BYD

Charlie Munger's Home Run

BYD is undoubtedly one of Berkshire’s greatest investments of all time. In 2008, Berkshire Hathaway purchased 225 million “H” shares of BYD for HK$8 per share - this came out to about $232 million in USD (the shares were purchased within Berkshire Hathaway Energy, of which Berkshire Hathaway only owns 92%). BYD, founded by Wang Chuanfu, is a Chinese manufacturer of lithium batteries, electric/hybrid passenger vehicles, buses, large trucks, forklifts, monorails, cell phone components, and more.

Why did Berkshire invest in BYD? In this 2017 interview, Munger explains the stock was so beaten down at the time that it was a Ben Graham-type stock. At the end of 2008 (according to its annual report), BYD had a book value of ~$1.95 billion, revenue of ~$3.5 billion and was actually profitable, earning about $180 million, with revenue growing quickly. Berkshire bought in at a $2.3 billion valuation, which is around 1.2x book value, 0.7x sales, and 13x earnings. Munger said “a venture capitalist would have paid 3x what we paid.” Additionally, Munger was very impressed by Wang Chuanfu, so a big part of the investment thesis was a bet on the horseman rather than on the horse. One more note: Charlie did not find BYD on his own. It was brought to his attention by Li Lu, who manages some of Munger’s money within Himalaya Capital.

Through the first 6 months of 2022, BYD sold more electric/hybrid vehicles than any company on Earth, surpassing Tesla. However, at the time of writing, BYD’s market cap is ~$110 billion versus ~$900 billion for Tesla, as it greatly lags Tesla in terms of gross and operating profitability. Additionally, a big chunk of Tesla’s valuation is attributable to the prospect of achieving full self-driving capabilities and the autonomous ride-hailing business they could build from it. On the other hand, BYD has multiple business lines outside of EVs, and will soon begin supplying batteries to Tesla, according to BYD’s executive vice president Lian Yubo. This is a blow to Tesla bulls’ thesis that Tesla would become the world’s major supplier of lithium batteries for EVs. Is the valuation gap too wide? Perhaps - time will tell.

So how has Berkshire’s investment done to date? BYD has actually paid out some dividends along the way, about $46 million by my estimates. However, nearly all of the return has come from immense unrealized gains - the current stake is worth approximately $8.3 billion, a MOIC of ~36 and IRR of 29%!

What were the sources of the return? Today, BYD is barely profitable, so this is a rare case where it makes sense to look at revenue and price-to-sales ratio. Revenue (in RMB) has increased at a 16% annualized rate from 2008 to 2022. On top of that, the price-to-sales ratio increased from 0.66 to 3.4, or 12% annualized. Berkshire’s ownership decreased from 10% to 7.73%, representing share dilution of -2% annually. Tack on a few percentage points for dividends and US dollar appreciation and you arrive at Berkshire’s 29% IRR to date.

Something notable about this investment is the timing of the returns. Over the first 18 months of Berkshire’s investment, from September 2008 to March 2010, the stock went up 10x. However, BYD did not exceed its March 2010 peak until August 2020! From August 2020 to today, BYD has gone up another 3.5x. Psychologically, very few investors would have been able to hold and capture that entire gain.

Recently, there have been rumors that Berkshire may begin selling the position, since a block of 225 million shares was put under Citigroup’s custody. As a major shareholder, Hong Kong Exchange rules would force them to disclose sales promptly. So at of the time of writing, it does not appear that Berkshire has sold any shares. Whether they cash out now or hold on, BYD belongs in Berkshire’s Hall of Fame.