BYD Auto IPO: Is the battered Chinese battery and car maker stock a buy?

BYD has applied to start trading in China via a new IPO. Not everyone’s sold on the company’s future prospects, though. Here are four reasons to consider avoiding shares in BYD despite an endorsement from Warren Buffett.

BYD Company Limited (HKG:1211) got one of the investment world’s biggest endorsements when a Warren Buffett company ponied up $230 million to invest in BYD during the height of the financial meltdown in 2008. Now, BYD Auto, which has long traded on the Hong Kong Stock Exchange, has applied to start trading on China’s Shenzhen Stock Exchange as it seeks new capital for expanding its operations. Not everyone’s sold on the company’s future prospects, though. Here are four reasons to consider avoiding shares in BYD’s latest IPO:

1) Time for a turnaround? Things haven’t looked good for BYD over the past year. The company’s Hong Kong-listed stock has tumbled 60 percent since the start of the year on weaker sales and the conclusion of a government subsidy for economy vehicles in China.

Sensing problems on the horizon, BYD has undertaken big plans to orchestrate a turnaround. The company has partnered with Daimler AG (PINK:DDAIF) to build its first all-electric car and its announced plans to unveil an SUV and several additional higher-end vehicles with larger profit margins.

BYD’s management is fully aware of the mounting competition it faces from GM, Volkswagen and Nissan. We’re “preparing for a price war,” BYD’s head of sales Xia Zhibing wrote on his blog last month (per Bloomberg). The problem is, BYD doesn’t have much room to tinker with its pricing. Profit margins were cut in half last year to 5 percent on growing competition in the Chinese market.

2) The E6 as savior? After several delays, BYD promises its on target to begin delivering it’s all-electric E6 to corporate and government clients in the U.S. this year. The E6 is expected to be available for retail consumers in the U.S. next year and should have a range of 186 miles on a single charge. Although BYD’s the world’s largest battery maker, some suspect the E6’s delays are due to problems achieving the electric car’s promised range.

If it’s any indication, American car reviewers have been less than impressed with BYD’s other offerings to date. The New York Times published a scorching review of the F3DM – a combination pure-electric/gas-powered car that operates like the Chevrolet Volt. “The steering wheel vibrates. The dashboard hums. You feel the vibration in your molars,” a reviewer wrote after test-driving the car in February.

3) Looming litigation. If the E6 does indeed make it to the U.S., the company could face intellectual property lawsuits. BYD has long been accused of backwards engineering existing cars, modifying them slightly and slapping their own logo on the hood. The company’s also been accused of falsely touting high safety standards. “If you shut the doors too hard, they fall off,” an unnamed consulate told Reuters.

4) The Sokol sting. Much of the credit for Warren Buffett’s investment in BYD goes to David Sokol – the embattled exec who left Berkshire Hathaway Inc. (NYSE:BRK.A) at the end of March, and has since taken fire for allegedly investing in a company that Berkshire ultimately acquired. “Whether or not they can manufacture their own cars isn’t relevant to us, because we see their real expertise is in the development of the batteries, the motors, the control systems for that,” Sokol told Reuters in January 2009. “That’s not to say that they can’t make a nice car, but a lot of people can make a nice car. The breakthrough from our perspective is the battery technology.” Until we get a real look at how BYD’s batteries perform in the E6, the rest is just smoke and mirrors.

Indeed, the whole thing has me wishing BYD would go back to focusing exclusively on batteries. The company has said a big chunk of the funds from it’s China IPO would go toward developing lithium-ion and solar batteries (per Reuters), but it’s also planning to spend heavily on growing BYD’s automotive line. Unless there’s a major cultural shift in the company’s highest level of leadership, though, I wouldn’t expect that turnaround to happen anytime soon. BYD may be good at batteries, but they’re a long ways off from being good at making cars.

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1 thought on “BYD Auto IPO: Is the battered Chinese battery and car maker stock a buy?”

  1. I have a web site where I give advise on penny stocks and stocks under five dollars. I have many years of experience with these type of stocks. If theirs anyone thats interested in these type of stocks you can check out my web site by just clicking my name. I would like to comment about warren buffetts holding company berkshire hathaway investing in BYD auto company. This does not seem like the sort of thing that warren buffett generally invests in warren generally invests in fairly solid safe companies.

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