I've been following BYD (BYDDY.PK) for quite some time -- basically since the day Charlie Munger told the world half of his family's personal funds were invested in the company. It was a bright company with amazing growth prospects run by a genius. Since then, it's been ugly. Top-line revenue has shrunk, and the bottom line has been brought to nearly nothing. A Hong Kong-based investment firm set price targets at $0.05. Is BYD a dying story, or is there hope for Berkshire Hathaway's (NYSE: BRK-A)(NYSE: BRK-B) bet on electric cars?
Yeesh!
With Halloween having just wrapped up, it seems unfortunately fitting to say something about how frightening BYD's results for the third quarter were to investors and analysts.
For those not familiar, BYD, (for "Build Your Dreams") is a battery maker and auto manufacturer based in China. The company was just a few years ago heralded as the future of Chinese auto manufacturing and the darling of Munger and Warren Buffett. Munger actually equated BYD CEO Wang Chuanfu to a blend of Thomas Edison and Henry Ford. And, realistically, the man did do something incredible. Chuanfu started with $300,000 of his own capital and built the company into a multibillion-dollar organization, not to mention the recipient of $200 million from Berkshire Hathaway. The company makes electric cars that are widely used in certain Chinese cities as taxis. While that is the glamorous business, the company also makes solar panels, cell-phone batteries, and other battery-centric items.
Last quarter, I reported that the company's year-over-year bottom line results fell 94%. The main drivers of the losses weren't in vehicle sales, which also dwindled, but mainly the company's solar cells and cell-phone batteries. BYD provides batteries to companies such as Nokia, which we all know is suffering at the hand of Apple.
As for this quarter, there is still little to no hope. During the quarter, the group sold a little over 77,000 vehicles, a decrease of more than 18%. Many analysts may have stopped there, comparing the company with Volkswagen, which has enjoyed double-digit gains in its Far East sales. But, to BYD's credit, it's taking in orders: In addition to 500 police cars in Shenzhen, its new K9 buses (its new electric bus) is showing up in the Hong Kong market, as well as in Spain, the Netherlands, and Hungary.
Top-line revenue was down nearly 11% year over year, but the bottom line deteriorated, again, by more than 94%.
In the company's annual report, which is exhaustive compared with most U.S. quarterly statements, management was very straightforward about the current conditions:
Amid the uncertainty over the domestic macroeconomic condition in 2012, the growth in market demand for automobiles in the PRC continued to be slow. The automobile business of the Group, despite its recovery benefited by the launching of new vehicle models, remains exposed to great pressure from market competition. The performance of the Group's handset components and assembly services in 2012 is expected to decline as compared with that of the corresponding period in last year due to the impact of a slowdown in the growth of global market demand for handsets and a decrease in the share in some customer markets. Due to the consistently weak global solar market, the results of operation of the solar business recorded a significant decline compared with that of last year.
So things are bleak, but does this spell the end for BYD?
Not so fast
For one thing, according to a family office filing, Munger's own investment in BYD stands up with every share present since the original purchase from a couple of years ago. This is a large show of faith from a cynical, risk-averse investor who also happens to co-head one of the most successful conglomerates in the history of public companies. If that's not enough, though, let's take a look at the individual businesses.
The solar business has been beaten down again and again. Adoption simply hasn't occurred at the rates predicted. This isn't BYD's fault; it's symptomatic of everyone in the business. BYD does have a reputation for high quality, and I believe, as the industry gains more traction internationally, those numbers will once more begin to tick up.
The company is in the electric-vehicle space, which is brand spanking new. The company's batteries are world class and are being adopted by forward-thinking nations around the world. Give it time -- these vehicles will sell. Shenzhen and Hong Kong's governments have repeatedly bought vehicles from BYD because they are affordable and reliable. The E6 electric sedan has been very successful, and the K9 bus is shaping up to be just as popular. The biggest threat right now to the company's auto business is competitors such as aforementioned Volkswagen and other multinationals such as General Motors (GM 1.71%) and Toyota (TM 1.58%).
The worst part of the group is the cell-phone batteries, and it's not because the batteries aren't good. BYD had the misfortune to sell to Nokia, which can't seem to stop its trend downward into oblivion. The company also supplies Huawei, which was recently slammed by the U.S. government with a very debatable allegation involving spying. BYD needs to jump on some good lines, from Apple or Motorola, to turn this segment around. Otherwise, it needs to get out.
The call
At $3.89, the company is pretty cheap. It's priced for near doom, understandably. For deep value chasers, if you put your work into this one, it could be a great pick. But it is a long-term story, and you need to have the risk tolerance to ride out a few more quarters, or even a year or two, of dismal earnings.
I have hard time believing this company is sinking down. Management is world class and will not cash out and go live on an island somewhere. There is a future to this business, but that future remains under wraps. For those with the energy to dig through this mess, it could be a rewarding task.
