FUND RAISING: BYD Raises Cash, Warburg Cashes Out Of Car Inc

Bottom line: BYD’s latest fund raising will test investor patience as its EV business struggles, while Warburg Pincus will continue to cash out of Car Inc to take advantage of its soaring stock.

Warburg sells down Car Inc stake

A couple of cash-raising stores are in the headlines for 2 car-related companies, led by the news that Warren Buffett-backed new energy car maker BYD (HKEx: 1211; Shenzhen: 002594) is planning a new share sale as it gets weighed down by a big debt and slow sales for its electric vehicles (EVs). Meantime, Warburg Pincus is selling down its stake in car rental specialist Car Inc (HKEx: 0699), following the end of a lock-up period after its IPO last year.

The BYD saga is easily the more interesting of the 2 stories, showing the company’s dreams for making big profits from the emerging market for EVs are moving ahead far more slowly than it had originally hoped. That reality has forced BYD to look to various measures to raise billions of dollars in cash over the last year to keep its operations going. In the process, Warren Buffett’s stake has slowly crept down from an original 10 percent to a current 9 percent. Everyone is watching closely to see if the billionaire investor may ultimately dump his stake completely.

According to the latest reports, BYD is  planning to raise 10-12 billion yuan ($1.6 billion to $1.9 billion) by selling stock through a private placement in China. (English article) Shares of the company were halted earlier this week pending an announcement, though BYD has yet to comment on the reports, which cite unnamed banking sources.

A key question will be whether this new placement will be new or existing shares. A new issue would dilute BYD’s current shares by about 8 percent, meaning, Buffett’s stake would be further reduced to below the current 9 percent level. He certainly can’t be too excited about seeing his original stake gradually whittled away like this. But he’s also known for taking a long-term view on his investments, and seldom makes decisions based on short-term actions.

This particular share issue would come just a month after BYD finalized the sale of its older electric component business, raising 2.3 billion yuan, or about $400 million, in the process. A year ago the company also raised another $400 million through a placement of new shares in Hong Kong. Those 2 exercises, combined with this massive new offering, would bring BYD’s total fund-raising over the last year to as much as $2.7 billion.

BYD has recently returned to profitability after a difficult retrenchment, but is still struggling under a pile of debt that totals $1.6 billion in liabilities, more than half of which is short-term borrowings and other debt due within a year. This new fund raising should easily help to cover that debt and fund its operations for the next year or two. But BYD can’t keep doing this kind of fund raising forever, and it needs to start showing significantly better results for its EV business soon if it wants investors to take it seriously.

Next let’s look quickly at Car Inc, which made its trading debut last September in Hong Kong, after abandoning a previous plan to list in New York. Warburg Pincus was one of the company’s earlier backers, and now is starting to sell down its stake. According to an announcement by Car Inc, Warburg Pincus, through one of its units, sold 168 million shares for HK$18.5 each, raising about HK$3.1 billion ($400 million). (company announcement)

The sale represented about 7 percent of Car Inc’s total shares, and reduced Warburg’s stake to about 11 percent. Car Inc’s shares have more than doubled from their IPO price of HK$8.50, meaning Warburg Pincus and other early investors have made quite a nice profit from the investment. Look for Warburg to continue to cash out its stake, especially if Car Inc’s shares continue to climb in tandem with China’s surging domestic stock markets.

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