Newbie investors often talk about how some famous investor holds a stake in their sacred cow. Sure, Warren Buffett’s holding company, Berkshire Hathaway (BRK-B), may hold shares in Snowflake (SNOW) and StoneCo (STNE), but those positions only account for 0.30% and 0.05% percent of his total stock holdings respectively. And that $333 billion stock portfolio is just part of what makes up Berkshire Hathaway’s holdings. Buffett doesn’t log into his Robinhood account and YOLO into whatever’s trending that day, his investment firm buys other companies outright in the same way retail investors make stock purchases using their brokerage accounts.
Berkshire’s concentrated portfolio of equities has historically been managed by Buffett himself who doesn’t care much for rebalancing. The last holdings report shows Apple occupying 47% of the total stock portfolio exposure. Further down the list in position #13 with a 1% weighting is a company called BYD (1211.HK).
Buffett’s Investment in BYD
In 2008, Berkshire Hathaway bought 225 million shares of BYD for eight Hong Kong dollars (~$1 USD) per share – an investment worth about $300 million U.S. dollars. Pulling up BYD’s aptly titled 2007 Annual Report – A Great Leap Forward – shows auto sales making up 23% of total revenues followed by rechargeable batteries (34%) and handsets (43%). That translated to about $690 million coming from automobile sales in 2007 vs. the over $40 billion they realized last year from selling electric vehicles and hybrids which now make up three-quarters of BYD’s business, up from 60% last year.
BYD saw electric vehicle sales grow at a compound annual growth rate (CAGR) of nearly 30% over 16 years which resulted in Buffett’s investment stake growing +3,250%. That’s called skating to where the puck will be, and today the Oracle of Omaha continues to sell BYD having exited nearly half his position starting in August of last year. But isn’t BYD only getting started? After all, with China only having 3% of her total automobile fleet electrified, the party’s just getting going. Right?
Investing in China
China has more passenger vehicles in the road than any other country with total passenger cars and trucks registered at around 319 million units. As of June 2022, China had the largest stock of highway legal plug-in passenger cars with 10 million units, 46% of the global fleet in use. That puts EV penetration at around 3%. The domestic opportunity alone merits a look, not to mention the global opportunity.
Nanalyze
Before diving down the BYD rabbit hole any further, we need to answer an important question. Which of the following themes are we most interested in getting exposure to?
- The growth of the Chinese economy
- The growth of autos in China
- The growth of Chinese electric vehicles
- The growth of EVs globally
“All four!” some will say. That’s why they’re attracted to BYD in the first place. From our perspective, the first bullet point is the most desirable. China now has the second largest economy in the world, and the bull thesis for the country spells itself out very quickly, from the time your airplane lands in Shanghai until you glumly board a Delta flight back to ‘Murica. But for non-Chinese, investing in China becomes complicated in a hurry. Various types of stock offerings – A shares, H shares, B shares, Red chips, and P chips – make up the MSCI China Index which contains 717 companies representing 85% of the equity universe. Mining that collection of stocks for automotive leaders becomes pointless when you realize “the big four” Chinese automobile manufacturers are all state owned. Collectively, these firms produced over seven times more units than BYD last year.
Those who know about The Great Leap Forward may question the accuracy of the above production numbers which points to the most fundamental problem of investing in China. It’s not the VIE structures which give foreign investors no legal ownership of the underlying shares, nor is it the multi-trillion-dollar black market shadow banking system everyone freely dabbles in. What you gweilos need to worry about is the Chinese Communist Party (CCP) who decides how things go. Should any of those four state-owned automobile companies decide that BYD has slighted them, things could go south in a hurry. The largest automaker on the lot, SAIC Group, managed to produce one million new energy vehicles in 2022, and pivoting from petrol propelled cars to electric vehicles isn’t that tough when you already have the infrastructure in place to produce automobiles.
