To The Moon

On December 13, the Hong Kong Stock Exchange disclosure show that

December 8, Warren Buffett's Berkshire sold 1,239,500 shares $BYD COMPANY(01211)$ at the average price of 201.3432 Hong Kong dollars / shares; the holding ratio dropped from 15.07% to 14.95%, Buffett still holds 164.093 million shares.

Historical data shows that this is the sixth time this year that Warren Buffett reduced his holdings of BYD, and this transaction cash out about HK$268 million. Since August 24, Buffett cashed about 3.417 billion Hong Kong dollars in total.

Analysts commented,

Warren Buffett's consistent investment style is that he would hold the subject of investment for a long time, and sell the stock when he is no longer bullish on it.

The frequent reduction signaled that he want to liquidate $BYD COMPANY(01211)$.

In the context of rising sales of BYD, why did Buffett reduce its holdings? Is it just because the saying that "Be fearful when others are greedy"?

BYD's Fundamentals Remain Strong

Sales

BYD's new energy vehicle sales have been the global champion, exceeding $Tesla Motors(TSLA)$ .

In November this year, BYD's monthly sales reached 230,000 units, up 153% year-on-year.

Future trends

According to media, BYD is also popular in Thailand, with people even lining up in the early morning to buy ATTO 3.

In 2021, the domestic car sales reached 26.275 million units. Assuming a stable 26 million units in the future and a monthly sales volume of 250,000 units, BYD's market share reaches 11.5%, and there is still room for improvement.

The overseas market is still in the early stage and is currently gaining momentum and is expected to become the second growth curve.

Before the pandemic, the global annual car sales were around 90 million units. With reference to the share of cars in 2016, the market share of one car company can achieve around 10%.

The global sales of TOP3 auto groups had been close to or even over 10 million units, and both BYD and Tesla are expected to reach this level.

Assuming that BYD's future sales can reach 10 million, according to the calculation of the revenue of a single car 200,000, only the car revenue can reach 2 trillion.

In the self-driving era, the car business focuses the added value through software services, and thus thicken profits.

Tesla's gross profit margin is close to 30%, the net profit margin is up to 15%, far beyond the profitability of of fuel cars:

Assuming that BYD's net interest rate can reach 10%, BYD can earn 200 billion net profit per year at most.

Referring to Toyota's historical P/E ratio, the valuation pivot is around 10 times. Based on this calculation, BYD's forward market value in 2 trillion.

At its peak this year, BYD's market capitalization was 1,044.3 billion. It still has much room from 2 trillion.

However, the 10 million sales forecast and the 10% net profit margin are both estimates, can they be achieved in the future? How long can be achieved is unknown, after all, BYD's current gross margin is only 13.5%.

Excluding the 3% sales expense rate, 2.3% management expense and 4% R&D expense rate, BYD can achieve a net profit margin of only 10% at 20% gross profit.

Therefore, the net profit of 200 billion is still a wild dream.

BYD still looks good on its fundamentals, but there is still uncertainty about whether forward profits can be achieved.

Risks

Geopolitical risks are gradually increasing this year

In Berkshire's investment map, there are few cases of investment in overseas companies. Currently, all of the top 10 holdings are US companies.

The US chip bill introduced this year will prohibit the sale of advanced semiconductor equipment to China.

It is foreseeable that such disputes will spread to many areas.

BYD is not immune to this problem. The annual sales of US auto market is 15 million units. In the future, US may also ban the sale of Chinese brand cars in the United States like it banned Huawei before.

Competition in the new energy car become fierce

Tesla and BYD laid out new energy vehicles earlier, and later $NIO Inc.(NIO)$ , $XPeng Inc.(XPEV)$ , $Li Auto(LI)$ also gained market dividends by virtue of their first-mover advantage. However, after 2022, new energy vehicle brands are springing up.

XPeng has even lost out in the competition, with monthly sales dropping from 10,000 units to around 5,000.

Tesla, the leader, has repeatedly cut prices this year in response to fierce competition. At the same time battery costs are still soaring, so it is clear that the market sales pressure is extremely high.

In addition, considering Buffett's age and investment in BYD is connected with Li Lu, this investment may have come to say goodbye.

Bottom Line

The real reason for liquidating BYD may only be clear to Warren Buffett himself. But for other investors, after 14-year's holdings, BYD investors should carefully consider to go or stay.