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Legendary investor Warren Buffett has made a lot of money on his firm’s investment in BYD Co Ltd (SEHK:1211), a Chinese battery and electric vehicle (EV) manufacturer.
After buying a 10% stake in BYD Co Ltd (SEHK:1211) in 2008 for HK$1.8 billion (US$230 million), Buffett’s Berkshire Hathaway has reaped the benefits. Near the end of 2018, Berkshire Hathaway’s buy-in translates to over 24% of BYD’s Hong Kong-listed shares, with the company currently boasting a market capitalisation of HK$149.5 billion.
While Buffett’s investment translates to billions in profit, Berkshire Hathaway hasn’t sold, and it would appear that Buffett remains bullish on BYD’s future. Here are three reasons why long-term investors might be bullish too.
Leading domestic EV maker in China
For reasons of both prestige and innovation, China’s government wants at least one or two domestic “national champions” in the EV market. By being the world’s current largest EV maker, China-based BYD is certainly likely to be bestowed with this label and potentially profiting from consolidating the industry.
Analysts expect BYD to sell 655,000 vehicles this year and account for a large percentage of the 1.6 million total EVs expected to be sold in China in 2019. If it can overcome the near-term slowdown in Chinese EV sales, BYD has a long runway for growth ahead. Estimates say that global EV sales are expected to rise from 3 million in 2020 to 60 million in 2040.
Big player in batteries
By virtue of being both a battery maker and an EV maker, BYD has in effect a “fall back” plan. If BYD fails to be an EV giant and EV profits fall short of expectations, the company could always just sell batteries to the EV makers that produce them.
The battery business is big enough for a company of BYD’s size. That’s because the market for batteries used in electric buses, electric cars, and related energy storage could grow by 10 times to as much as US$500 billion by 2050.
BYD has massive scale
Currently, BYD is one of the leading battery makers in China, with its factories churning out almost 30 gigawatt-hours worth of battery storage every year. BYD’s huge scale gives it higher margins than competitors.
Due to its scale and balance sheet, it will likely be able to compete against foreign battery makers that have just been allowed to enter the market, such as LG and Panasonic. If management executes, the company’s battery making business could supercharge BYD’s future profits.
While BYD might face some near-term turbulence due to China phasing out EV subsidies, as well as the entry of foreign EV and battery makers in the country, the long-term investment case for BYD is pretty compelling. BYD has a scale that few can rival. It has a backup plan in batteries in case it doesn’t do well in EVs and the company will likely be one of the national champions that can capture a sizeable chunk of the future growth in China’s burgeoning EV market.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.