Buffett's BYD Falls to Two-Month Low

It emerged on Monday that BYD, the Chinese carmaker that is partly owned by Warren Buffett and Berkshire Hathaway BRK has fallen to a two-month low in Hong Kong trading, with the company forecasting 1Q profits my drop up to 95%. According to Bloomberg, BYD dropped up to 11%, the largest intraday decline since September 26, before closing 4.8% lower at HK$19.94 yuan in Hong Kong. BYD's Shenzhen-traded shares gained 1.8%, which reversed a 3.9% decline. Still, critics of Buffett will point to the numbers as proof that everything he touches does not turn to gold. 1Q net income could well drop 65% to 95%, BYD said in statements over the weekend. It derived 48% of 2011 sales from cars with 42% coming from handset components and assembly services, and the rest from rechargeable batteries. In June of this year, BYD will introduce the second generation of its F3 model, China's top-selling sedan in 2010 and 2009. “In 2012, the Group expects the automobile market to rebound during the whole year,” Wang Chuanfu, BYD chairman, said in the annual report. On Monday, KGI published a research report saying that BYD's solar cell division incurred a net loss of Rmb560mn in 2011, eroding 40.4% of company earnings. BYD says losses will be Rmb250mn in 1Q12, dragging down net profits by 65-95% to Rmb13-93mn. Higher-cost inventory will be fully cleared by end-June, turning gross margin positive in July, at 1-3%, which will allow BYD to break even. “BYD guides car sales of 500k units this year, up 14.4% YoY, in line with our expectation. It will launch a longer car warranty policy in early April, doubling the warranty from the current two-year, 50k-kilometer to four years and 100k kilometers.” On Sunday, Bank of America Merrill Lynch said that it is reducing BYD's PO by 5% to HK$15.0 (implying 28% downside potential), after cutting 2012/13E earnings by 3%/4% on lower battery BU assumption – cut 2012 /13E revenue by cut 34% / 35% and operating margin by 5pts / 4pts on weak demand. “We believe this should cool down some investors' expectation on immediate earnings power revival, who were excited about BYD's margin improvement in 4Q2011 – GP margin up 4.7% QoQ on the back of 30% YoY auto sales growth. Along with 4Q result release, BYD full year reported net profit totaled Rmb 1,385 mn (in-line with its profit warning). Excluding Rmb503 mn one-off asset disposal gain (from battery separator JV), organic NP was Rmb 882 mn, down 65% YoY.” Meanwhile, Buffett continues to back the company whose name stands for Build Your Dreams. He said in September 2010 that BYD is the right choice for him and, even following this recent slump, he has a profit of $400 billion.