China’s bubbly stock market is making heroes out of some unlikely companies. And none more so than BYD Co. , in which Warren Buffett plans to take a 10 percent stake.
BYD has a much-hyped project to manufacture electric vehicles. Its shares have surged 140 percent in the past three months and 440 percent in the past year. They now trade at 74 times of current year profit and 54 time of next year earnings. That is double the level of capital goods companies and four times the multiple on which Chinese automakers trade.
BYD seems to have become the “poster child” for environmentally friendly transport. For all that, it has not yet sold any electric cars in its home market, though it has hundreds of trial customers in the government. The project may have real substance and it’s fair to say that Buffett has probably done his homework. But meaningful earnings are at least two to three years away, assuming those trials are successful.
Meanwhile, BYD’s real business is producing conventional cars and cell phone components. These do not support the company’s stratospheric multiple. Investors seem to have bid up the shares, taking their lead from Buffett. But they should remember that Buffett bought in at around HK$7 a share, and now the stock is trading at HK$42. Moreover, Buffett’s investment is under consideration in Beijing, and the company does not expect a decision until October.