MONDAY, SEPTEMBER 14, 2009
EARLY LAST YEAR, WARREN BUFFETT'S Berkshire Hathaway sold its stake in Petrochina (ticker: PTR), turning a $488 million investment into $4 billion, or a neat 700% return over five years. His sale of the shares -- before oil prices peaked, the credit crunch arrived and stocks tanked -- now seems like a perfectly timed exit. But it's Buffett's most recent entrance that has been drawing attention in China.
A year ago, the MidAmerican Energy Holdings unit of Berkshire (ticker: BRK-A) bought 225 million shares, or 9.9%, of BYD (1211.Hong Kong) -- a Chinese maker of hybrid and electric cars, and batteries for automobiles, cellphones and notebook PCs -- for HK$8 (US$1.03) each. This happened just a week after Lehman Brothers' collapse. BYD's stock has risen nearly sevenfold since, giving the Sage of Omaha a cool $1.3 billion paper profit in just under a year.
What's driving BYD? China's burgeoning car market -- where more than 12 million passenger cars will be sold this year. (Total car sales in China grew 90% year-over-year through August.) BYD will sell 415,000 passenger cars this year and 650,000 next year, estimates Adrian Chan, China auto analyst for Credit Suisse. That figure could rise to more than a million cars in 2011.
|Upward: Japan gained on a historic election, and other Asian stock markets surged, too.|
BYD REMAINS A highly-leveraged outfit. By most estimates, it could absorb up to $3 billion in capital expenditure on technology and new facilities between now and 2011. With a net-debt-to-equity ratio of 76%, rising to more than 100% next year, BYD needs to raise a lot of cash to sustain its recent growth trend.
That's where a wealthy backer like Buffett might come in handy. BYD is expanding its car-production facilities and will begin marketing its own electric car in the U.S. late next year -- in addition to supplying batteries and other technology to auto makers worldwide.
Up next: an electric bus for China.
Even its most ardent fans concede that BYD stock looks very expensive -- trading at 47 times this year's estimated earnings -- but its fundamentals remain on track. Net profit grew 98% in the first half of this year. Profit is forecast to grow 102% this year and 73% next year. That's drawing even more investor attention. BNP Paribas, for example, last week upgraded the stock to a Buy after it had run up nearly sixfold in 11 months.
"With such explosive earnings growth, the high valuations are justified," says Credit Suisse's Chan, who also has a Buy on BYD with a HK$59 (US$7.61) target price, or 9% above recent levels. Indeed, Chan anticipated a 27% jump in the stock when he first recommended it just two weeks ago, but then the price reached two-thirds of his 12-month target in a mere nine days.
Others are even more bullish. Chitra Gopal, an analyst for Nomura Securities in Singapore, last week raised his own price target on BYD to a whopping HK$77, or 43% above recent lofty levels. If Nomura's 12-month price target is achieved, Buffett would have a nearly tenfold gain on his investment.
However, Charles Guo, an analyst for JPMorgan in Hong Kong, believes BYD shares might need to take a breather in the interim before they are ready to surge again.
Some analysts still wouldn't take any money off the table, pointing to MidAmerican's support. When the company first bought a 10% stake in BYD a year ago, Buffett said he had wanted to buy up to 20%. BYD executives have told media and analysts since that MidAmerican still intends to increase its stake.
The betting among investors is that any such move would come through a new-share placement by BYD.
The company's current market capitalization is above $16 billion. If BYD does a new-share placement equivalent to 10% of its outstanding shares -- at, say, a 10% discount to the current market price -- it could easily raise more than $1.3 billion to help pay down debt.
For now, BYD shares are listed only in Hong Kong, but the company could soon list in Shanghai's A-shares market in an initial public offering that could raise more than a billion dollars. New-share issues will dilute current shareholders, but with pared-down debt and a stronger balance sheet, BYD will be poised to grow at an even faster clip as it races to realize its ambition to become a global electric-car giant.
What's the risk? If Buffett decides that he'd rather not buy any more shares or chooses to take profits, BYD stock could get hammered. Similarly, a failed private placement would take some of the air out of the stock.
But in light of its strong sales growth, improving cash flow, and solid margins, as well as growing car demand in China -- not to mention battery demand worldwide -- that seems unlikely for now.
ASSIF SHAMEEN is a free-lance writer based in Singapore, who writes about Asian finance and market topics.
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