Billionaire investor Warren Buffett has remained faithful to Chinese car maker BYD (1211.HK; Shenzhen: 002594), refusing to change his 10 per cent holdings in the company despite a rapid tumble as its bet on electric vehicles (EVs) fails to take off. But soon the man known as the Oracle of Omaha may have no choice but to reduce his stake, since BYD has just announced a plan to issue more shares to raise desperately needed cash. Of course Buffett may choose to buy some of those new shares to maintain his stake at 10 per cent; but I suspect his patience is probably running out with this company, with the result that his stake in BYD will get diluted with this planned share issue.
BYD has announced it wants to boost its Hong Kong-listed share count by up to 20 per cent, meaning it could sell up to 159 million more shares. Based on its Friday closing price, the company could raise around US$500 million if it issues all the news shares. If it did that, then Buffett could see his stake reduced to about 8.3 per cent due to a diluting effect, helping him to automatically lower his holdings as a possible prelude to an eventual exit from the company.
It's quite possible that BYD's future won't include the continued support of Warren Buffett. Photo: AFP
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BYD is quite frank about its need for cash, which should come as no surprise since its profits have plunged over the last two years as sales of its traditional gasoline powered cars plummeted and its EV program failed to gain much traction. In its announcement on the plan to issue more shares, it says the capital raising plan is the result of the "current capital strain" on the company due to fierce competition.
In a separate media report, BYD also disclosed that it plans to abandon its older gasoline-powered car business completely over the next two years as it focuses on its EV program. Traditional cars were once BYD's biggest money maker, helping the company to rake in big profits at the time when Buffett made his landmark investment in 2008. But BYD has seen its sales of those cars tumble over the last two years as it failed to find a replacement for its F3, once China's best selling car model.
The so-called 'rebirth' plan could send BYD into a death spiral if EVs don't start to find a bigger audience in the near future
The company is trying to put a positive spin on its decision to abandon gas-powered cars, calling the move part of a "rebirth" to end its downward skid that has seen its profits evaporate over the last two years. Perhaps somewhat ironically, this so-called rebirth plan could send the company into a death spiral if BYD's EVs don't start to find a bigger audience in the near future.
