In 2008, Berkshire Hathaway Inc. (BRK.A, Financial) (BRK.B, Financial), the insurance conglomerate led by Warren Buffett (Trades, Portfolio), purchased a 10% stake in BYD Co. Ltd. (HKSE:01211, Financial) for around $230 million.
At the time of the investment, BYD was still relatively unknown outside of China. Founded in 1995, the company initially focused on producing batteries for cell phones and other electronic devices. In the early 2000s, however, it began to develop electric vehicles, drawing on its expertise in battery technology.
The company's commitment to sustainable technologies and its innovative products eventually caught Buffett's attention following the recommendation of Charlie Munger (Trades, Portfolio). At an event in 2010, he said, "BYD is the right choice for me" and described the company as "a leader in innovation and technology.” Since then, it has expanded rapidly, becoming one of the world's leading EV makers and diversifying into other areas, including energy storage systems, solar power and rail transportation.
In terms of financial returns, Berkshire Hathaway's investment in BYD has been a success. According to Bloomberg, the initial $230 million investment was worth around $6 billion as of June 2022, an increase of more than 2,700%. This represents one of the most successful investments that Berkshire Hathaway has made in recent years.
The strong performance of BYD's stock is mainly due to the company's growth in the EV market. In 2020, it was the world's second-largest EV maker, behind only Tesla Inc. (TSLA, Financial). The company's EV sales have been boosted by favorable government policies in China as well as increasing demand for electric vehicles in other markets. Munger also said the company is a notable rival to Tesla.
Berkshire Hathaway, according to regulatory filings, has been unwinding its BYD stake since last August, spooking some investors. A closer look at the company's financials suggest, however, that BYD is still one of the best bets in the market for investors looking to gain exposure to the booming EV industry.
Beating the market amid macroeconomic challenges
The S&P 500 has declined close to 7% in the last 12 months amid interest rate hikes, surging inflation and geopolitical tensions in Europe. The stock has fallen close to 3% over the same period, though the company had to grapple with regulatory pressures in China in addition to global macro-level challenges.
In the third quarter of 2022, BYD surpassed Tesla as the top seller of electric vehicles globally, selling close to 200,000 more cars. Achieving this market-leading position has attracted many investors recently, which could be one of the reasons for the stock's outperformance. Continuing with this momentum, BYD sold a record 235,197 vehicles in December 2022, which was a significant increase from the 93,945 vehicles sold in the same period of the previous year. The company's total new vehicle sales for 2022 rose by more than 200% to 1.86 million, where electric vehicle sales accounted for 48% of total sales. The reopening of the Chinese economy following a period of strict zero-Covid policies should lay the foundation for BYD to improve its sales further in 2023.
The company's dominance in China, which is the largest passenger car market in the world, sets it up for long-term success, which is being felt by other automakers. As reported by Reuters, brokerage data revealed that in the first four weeks of November 2022, BYD outshone Volkswagen (XTER:VOW3, Financial) to become the leading car brand in China, highlighting the challenges faced by established companies in the world's biggest automobile market.
BYD is expanding its reach beyond China, seeking to secure footholds in Asia, Europe and South America. The company has announced plans to crack the European market by building local factories on the continent, signaling its intent to compete with other major EV players in the region. Last December, the company announced it will introduce a "professional and personal" brand in addition to a premium brand called Yangwang in the first quarter of 2023. It as also collaborated with rental car company Sixt to roll out 100,000 vehicles in various European countries.
The company has been focusing on U.S. expansion as well, but its efforts have been slowed down by geopolitical tensions between the U.S. and China. Despite conducting an advanced study on setting up a U.S. distribution network for its latest electric models, BYD has not received the green light from its management, so an aggressive U.S. expansion seems unlikely for the foreseeable future. Further, the Inflation Reduction Act,which was signed into law last year, imposes rules on sourcing battery materials and disqualifies EVs produced outside North America for a $7,500 purchase rebate. While BYD is still the world's biggest seller of BEVs and plug-in hybrids, it has had to rein in its U.S. ambitions due to President Biden's push for local production.
Although the U.S. expansion has hit barriers, the company will likely benefit from the large addressable market opportunity in Asia, Latin America and Europe.
Takeaway
With a vertically integrated supply chain from batteries to chips, BYD is well-positioned to become a formidable player in the global automotive industry in the coming years. There are many risks associated with investing in companies outside of the United States, but strategically allocating a small portion of a portfolio to a high-growth company such as BYD could help investors beat the market in the long term.
BYD is a profitable company, which makes it a unique play in the EV sector. Assuming that corporate earnings will dictate terms over the market performance - not geopolitical tensions - it seems reasonable to expect the stock to head substantially higher from here.
