NEW ENERGY: BYD Waters Down Buffett, Welcomes Samsung

Bottom line: BYD’s latest new share issue, including a sale to Samsung, reflects a dire need for cash as its electric vehicles fail to gain traction, and could be followed by more fund raising in the next 12 months.

BYD issues more new shares

Sputtering electric car maker BYD (HKEx: 1211; Shenzhen: 002594) is making some big adjustments in a bid stabilize its financial footing, with word of a major new share sale that includes the addition of Korea’s Samsung (Seoul: 005930) as a stakeholder. At the same time, that same new share issue has further diluted one of the company’s oldest and most loyal stakeholders, US billionaire investor Warren Buffett. Following this latest shift, Buffett’s holdings in the company are about half of what they were when he first purchased nearly 10 percent of BYD in 2008, when it looked poised to become a new energy car superstar.

The shift in major shareholders reflects a very real cash crunch that BYD is facing, as it waits for a boom in electric vehicle (EV) sales that never seems to materialize. The company has launched numerous pilot projects around the globe, mostly for its electric buses and taxis, and has fared even better in its home China market due to support from Beijing. But despite all that, it’s having a hard time finding the mass audience it needs to justify its huge investment in electric vehicles.

Let’s begin with the new share sale, which has BYD saying it has issued 252 million new A-shares for its China-listed unit at a price of 57.40 yuan per share, representing a discount of about 7 percent to its last traded price. (company announcement) It raised about 14.5 billion yuan ($2.2 billion) through the issue. The steep discount reflects just how desperate BYD is for new cash, and extends a series of asset sales and previous new share issues all designed to raise money to continue funding operations.

Separately, BYD announced a new tie-up with Samsung that was reported earlier this week. Based on the latest reports, Samsung purchased about 3 billion yuan worth of the newly issued shares, giving it about 2 percent of BYD’s A-shares. (Chinese article) The earlier reports had indicated that Samsung was interested in BYD as a buyer of its chips for new energy vehicles, meaning this new tie-up could help BYD by giving it better access to cutting-edge Korean technology.

Steady Dilution

BYD is traded in both Hong Kong and Shenzhen, so we need to look at both listed units combined to better understand who exactly holds what stake of the company. Buffett purchased 9 percent of BYD in 2008 when it was only listed in Hong Kong, in a relatively straightforward purchase that meant he held 9 percent of the company.

But following the China IPO and several new share issues, mostly by the China-listed company, the value of BYD’s Shenzhen-listed shares now represent about 60 percent of the company’s total value. I’ve done some of my own math based on various company information, so I’ll admit my calculations may be flawed. But based on that math, Buffett’s share of the entire company now appears to be about 4.4 percent, or about half of the 9 percent he originally purchased.

Meantime, Samsung’s actual stake in BYD is about 1.3 percent, which is also quite small but still significant for a company whose market value is still worth more than $40 billion. My larger point in all this is that BYD’s constant issuing of new shares is helping to raise much-needed cash, but is also diluting existing shareholders like Buffett.

The bottom line is that BYD doesn’t have much choice, since it needs cash and is rapidly running out of time and options for raising such money. I suspect that besides Samsung, many buyers of the newly issued shares are big state-run investors linked to BYD’s hometown of Shenzhen, which has been one of the company’s top supporters. I also suspect this won’t be the last fund-raising we see from BYD, which may be forced to either sell more assets or issue new shares yet again within the next 12 months.

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