BYD's breakthrough growth got Buffett's attention

Li Lu on BYD

Courtesy of Street Capitalist:

Question via Columbia University:

So I did some research on lithium ion batteries, and I saw that BYD has a manufacturing advantage with consumer batteries. But I saw that automobile batteries are much more complex. I did not think that the idea of a good consumer battery manufacturer + an automobile maker made much sense.

So when Buffett looked at the stock maybe it was a better deal but today it is this dream of vehicles that is really priced in.

It does not feel like a good value investor stock. So why would you own it today?



Li Lu:

Well that is interesting. One of the most fascinating things about being an investor is that surprises are part of the game. When you get into situations like BYD, you see lots of good surprises.

Chuanfu and his team have this fabulous culture, everything people thought they knew turned out to be a few years late. He got into battery manufacturing in that particular way because he really had no other option. He had no money, he only had $300,000 in venture capital funding before IPO and that was it. He raised money in an IPO and Buffett gave him $200M, now they have 160,000 employees. $6-7B in revenues, $500M in net profit. It is amazing.

[Reflections comment: BYD had approximately $4B in revenues at the time of Berkshire Hathaway's investment, and was priced at about 12x trailing earnings. Berkshire Hathaway bought a 10% stake for $230 million, implying a cost basis that is roughly 4x recent earnings -- with an interesting set of tire-tracks.]

So he has this ability to adapt in a competitive environment. He has demonstrated that ability again again and again. The way he does automation is far cheaper than anyone else and more reliable. He continues to surprise me with his ingenuity, to figure out ways to do something better than everyone else. What he is currently doing is very different than what everyone else has done. At the end of the day, you might look at what he has done.


So how do you look at it as an investor with imperfect information? Well I suggest you look at what he has accomplished. 8 years ago I had no idea they would go into the automobile or laptop or cellphone battery business. So that demonstrates how he is. This investment is not easy to understand because it is changing so fast, at such a large scale. An almost unheard of speed. Their manufacturing capabilities will double soon. This year they will hire 10,000 college graduates, 8 or 9 thousand engineers. The scale is almost unparalleled.

So this is why the study of history, of all the great corporations will give you a good insight in seeing what will happen with BYD. I suggested that we start with GM and analyze its performance every 5 years for 100 years to understand at least one aspect of BYD’s business.

http://valueinvestingresource.blogspot.com/2010/06/li-lu-on-byd.html