dilution.

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I've had a position since last October or so.  It's hard for me to see this being a great company and bad investment, though I suppose I might be biased.

 

The energy initiatives are certainly capital intensive, but I don't believe it means that they're going to be forgoing profits because of their "civic duty."  If you'll recall the Microsoft letter that Buffett wrote a few years ago concerning a toll booth on the internet -- I believe that Buffett sees BYD as a toll on the new energy era.  Right now, BYD has the best value/technology mix for batteries.  (If I remember correctly, A123 might have a slightly better battery, but they can't build it profitably.)  I think it's likely that BYD will continue to keep the best value/technology mix position, and that will make them akin to "Intel Inside" or "Microsoft Inside."

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think there are some clues in buffett's comments:

 

BECKY: ...since Carl mentioned this in his introduction to that question. Ray from Westminster, Maryland, writes in. He says, "Everyone seems to be aware of your investment at BYD--that's the Chinese electric car company. The stock's deteriorated of late and I can't seem to get a handle on the firm's profitability. Are they trying to compete on pricing only, or does their battery technology give them a clear advantage?"

 

BUFFETT: Well, the battery technology, if it works out like they hope it will, will give them a clear advantage. But battery technology is a evolving and tough game. And my partner Charlie particularly thinks that we've got the right fellow to make the breakthroughs in that--in that area. But it isn't like you get it tomorrow or the next day. And, you know, there are a lot of smart people working on battery technology. And, you know, I--in the--in the end, what I hope is the world gets a great answer on it very quickly...

 

 

BUFFETT: And my friend, Charlie, who knows a lot more about batteries than I do, thinks that this guy is the second coming, more or less. So we'll see what happens on that. It's not easy. I mean, when you're dealing with batteries, you know, the weight, the cost, there's all--there are plenty of problems involved, but I will bet significant progress is made by BYD, but there may be more significant progress made by somebody else in the next few years.

 

BECKY: Tony in San Diego writes in and says that, "BYD has lost more than 60 percent from its peak in 2010. Do you consider buying more shares because of the current discount?"

 

BUFFETT: No. Well, who knows?

 

 

CARL: I do like your point, though, about batteries. And a big--it's a tough hill to storm, but if you could--if you could take that hill and turn batteries into something other than what they are today, that has implications for solar, certainly for BYD. Would you say, Warren, that battery--the evolution of batteries is where you are most leveraged to innovation and tech?

 

BUFFETT: Well, perhaps. And, Carl, you're 100 percent right. I mean, it--and it's going to happen. It may happen at BYD, it may happen, you know, with General Motors, it may happen in Japan. Lots of smart people are working on it, and you know it's a tough problem because you're got to many smart people and it is proving tough to get accomplished, but it's going to happen. It will happen. And I'm not the kind of a guy normally that makes a bet on who's going to make it happen. I'm just not that--I'm not that good at picking the winner in something like that. I know who's going to win in soft drinks, I know who's going to win in chewing gum, you know, I know who's going to win in auto insurance. But that doesn't really take any great insights. My partner, Charlie Munger, believes very strongly that BYD is the most likely winner in this. He's got a--and he is a lot smarter than I am on this subject and a lot of other subjects. But that doesn't mean I'd shove all my chips out in the table just because Charlie feels that way.

 

regards,

rijk

http://everythingwarrenbuffett.blogspot.com/2011/03/cnbc-full-transcript-of-warren-buffett.html

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an objective to be the number one car company in the world by 2025

 

So does probably every car company.

 

 

Remember that this wasn't truly a Buffet investment. This was Lui and Munger. Buffet could just as easy be viewing this as a mistake.

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In battery, byd is the king with 1000 engineers research on battery alone. 2nd place is Sanyo with about 300 engineers. Other companies just cannot afford so many engineers. Of course labor cost is rising very fast in china too!

 

About technology, Cisco used to complain that Huawei copied them. Nowadays Cisco is using US government to block Huawei from entering US market because they know, Huawei technology is at least one generation ahead of them today!

 

Tell me, which technology company does not copy or steal ideas from others? Microsoft? Apple? Please! When Japanese or Koreans moved up from the food chain, didnot they copy or steal, then beat US car companies in quality?

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Guest valueInv

I think there is a difference. Apple, Microsoft, etc "imitate" the best features i.e. the develop features that are similar to their competitors. Many of the vendors you speak of blatantly copy I have heard stories of Huawei copy Cisco so much that they were shipping customers Cisco manuals with the branding changed. There was another of Volkswagen shutting down and sold  a factory in China only to find the factory open a few months later producing the same cars, but branded as a Chinese car.

