Warren Buffett-backed BYD latest Chinese green energy stock to take a hit as valuation, insider selling concerns build up

  • The sell-off in BYD shares wiped out HK$77.5 billion from its market capitalisation that exceeded HK$1 trillion in June
  • Investors however remain bullish and expect BYD’s shares to rise 24 per cent to HK$365.45 in the next 12 months

BYD, the Chinese electric-vehicle maker backed by Warren Buffett, is taking some of the zing out of the red-hot renewable energy sector. Investors are concerned that some bets in the green energy segment have become crowded, while others say that price gains are unsustainable.

The Shenzhen-based carmaker slumped 8.5 per cent for the week ended July 15 in Hong Kong, posting the biggest decline for the five-day period since the end of March. The sell-off wiped out HK$77.5 billion (US$9.9 billion) from BYD’s market capitalisation that exceeded HK$1 trillion last month.

One direct trigger for the sudden sell-off was due to speculation that Buffett’s Berkshire Hathaway was selling its stake in the Chinese company, which has been kept unchanged since the investment was made in 2008. Berkshire Hathaway holds 225 million shares, or a 7.7 per cent stake, in BYD through its unit Western Capital Group, company filings show. The same number of shares has shown up in Hong Kong exchange’s Central Clearing and Settlement System, which some investors see as a precursor to insider selling.

Omaha-based Berkshire did not immediately respond to an email sent by the Post seeking comment and an official from BYD’s investor relations department said the company had nothing to disclose for now.

A report from the Securities Times, a publication under the People’s Daily, last week cited an unidentified source from BYD saying that there was no stake-reduction information revealed to the Hong Kong exchange, the only official source for disclosing insider selling.

“We tend not to take such rumours seriously. For BYD and many other companies in the new energy auto supply chain, our main concern is the valuation,” Wang Qi, CEO of MegaTrust Investment in Hong Kong. “We do like new energy tech as a long-term investment theme. However, valuation discipline is also important to our investment process. There are other companies in the new energy auto industry that trade at a more reasonable valuation.”

After the week’s pullback, BYD trades at about 90 times its projected earnings for this year, compared with the five-year average of 50 times for the multiple, according to Bloomberg data. The Hang Seng Index, of which BYD is one of the 69 members, is valued at about 10 times, the second cheapest benchmark among the world’s major indices.

Bullish investors point to BYD’s strong earnings growth and China’s booming EV sales as the catalysts that can underpin the elevated valuation. First-half profit probably surged by as much as 207 per cent year on year amid increased sales, BYD said in an exchange statement on Friday. It sold a record 134,036 EVs in June, representing a 163 per cent gain from last year and taking the year-to-date increase to 315 per cent.

To revive the EV sector that has been battered by the flare-up in the pandemic, local governments in Guangzhou and Shenzhen have granted subsidies to EV purchases. Even the State Council, China’s cabinet, is mulling extending the exemption on EV purchase tax that expires at the end of the year.

BYD will probably rise to HK$365.45 in the following 12 months, implying that the stock will rise 24 per cent from its Friday close, according to the consensus price target of analysts tracked by Bloomberg. The most bullish is Citigroup’s Jeff Chung, who predicts the stock will rise to HK$640 in this period.

The stock rallied 4 per cent to HK$294.20 on Friday, clawing back some of the weekly loss after issuing the first-half profit guidance. The Hong Kong-traded shares of BYD have surged about fivefold over the past two years and so has its onshore stock in Shenzhen.

The renewable-energy sector has shown some signs of unravelling recently amid concerns that stock prices are rising too fast. A comment on Tianqi Lithium’s valuation by the wife of a disgraced Chinese trader sent the mainland-traded shares of Asia’s second-largest lithium compound producer plunging by 16 per cent last week. Last Wednesday, the company’s Hong Kong stock fell below the offer price on the first day of trading in the city.

“Some segments of the new-energy industry are crowded bets and the risk has already emerged,” said Zhu Liang, Shanghai-based chief investment officer at AllianceBerstein, which manages US$647 billion of assets globally. “Among the sector, we like wind-power stocks whose valuations have dropped to reasonable levels after the price war and some consolidation within the industry over the past year.”

While EV sales in China may rise 50 per cent for the full year, CCB International remains cautious about car stocks, citing the Shanghai lockdown and the lingering impact of any flare-up in the pandemic on the industry.

“We expect more time will be needed for supply chains to return to normal, as some OEMs [original equipment manufacturers] will still be scrambling for chipsets due to import shortages,” said Ke Qu, an analyst at the brokerage in Hong Kong. “Though production has resumed in locked-down regions, consumption remains weak.”

Author: Zhang Shidong, SCMP

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