Warren Buffett cuts his stake in BYD. Trouble ahead for the EV market?

What happened?

Berkshire Hathaway's sale of part of its stake in BYD shook investors this week. 

Over several transactions, Warren Buffett-backed Berkshire Hathaway reduced its stake in the leading Chinese EV maker to 18.87% as of 1 September from above 20% previously. 

BYD’s shares fell by 7.9% on 31 Aug (Wed) following an announcement of its first stake sale. As of 2 September, its share price has declined by 19% over the past one month.  

If you are wondering why this development attracted so much investor interest, it is because Berkshire Hathaway was an early and high profile supporter of BYD.

In 2008, Berkshire Hathaway invested about US$230 million in BYD. The stake is now worth above US$8 billion. 

Does Warren Buffett's sale of its BYD shares spell trouble ahead for the EV market? 

What we learnt from BYD’s recent results

Just a few weeks ago, BYD reported its earnings for the first half of 2022. We take a deeper look at these results to determine if there is anything fundamentally weaker about BYD we should be worried about. 

BYD’s net profit for the first half of 2022 tripled from the same period last year to reach 3.6 billion yuan (US$ 521 million), at the top end of the company’s forecast of 2.8 billion to 3.6 billion yuan. 

#1 – BYD’s EV sales remain very strong

BYD sold 641,350 electric vehicles in the first half of 2022, exceeding last year’s total of 630,000. 

With the strong EV sales, BYD’s revenue reached 151 billion yuan in the first half of the year, an increase of 66% from the previous year. 

The company projects that it is on track to achieve its sales target of 1.5 million EVs this year, doubling from the number of EVs sold in 2021. 

This reflects that BYD has been able to navigate the supply chain challenges better than the other Chinese EV makers. BYD has also been less impacted by the Covid-19 lockdowns in Shanghai because its production facilities are based elsewhere. 

According to the China Passenger Car Association, BYD’s market share of EV sales in the Chinese market from January to July this year reached 29.0%.

This would put it far ahead of its next largest competitor, SAIC-GM-Wuling, which has a market share of 9.1%.

Tesla, the electric car maker backed by Elon Musk, achieved an even lower market share of 7.5%.  

As we shared earlier, BYD is also the largest manufacturer of EVs globally in the first half of this year.

#2 – BYD continues to make progress in the EV battery market

BYD’s edge in the EV market comes partly from its in-house capabilities in EV components including batteries. 

BYD installed 24.0 gigawatt-hours (GWh) of batteries from January to June this year, putting it as one of the top three manufacturers of EV batteries globally according to SNE Research. 

Only CATL and LG Energy Solution exceeded BYD in battery sales during this period. 

It is also quite impressive that BYD’s market share in the EV battery market increased to 11.8% in the first half of 2022, from 6.8% in the first half of 2021. 

Just recently, it was reported that BYD will be supplying its Blade batteries to Tesla Model Ys built in its Giga Berlin factory. 

This comes after a BYD senior executive said that it will supply batteries to Tesla ‘very soon’.

"We are now good friends with Elon Musk because we are preparing to supply batteries to Tesla very soon," said Lian Yubo, BYD's executive vice president in an interview with China's state-owned broadcaster CGTN.

#3 – BYD’s cash flow has improved significantly 

With the better revenue performance across its EV and battery businesses, BYD has also seen an improvement in its profitability and cash flow.

Its gross profit margin rose to 13.5% in the first half of 2022 from 12.8% in the first half of 2021. 

This was despite concerns of supply chain constraints and higher raw material costs impacting its margin. 

With the improvement in profitability, BYD generated 43.2 billion yuan of operating cash flow in the first half of 2022, a sharp increase from the 9.7 billion yuan generated in the first half of 2021. 

What would Beansprout do? 

Warren Buffett’s share sale in BYD has led to weaker sentiment towards the world’s largest EV maker. 

After all, many investors are now wondering if Berkshire Hathaway will sell its remaining 19% stake in BYD. 

Its entire stake in the company remains on Hong Kong’s Central Clearing and Settlement System, which is seen by some to mean that Buffett eventually intends to exit. 

However, as Bloomberg pointed out, Berkshire Hathaway’s share sale might be “an old-school investing move by Buffett”

As we have seen, BYD is still doing well across its electric vehicle and battery businesses. Hence, some investors might see this as a sign that Warren Buffett is more concerned about the intrinsic value of the stock rather than the fundamentals of BYD. 

Are you are interested to invest in the long term structural growth of the Chinese EV sector without having to research on individual stocks or look out for when Warren Buffett is next selling his stake in BYD?

It might be worth looking at an exchange traded fund (ETF) which provides diversified exposure across the value chain of the fast-growing Chinese EV sector. Find out more here.