Berkshire Hathaway Dumps All Its Stake in BYD - Impact on the Chery Auto IPO
Warren Buffett's Berkshire Hathaway completely exited its stake in BYD (1211 HK).
We highlight four major reasons why Berkshire may have exited its entire position including valuations, tariffs, competition and lower profit margins, and greater risk prospects on economic stagnation in China.
Berkshire selling all its stake in BYD is likely to have a slightly negative impact on the Chery Auto IPO. However, we maintain a Positive view of Chery Auto IPO.
Warren Buffett's Berkshire Hathaway completely exited its stake in BYD (1211 HK). Berkshire purchased 225 million shares in BYD way back in 2008 for US$230 million. This stake was worth nearly US$9 billion at its peak in 2Q 2022. Berkshire started to reduce its stake in BYD in August 2022.
Berkshire has been gradually reducing its stake in BYD and by June 2024, its stake in BYD was just under 5%. In this insight, we discuss the impact of Berkshire's complete exit of its BYD stake on the upcoming IPO of Chery Auto.
Source: Berkshire Hathaway financial reports, CNBC
Conclusion First
Berkshire started to sell its stake in BYD in 2022 and now has finally exited its entire position. We highlight four major reasons why Berkshire may have exited its entire position in BYD including valuations, ongoing tariff concerns between the US and China, concerns about competition and lower profit margins, and greater risk prospects on economic stagnation in China.
The overall impact on Berkshire selling all its stake in BYD is likely to have a slightly negative impact on the Chery Auto IPO. It appears that Berkshire has a bigger concern on BYD's declining profit margins which is a result of slowing demand and higher competitive pressures in the local auto market in China.
With regards to the Chery Auto IPO, we continue to have a positive view. Our base case valuation of Chery Auto is target price of HKD 40.6 per share which is 32% higher than the high end of the IPO price range. It was reported on 22 September that Chery Auto plans to price the IPO at HKD 30.75 each.
Our base case valuation is based on EV/EBITDA of 5.9x our estimated EBITDA of 37.1 billion RMB in 2026. Our target multiple is 30% premium to the comps' average multiple. We have chosen to use a premium valuation multiple mainly due to Chery Auto's higher ROE, sales growth, and net margins vs the comps.
Overall, while we remain impressed with Chery Auto's high ROE and solid sales growth and profit margins amid economic stagnation in China, if there is lack of progress in the economic turnaround in China, this would negatively impact Chery Auto's sales and profit growth.
