Chinese Stocks

FAN YU is an expert in finance and economics and has contributed analyses on China’s economy since 2015. Fan Yu

Why Did Buffett Sell BYD Shares?

Berkshire could sell its entire 20 percent stake in the Chinese EV maker

When berkshire Hathaway, Warren Buffett’s investment firm, began trimming its stake in Chinese electric car and battery maker BYD, rumors began circulating about what the move meant for the company, China’s stock market, and ordinary investors following Chinese stocks.

But to regular everyday investors who follow Buffett, it means very little.

On the surface, the stock sales appear strange. After all, BYD now is the world’s second-biggest electric vehicle (EV) battery maker, overtaking South Korea’s LG. Sales of its electric vehicles (EVs) have also been accelerating. Its first-half 2022 net income tripled. BYD also has a commanding 30 percent market share in China’s expanding EV market. Those are all good news on their own and should send the company’s stock soaring.

But Berkshire, one of BYD’s biggest shareholders, has now sold 18 million shares according to securities filings. That has sent BYD shares plummeting in Hong Kong trading. As of Sept. 6, BYD stock was down by almost 30 percent from July 1.

Now, Berkshire still owns about 220 million shares, good for almost 20 percent ownership stake in the company’s “H shares.” While the exact number of shares Berkshire owns at any time is hard to discern, the number of stocks it has already sold only amounts to very little of its total holdings.

So what’s going on here?

For one, some experts are expecting more sales, which could drag the price down.

“This is a common trend for investors starting to take cash,” Yang Liu, Atlantis Investment’s chief investment officer, told CNBC on Aug. 31.

While that’s a rather obvious remark, the sheer volume of stock Buffett owns can easily move the market. If Berkshire can’t arrange a block stock sale with an investment bank, it could take months for Berkshire to unload the stock in the open market, and those sales will mechanically put pressure on BYD’s stock price.

And why do investors expect Berkshire to keep selling?

Buffett is a proponent of the value investing strategy, which focuses on long-term value appreciation and buying companies with good balance sheets at depressed prices. But BYD isn’t a typical Buffett investment that follows the value investing mantra. Berkshire invested in BYD at $1 per share back in 2008 at the suggestion of Li Lu—who founded the investment firm Himalaya Capital—who recommended it to Buffett’s longtime business partner Charlie Munger. That was three years before the company went public on the Hong Kong Stock Exchange.

The shares Berkshire recently sold averaged $35 per share. That’s a 35fold realization multiple. Berkshire held the stock for 14 years, a longer timeframe than many retail—or even institutional investors—would think about holding onto their shares. This gives us a sense of the immense profits the company was sitting on, and it makes sense that it would start selling given the uncertainties around the Chinese stock market.

It didn’t exit the investment when the company went public in 2011, and it kept the stock even during the tumultuous period of 2014 to 2016 when the Chinese stock market suffered from large volatility. It continued to sit on the shares during the Chinese stock market revival over the past five years.

And finally, as policy sentiment in Beijing has turned against technology companies and the country’s economically destructive COVID-19 policy has rendered the future bleak, Berkshire has decided to begin unloading its massive shares in BYD. And we haven’t even touched upon more direct factors impacting BYD’s financial outlook, which is bright but is facing headwinds. Raw material prices for EV batteries will squeeze the company’s margins. And despite the recent decline in its stock price, BYD continues to trade at higher multiples than peers and very high absolute multiples. BYD has also been accused by the Australian Strategic Policy Institute of being connected to forced labor among the Uyghur population in Xinjiang, China.

All of this, coupled with the immense paper profits Buffett was sitting on, suggests that Berkshire should sell. It probably should have begun selling sooner. And for average investors who happen to also own BYD stock, it’s probably also a good time to sell given the macro picture and specific challenges facing the company’s richly valued stock.

BYD isn’t a typical Buffett investment that follows the value investing mantra.