Buffett's BYD stake sale fueled fears of more sales to come

(Bloomberg) — Traders rushed to sell BYD Co. after Warren Buffett’s Berkshire Hathaway cut its stake in the Chinese electric vehicle maker, fearing the legendary investor could be preparing for an eventual exit after more than a decade as the company’s the most notable supporter.

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BYD shares tumbled as much as 13 percent in Hong Kong on Wednesday, the most in seven weeks and the worst performer on the benchmark Hang Seng index. The sale followed Berkshire’s stock exchange filing late Tuesday that said the firm had cut its stake in Hong Kong-listed BYD shares to 19.92 percent from 20.04 percent on Aug. 24.

Read: Buffett cuts stake in China’s BYD, more bets could be coming

Speculation has swirled for weeks about Buffett’s intentions since a 20.49% stake – identical to the size of Berkshire BYD’s last reported position in December – entered the Hong Kong Central Clearing and Settlement System last month, a move that is often seen as a precursor to sales sharing. BYD shares are down more than 25% from their July peak.

“Investors could interpret this as the beginning of closing Berkshire’s position in BYD,” said Bridget McCarthy, market research analyst at hedge fund Snow Bull Capital Inc. decade, especially on its highest-returning investment, percentage-wise.’

Buffett sold about 6.3 million shares from June 30 to Aug. 24, according to calculations based on BYD’s interim report and the latest investor filing. Berkshire, which first bought 225 million shares in September 2008, is the largest shareholder in the electric car giant.

The investment also turned out to be extremely profitable, as BYD’s stock jumped over 2,000% since its initial purchase.

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Investors view BYD, China’s largest electric car maker, as a leader in the sector. The company reported a jump in profit for the first half of the year as record productivity and sales shielded it from Covid disruptions and supply chain problems.

Read more: BYD’s first-half net income triples to top end of forecast

The automaker’s fundamentals suggest BYD can withstand further selling by Buffett, especially as investors pour into China’s green energy sector on bets that the industry will benefit from Beijing’s policy pressure. The auto industry is also a key recipient of a range of tax and consumption incentives as authorities seek to dominate the shift away from internal combustion engines and speed up the economic recovery.

BYD’s business model has improved significantly since Buffett first invested, said Andy Wong, a fund manager at LW Asset Management Advisors in Hong Kong. “Despite the short-term share price struggle, there is value in investing in the company with its solid business model in the medium to long term,” he said, adding that some investors may have been waiting for a correction to buy.

A BYD representative, in comments to China’s 21st Century Business Herald, said there was “no need to interpret too much” of the stake sale and added that the company’s operations remained normal.

As of Tuesday, BYD was the world’s second-most-richly valued automaker, with a price-to-earnings ratio below Li Auto, a U.S.-listed Chinese electric car startup, and higher than Tesla Inc.

“In terms of valuation, it’s not cheap,” said Vincent Sun, an analyst at Morningstar Investment Service. “But the Chinese auto market is attractive given its size. If investors want to tap into the growth potential here, BYD is still the best choice.”

(Adds more information on Buffett’s investment, additional comments)

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