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Buffett's gamble pays off as BYD catches market fancy

(China Daily)
Updated: 2009-08-01 08:27

Billionaire investor Warren Buffett (R) receives a BYD car model as a gift from BYD's Chief Executive Officer Wang Chuanfu in this file photo. Buffett's Berkshire Hathaway Inc has realized a $1.02 billion paper profit on a 10-month-old investment in BYD Co after shares in the mainland car and battery maker quintupled.

Warren Buffett's Berkshire Hathaway Inc earned a $1 billion paper profit from an investment it agreed to make in Chinese carmaker BYD Co less than a year ago.

The automaker has jumped fivefold in Hong Kong trading since the deal was announced on Sept 27, helped by Buffett's investment and rising demand for fuel-efficient vehicles. Three days earlier Berkshire agreed to an investment in Goldman Sachs Group Inc that has since generated a paper profit of about $2 billion.

"When Warren Buffett says the sun shines out of somebody's backside, it's worth paying attention," said Guy Spier, principal at New York-based hedge fund Aquamarine Funds LLC, who owns Berkshire shares and has researched BYD. Buffett is "betting on the jockey in this case," Spier said, referring to BYD's Chief Executive Officer Wang Chuanfu.

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Berkshire's MidAmerican Energy Holdings Co unit agreed to buy 225 million new shares of BYD for HK$8 apiece. That stock now has a market value of HK$9.37 billion, based on Thursday's closing price. Buffett will pay HK$1.8 billion.

BYD said Thursday night it completed the sale. Buffett didn't respond to a request for comment.

The investment may help BYD, the seventh-biggest carmaker in China, boost its profile overseas and also reassure potential customers, Chief Executive Wang said last year. The automaker started selling the F3 DM, the world's first mass-produced plug-in hybrid, in December.

"Investors are buoyed by the potential growth in BYD's electric-car business," said Barry Leung, an analyst at Sun Hung Kai Securities in Hong Kong. "The alternative-energy sector is clearly one that will continue to enjoy the support of the Chinese government." Leung rates the carmaker "buy".

BYD, also China's biggest maker of rechargeable batteries, climbed 4.3 percent to HK$43.45 at 10:09 am. The company supplies power units to mobile-phone makers including Motorola Inc, Nokia OYJ, Samsung Electronics Co and LG Electronics Inc.

"Battery technology is one of the most important subjects affecting the technological future of man," Charlie Munger, Berkshire's vice-chairman, who first identified BYD as a potential investment target, said in a May 1 Bloomberg TV interview. "BYD is one of the most interesting small companies in the world."

The Shenzhen-based company aims to more than double vehicle sales this year to 400,000 helped by exports and new models, Wang said in March. First-half sales more than doubled to 176,814, helped by demand for the F3, China's fourth bestselling car, according to the China Association of Automobile Manufacturers. China's overall passenger-car sales rose 26 percent to 4.53 million.

BYD plans to sell shares on the mainland to help fund the development of its auto business. The company intends to offer as many as 100 million yuan-denominated shares in Shenzhen, it said in a July 16 statement.

In May, the automaker agreed to explore cooperation with Volkswagen AG in areas including hybrid cars and lithium-battery powered electric vehicles. The company will also work with Buffett's MidAmerican on the development of rapid-charge batteries for storing power from wind and solar generation, MidAmerican Chairman David Sokol said in September.

Goldman Sachs turned to Buffett after the global credit crunch forced Lehman Brothers Holdings Inc into bankruptcy. Berkshire agreed to buy $5 billion in preferred shares paying 10 percent interest and took options to buy $5 billion of shares at $115 apiece. Goldman closed at $162.42 in New York Stock Exchange composite trading Thursday.

The company is likely to hold onto the warrants until close to their 2013 expiration dates, Buffett said in a Fox Business Network interview on July 24.