Why might Buffet dump his BYD stock?

A stake similar to the size of Buffet’s Berkshire Hathaway’s in Chinese electric vehicle maker BYD appeared in the Hong Kong clearing system, prompting speculation of a Buffet exit.

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Warren Buffet backed BYD has proven to be one of the most prolific Electric Vehicle makers of the past few years, after once being laughed at and dismissed by Elon Musk as a Tesla competitor: ‘Have you seen their car?’ he said, ‘I don’t think they have a great product.’

Eleven years in the future and Chinese EV maker BYD produces cars that are among China’s most popular vehicles. Company sales have surged 250% to a record 114,000 units in May, as Beijing encourage their population to reduce their carbon footprint. BYD now sells more cars per year than any other domestic brand in China, and ranks second in sales overall. A 2008 investment from Warren Buffet’s Berkshire Hathaway proved to be highly lucrative as BYD’s stock soared, boosting the value of Berkshire’s 7.7% stake to over $9 billion today. Ironically, BYD’s latest chapter in its story of success was a rumoured deal to sell car batteries to Tesla, which would prove to be a remarkable turning of the tables in proving to Elon Musk and Tesla that the company does in fact retain technical prowess.

Much of BYD’s success is accredited to the intense buzz around EV companies and makers like Tesla and Rivian during the pandemic. Investors have increased shares more than seven fold since 2020.

Buffet’s investment in BYD might seem a little out of pattern, following his previous investments in mainly US based companies, such as Apple and Coca-Cola. However, this investment came at the insistence of his business partner Charlie Munger. One of Munger’s selling points was his acclaiming of BYD CEO, Wang Chuanfu, as a combination of Henry Ford, Thomas Edison and Bill Gates in one person.

All the above may contribute to the confusion of the masses in the recent BYD news. Shares in BYD fell 12 percent after a stake similar to the size of Berkshire Hathaway’s appeared in the Hong Kong stock exchange clearance system. This prompted speculation and fears in many investors that the conglomerate may dump its holdings.

BYD shares registered with the Hong Kong stock market’s clearing system rose last week, and that addition of 225 million registered shares closely matched the size of the stake in BYD held by Berkshire Hathaway, according to a Bloomberg estimate.

There is a great deal of uncertainty surrounding this, however, as due to Buffet’s holding in this stock being on the Hong Kong stock exchange, he is not required to report any changes in position to the US Securities and Exchanges Commission. Although large shareholders must disclose significant changes in their holdings, Buffet may have made smaller changes over the years that he was not required to report: we will never know unless Buffet talks about it.

This speculation that Buffet could soon sell out of his position prompted a surge in selling by traders hoping to get out prior to a potential exit. ‘it’s psychologically very disturbing for the market when this kind of news comes in.” said the head of a Hong Kong brokerage.

In a statement to the FT, BYD claimed there had been no statement given to the Hong Kong exchange declaring a major shareholder was changing its holding in the company, a regulatory requirement.

So why may Buffet be considering the exit? The Chinese firm seem to have done all the right things, with their preliminary net income being expected to jump to 207% in the first half. The answer is, there may be a slight problem with the company’s future in Buffet’s eyes, and this move, if confirmed, may display his excellence in exiting as well as investing at the right moments.

A slight crack at the surface of BYD’s stellar progress has emerged in Lithium supply. Amongst material prices surging as shortage looms in China, BYD has so far circumvented cost pressures. They have been eyeing mines across the world, improving battery technology and boosting production. There has been some uncertainty with its grip on Lithium production however.

BYD is connected with Youngy Co, one of China’s first raw lithium compound miners. In March, it participated in a private placement in Chengxin Lithium Group, another miner. As part of this, BYD will get discounted lithium compounds in the future. Although both miners will continue to buy more mines in the Sichuan region, it won’t lead to immediate or guaranteed supply. Chengxin, for example, does not have full access to supplies in some of the quarries with future ore production capacity.

Meanwhile, lithium iron phosphate batteries; the type of batteries the firm make; are now gaining traction worldwide as key patents that restricted production outside of the firm are expiring. This means that companies around the world will now be able to copy BYD’s pioneering battery technology, reducing originality and therefore sales.

There are other issues. For example, analysts are counting on more lithium-bearing minerals and ores from Sichuan, but the count could be lower than expected due to difficult terrains in the region, which affect how long mines can operate. There are also environmental issues arising in the region.

These pressures led the firm to target Chile, where it achieved a contract for lithium extraction. Progress made there was once again hindered when some of these contracts were suspended by Chile’s top court. It is currently looking for mines in Africa, however no clear deals have been struck.

Another factor could be Buffet’s potential lack of personal attachment to the stake at hand, perhaps seeing that the best idea for him now is to engage in profit-taking. Munger has been quoted in an interview as saying ‘“[Buffett] didn’t want to use his own money,” so he made “Mid American use their money to buy the stake." Berkshire Hathaway owned 80% of Mid American Energy at the time. Interestingly this provides a reluctance from Buffet’s perspective to being attached to the stock, as he had to be convinced by Munger to invest in the first place. Perhaps now is the right time for profit-taking in his eyes: after all, Berkshire Hathaway has made nearly 40 times its money on the stock, the value of it soaring from $230 million to over $9 billion. If proven, this would be a highly successful investment and exit, as astronomical profits have been made.

Sticking with his stake at this point may seem pointless for Buffet, as limiting factors in BYD’s future success may prove it less lucrative in his mind, and perhaps now was the best time to bow out and rake the profit from his perspective.

Investments are always made in the best interests of the company’s future. Perhaps Buffet saw limitations in BYD’s future progress due to raw material shortages and uncertainty. There may also be other factors, such as constant regulatory pressure in China, and the sheer EV competition in the country. BYD’s constant progress and success in the past may make it seem like there’s nowhere to go but up for the firm, however no matter how good of a record the company has, or how potent sale forecasts look, raw material shortages and regulatory pressure will always leave the future of the company uncertain in a great investor’s mind.