Investing in Chinese Electric Vehicles
Our previous pieces focusing on electric vehicles in China generated excitement around the potential growth opportunity being spurred on by her fearless leader . We need to understand to what extent electric vehicles play a part in China’s aspirations to move “from a big automobile country to an automobile power.” Does it really matter if those vehicles run on petrol or electricity? From the shrewd Chinese consumer’s point of view, electric vehicles enjoy a lower cost of ownership given the current support from government. As a result, they’ve grown in popularity, but still make up a small part of total vehicles in China. China’s goal of becoming an automotive power really comes down to production numbers – electric and petrol, imports and exports.
Before investing in any thesis, we first need to understand who the market leaders are. Our last piece on The Biggest Electric Vehicle Company in the World required some context. If we include both electric vehicles and hybrids, BYD’s 1.86 million units sold in 2022 surpass Tesla’s units sold of 1.3 million across the globe. But, if we restrict the measurement to “electric only” vehicles, then BYD’s number falls to under a million and Tesla becomes “the biggest EV company in the world.” Regardless of which company sells the most electric vehicles, total vehicle sales pale in comparison to China’s four largest state owned auto enterprises which collectively sold 13 million vehicles with aspirations to grow as quickly as the rest.
If you can’t beat the CCP, join them. Perhaps the best strategy would be to invest in China’s biggest automakers, state owned or not, but then what’s so particularly bullish about the Chinese automotive sector? Wouldn’t vehicle autonomy be a far more attractive thesis? If so, now there’s an entirely new rabbit hole to dive down as firms like Xpeng try to survive in the automotive business long enough to figure out the complex puzzle of autonomy. Since nearly all Chinese tech firms trade as VIE structures, that’s a dead end road for us. Even the recent IPO of the world’s leading LiDAR company, Hesai, has enough oddities in the financials to raise suspicions.
The Chinese consumer has been voting for BYD vehicles with their wallets, and there’s no reason to believe that the rapid growth of electric vehicles on the mainland won’t continue. BYD’s H-share status means there no shoddy Cayman Islands intermediaries to deal with, and there appears to be plenty of growth ahead. Just because Buffett is cashing in his chips doesn’t mean the table is closing. That said, BYD may be a leader in “new energy vehicles” for now, but state-owned enterprises can up their new energy game at any time. Not surprisingly the Americans are claiming that “BYD uses its status as a “private company” to acquire foreign technology, data, and markets, then hands off to China’s state-owned and military enterprises.” Keep your friends close and your enemies closer.
MSCI and Blackrock are now being criticized for enabling foreign investors to provide funding to China while China’s rules for foreign investors require a secret decoder ring to decipher. As appealing as the China thesis might be, we believe the best exposure is probably a cross-sector ETF that provides exposure to other sectors China might see strong growth in. The explosion of China’s middle class means increased demand for consumer staples and financial products, two heavily weighted sectors when looking at China’s 50 largest firms.
China’s Global Aspirations
The missing piece of the Chinese automotive puzzle might be their global aspirations. While Visual Capitalist claimed SAIC sold around 250,000 electric vehicles and hybrids in 2022, the horse’s mouth begs to differ. SAIC claims to have produced just over one million new energy vehicles (NEVs) – a term China uses to describe EVs and hybrids – and also claims they’re “China’s first automobile enterprise to sell one million overseas, as well as the first Chinese carmaker to sell more than one million vehicles overseas.” An article by SCMP describes just how far Chinese automotive manufacturers have come. “China closes gap with Japan after 2022 car exports surpass Germany with 54.4 per cent surge to 3.11 million vehicles,” says the article which goes on to say that “exports accounted for 11.5 per cent of mainland China’s total 2022 production of 27 million vehicles, according.” A piece by Bloomberg says it more bluntly.
Conclusion
Betting on a single company in the consumer discretionary sector seems like a big gamble when there’s much more to China’s growth than automobiles. Looking back at the chart which shows how the “big four” dominate automobile production in China and it’s not hard to imagine they can pull ahead of BYD anytime. Having the CCP in your back pocket is the ultimate impenetrable moat. We like BYD, but believe it’s risky to invest in a single Chinese auto firm that happens to be the most accessible to foreign investors. Even for domestic Chinese who understand the brands and market much better, picking a single firm to outperform will be tough. There’s only one Buffett, though if there is another Buffett out there, he or she probably speaks Chinese.