 

I don't think Apple or Microsoft or even Toyota have ever gone to that extent.

 

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It's funny how wildly biased reporters can be to try and sensationalize to get a story published over and over.  The New York Times article cited by that hit piece as confirming problems with the BYD F3 is actually very positive overall, and cites the problems as easily surmountable and the dual mode as vastly better at all electric than the other models out there:  "With some engineering effort, better engine mounts and lots of sound damping, BYD can reduce the din. The company has nearly a year to absorb feedback from spoiled Americans and do something about it. The hardest engineering is done, and there are no showstoppers. All of the problems are fixable without adding a lot of cost."  The NYT reporter seemed quite fair and neutral in his assessment, and came out pretty impressed with the battery range and technology.

See for yourself.  Here's the link:  http://www.nytimes.com/2011/02/20/automobiles/autoreviews/byd-f3-dm-review.html

 

The Reuters hit piece was a rehash of old news with lots of innuendo thrown in.  Really bad reporters and editors there.  BYD's got plenty of challenges, but is doing pretty well in its long term strategy - and it is one of the few domestic companies in China that actually has a long term strategy that I can see.  They have since last year wisely let go of the outrageous press claims ann focus on market share at any cost, and instead are now focusing on quality and brand now.  And they are still selling 50,000 plus conventional cars a month, despite all the talk of their sales being so low in the electric and hybrid models (so are everyone else's in the new technology models for the moment). 

 

 

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  • 1 month later...

The amount of China’s auto production was approx 18.3M units for 2010 -- a 40% increase yoy. For 2009 the figure is 13M, 2008 its 9.35M and, 2007 8.5M units were produced.

In 2007 BYD produced about 86'000 units -- a 1% market share, in 2010 their market share had grown to approx 3% (520t units). The F3 model accounted for nearly 98% of production in 2007, and I guess approx 60% in 2010.

 

Two things appears to be valid; Over time, the F3 model becomes less important as a %age of total revenue and, BYD market share is increasing. In Jan-11 the auto production in China was about 1.8M units, a 11% increase yoy, so it would not be unrealistic to assume a 20M unit auto production in China 2011. A 3% market share means 600 000 auto production from BYD. Apart from this, BYD will introduce Buses, SUV and other vehicles to the market as well as entering USA and other countries with their products.

 

Aside from the auto segment. 'The handset components & assembly services' sales increased 40% 2010 (21% in 2009) and now stands for 44% of total revenue. This segment is also likely to increase due to the popularization of smart phones. The risk of course being that one customer stands for 37% of all purchase orders.

 

The rechargeable battery segment (and in my opinion the popular discussed 'future technology segment') stands for 10% of total revenue. I would not put too much weight on this area and believe that sales will be in line with 2010. This segment will be interesting when cost of producing solar power comes down in line with cost for coal power five years out.

 

If we assume a 600'000 auto production in 2011, a 7% increase in 'handset components' and same level in 'battery' sales, our total revenue will land around 52B RMB for 2011.

In 2010, profit margin declined 50% to 5% largely due to an 46% increase in Selling & distribution cost. I believe that this effort was made to meet future demand in auto segment as well as new positioning in new markets. The margin will probably revert to previous levels and say, on a 8% profit margin the profit would be above 4B RMB.

 

Taking the price of the stock 23,6 RMB we get multiples of 13 on profit and around 8,8 for the business itself. That is a good price for a company that has a Total Revenue 3YCAGR 30% (5y 48%) and profit 3YCAGR 16% (5y 38%) -- it is a wonderful company at a fair price is it not?  ;)

 

I am simplifying this analysis of course but hopefully it gives the big picture. I have started to buy the company at these levels. BRK bought the BYD rights issue @ 8HKD/share. I find it very hard to believe that the price will come down to this level again -- for that price to appear we need a crash in the market. And not to forget, BRK bought it September 2008, BYD has evolved since then.

 

Thoughts anyone?  ::)

 

 

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If we assume a 600'000 auto production in 2011, a 7% increase in 'handset components' and same level in 'battery' sales, our total revenue will land around 52B RMB for 2011.

In 2010, profit margin declined 50% to 5% largely due to an 46% increase in Selling & distribution cost. I believe that this effort was made to meet future demand in auto segment as well as new positioning in new markets. The margin will probably revert to previous levels and say, on a 8% profit margin the profit would be above 4B RMB.

 

This seems optimistic to me. BYD's auto sales are down year over year so far in 2011. According to this article from Reuters, sales are down 27.5% through March: http://www.reuters.com/article/2011/04/07/china-auto-idUSL3E7F70A220110407.

