Before Buffett came to China, many U.S. media quoted a Reuters article. The article mentioned that this time Warren Buffett may sell some shares of BYD, because BYD's stock may have reached its peak.

 

In fact, Buffett not only allowed BYD to handle his China trip, but also attended a variety of commercial activities organized by BYD. The eighty-year-old “stock icon” claimed using the most simple logic, but yet always unpredictable.

 

From PetroChina to BYD

 

In China, people talk about Buffett’s two big investments - PetroChina and BYD. Both companies are energy-related.

 

PetroChina is the leader in traditional energy sector. From 2002 to 2003, Buffett’s Berkshire Hathaway invested $488 million buying PetroChina shares. Since July 2007, Buffett reduced the stake of PetroChina H shares and sold all $2.34 billion H shares at a high price a month before PetroChina listed on A share market. This brought a $4 billion profit and almost seven times profit gain. In a letter to Berkshire shareholders in 2008, Buffett concluded, “PetroChina's market cap rose to $275 billion, I think the valuation compared to other large petroleum companies is fair. So I decided to sell all $4 billion shares.”

 

Selling PetroChina is a classical battle Buffett won in China. He also established himself as the “stock icon” in China. Because of this, in 2008 after the purchase of BYD stock by MidAmerican Energy, which is controlled by Buffett's Berkshire Hathaway, caused a sensation in China. The company's shares become famous overnight and had huge growth momentum. However, Buffett said in the shareholder meeting in 2009, “This is not my idea, my partner Munger led the project.”

 

Buffett said that he not only didn’t understand mobile phone and cell phone batteries but also didn’t understand automotive manufacturing. However, he believes in Munger. It is understood that, in 2008, a fund manager introduced to Munger the Chinese battery and car manufacturing company BYD. In 2008, Berkshire's MidAmerican Energy invested $230 million and acquired 10% stake in BYD.

 

U.S. Witter Asset Management managing director Peter Tsu also told the reporter that he felt Buffett did not fully participate in BYD’s buying decision.

 

“He has a committee to determine the investments. This may be recommended by other people. I'm sure Warren Buffett knows this company, but I do not think he knows everything about it.”

 

“Long-term Investment”

 

On average, Buffett bought the stock at about 8 HKD per share. Last October, the company's share price rose to a record high of 88.40 HKD, but soon dropped back to 57 dollar per share now. Now the market cap of Buffett's investment is close to $1.6 billion and earned 6 times.

 

But this year, BYD faced many bottlenecks in development process. Due to lower car sales, the company had to reduce this year's sales forecast by 25%. Other challenges included technology and building factories. In addition, in July this year the Ministry of Land and Resources publicly criticized BYD involving in local government’s illegal use of land, etc. Before Buffett's visit to China, Reuters forecasted that Buffett may sell part of BYD share because the company had lost its strong growth momentum. World-renowned investment banks also downgraded BYD shares last month. Credit Suisse lowered price target to 40 HKD and issued a rating of underperform. Goldman Sachs issued a hold rating and reduced price target to 41.22 HKD because the company missed guidance. Deutsche Bank also reduced price target to 44.2 HKD.

 

However, during the 4-day stay in China, Buffett spent most of the time with BYD. He was involved in various BYD public events and visited BYD’s Shenzhen, Beijing, Changsha manufacturing base. BYD's stock price was up more than 20% over the past week, especially on Monday, when it rose 4.4 percent to 57.6 HKD. Buffett also told the Chinese media, “I will never sell BYD shares. You can say 100% that I will not sell shares of BYD.”

 

However, it’s not uncommon that Buffett changes his investment decision. That’s why this time some private equity fund managers still can’t judge the move of Warren Buffett. Barron Partners is a New York based private equity fund focusing on investments in new energy companies. Chairman Andrew Barron Worden told reporters that he had studied Buffett’s investment philosophy. He couldn’t predict Buffett’s investment in BYD. But generally speaking, Buffett will invest in company that has great value.

 

“Buffett is a value investor. If the value of something not so good, he may sell.” Worden commented, “Generally speaking, this (investment in BYD) is a wise investment decision because this is the right industry. China is working towards this area - electric cars and batteries. The problem is that this stock is not very cheap and is not substantially undervalued,” Worden said.

 

Senior private equity manager of a Singapore bank told reporters that even Warren Buffett would not announce even if he sold his shares. He will not necessarily sell the shares. But for BYD, if Buffett sold the stock, even if only a small part, it is catastrophic. It is bad for the stocks that Buffett still owns. However, the possibility of him selling all the shares is also small.

 

Word from BYD indicated that Warren Buffett not only would not sell, but may even buy more shares.

 

Attention to New Energy?

 

Although Buffett did not participate directly in the investment of BYD, his China trip still showed his interest in China’s energy industry, especially the new energy. He visited BYD’s four R & D manufacturing bases, the iron battery factory, LED factory and engine factory with a focus on new energy, power grid, electric vehicles and charging stations. During Buffett’s visit, he kept asking about the battery technology, price and revenue.

 

Many fund managers of private equity specializing in China investment believe that Buffett will keep his investment philosophy and focus on the energy-based industry, alternative energy or new energy.

 

“I guess he will (pay attention to new energy.) China dominates the solar energy market. China currently manufactures over 90% of the solar panels in the world. They are capturing the wind power market. I think within 5 to 10 years, China will dominate the wind power market. Smart people like Warren Buffett will definitely follow the trend,” Worden said.

 

Worden believes that by 2020, China will have an overwhelming advantage in the international wind power, nuclear and solar power. Related companies will have great potential.

 

Peter Tsu believes that, “Government’s support and requirement for new energy presents great growth opportunities for many companies. This industry is very healthy.”

 

In addition, Peter Tsu also speculated that Buffett may choose to invest in those companies that benefit the emerging middle class, such as consumer products, beverages, hotels and so on.

 

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