 

Margin reversion to 8% is also a stretch, I think. BYD cut prices on several models in February: http://www.cnbc.com/id/41656075/China_s_BYD_Says_Cuts_Car_Prices_by_Up_to_19. I'll be happy if the margin stays at 5% this year without falling further.  :)

 

I do own some BYD, but that is basically a speculative bet that they will be a big player in the future in electric batteries or solar energy.

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# treasurehunt,

 

Thank you for your insight,

 

I believe you are right with auto sales, I am optimistic about BYD to reach 600t vehicles, but not unrealistic... but lets not forget that 'handheld components' stands for 44% of revenue and increasing, so even if not meeting target in auto segment, they should come out ok on top line.

 

About margins.. I believe you have a point that the price cuts will hurt the margin, but less then many anticipate. The larger cuts are for G3 and F6 model which might very well increase in sales in same proportion, but who knows? But one thing is clear, the biggest cause of the drop in margin 2010 was not drop in sales but due to increased effort in sales channels and distribution -- a 77% cost increase. I don't believe BYD will repeat that increase.

 

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I think the unusually high number of investments made in 2010 also hurt profits but will allow for future growth and vertical integration that will ultimately help margins return to previous levels.  I think this company is valued as a conventional car company, when it is so much more.  Wang refers to conventional cars as essentially lawn mowers with a bench attached.  That's just a means to get into car business because to wait until electric cars are viable it would be too late.  This is just a stepping stone phase.  Beijing just exempted electric cars from the lottery system required to get a license plate there (instituted earlier this year).  Beijingers will be forced to buy electric vehicles in droves.  Only a few companies are truly ready to supply those and BYD is one of the few domestic companies able to do it.  I can't see how this won't help them move the e6.  Wang Chuanfu has said that the main driver of China's need for electric vehicles is allevation of reliance on foreign oil.  It is a national security issue for them, as well as a pollution one.  So it takes 9 guys sitting around a table in Beijing to force the changes necessary to fix this problem as opposed to several election cycles and changes in attitude in the West.  I believe strongly that electric cars will truly take off first in China and that the Beijing government will ensure that domestic companies are given advantages.

 

Wang's reasoning for getting into US now is also interesting -- the main reason they want a US presence in the near term is to increase credibility with Chinese consumers back home, who want to buy cars that meet US standards.  Finally, BYD is attempting to create products for the new middle class -- this is creating new markets, not just vying for market share in the old markets.  He is focused on the consumers that now do not buy things like cars and appliances but want to.  They can't spend $700 for a notebook, but can spend $300.  Can't spend $600 for an air conditioner, but can spend $200, especially one powered by solar in part or fully.  Low cost with respectable quality.  This I think is how you build a respected brand in China that has real loyalty among consumers.  Long-term strategy a la Phil Fisher.  Still speculative, but I think highly intelligent speculation with very high upside and little downside at these prices.   

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Oh and anders, thanks for your analysis of current multiple, which I think is approximately right and insightful.  It is a fair price for the current business, which is growing at a strong clip even now, not even counting the many far-reaching businesses that Wang has on the drawing board.  To me, that's the downside protection - current price is justified by cell phone and conventional car businesses.  You get all the solar and wind storage utility battery business, appliance businesses (whatever those turn out to be) and electric car business for free essentially in my mind.  Any one of those could be a home run.

 

And it's nice to have a stock that is not very correlated to the US and Western markets.  Well -- it's nice unless the Western markets are going up and BYD isn't! 

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But one thing is clear, the biggest cause of the drop in margin 2010 was not drop in sales but due to increased effort in sales channels and distribution -- a 77% cost increase.

 

anders, wasnt the drop in margin caused by both? and wasnt the reason for their aggressive increased sales & distribution efforts in 2010 because, in short, they miscalculated 2010 sales trend projections by a country mile?

 

i agree tho that byd is a worthwhilelong term speculation at these prices

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@anders:

 

Taking the price of the stock 23,6 RMB we get multiples of 13 on profit and around 8,8 for the business itself. That is a good price for a company that has a Total Revenue 3YCAGR 30% (5y 48%) and profit 3YCAGR 16% (5y 38%) -- it is a wonderful company at a fair price is it not?  ;)

 

I am simplifying this analysis of course but hopefully it gives the big picture. I have started to buy the company at these levels. BRK bought the BYD rights issue @ 8HKD/share. I find it very hard to believe that the price will come down to this level again -- for that price to appear we need a crash in the market. And not to forget, BRK bought it September 2008, BYD has evolved since then.

 

Thoughts anyone?  ::)

 

 

 

Can you clarify the valuation that you derive above..."13 on profit and 8.8 for the business itself". thx.

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