Investors' Electric Dreams For BYD

By ANDREW PEAPLE
Chinese automaker BYD couldn't have found a better advertiser than Warren Buffett.
The company, best known for a plan to develop a mass market electric car, has instead seen sales of its gasoline powered cars surge. For that, Buffett gets much credit. The buzz in the Chinese press, surrounding Berkshire Hathaway's September 2008 investment in BYD, boosted the company's brand recognition, just as auto sales in China were taking off.
BYD's F3 model is now China's leading compact car model by sales, after ranking fourth in 2008. Another model, the F0, is the second biggest seller in the mini car category. By the year's end, BYD's unit sales will be up 137%, JD Power & Associates projects, and the company's profits are benefiting accordingly: these rose 72% on-year in the first half of 2009.
The problem is that stock investors have been even more enthusiastic about BYD than car buyers -- driving the shares up sevenfold since Buffett bought into the company. The rise has propelled BYD's founder Wang Chuanfu to the top of China's richest list, according to Forbes magazine. He's now worth a cool $5.8 billion.
Great for Wang, and Buffett, but such a share move makes it difficult for others to back BYD now, no matter what the hope for the company is. BYD's lithium-ion battery technology, critical to its plan to sell electric cars to the mass market, faces far more uncertainty than a valuation of 60 times earnings suggests.
It's not yet clear whether the Chinese government will provide the subsidies that will be critical to promote electric car sales in China; their current price is far beyond most Chinese households.
Moreover, BYD's prototype electric car has left some critics disappointed, and with competition heating up, it's far from a given that BYD's lithium-ion batteries will become a market leader. The company faces no fewer than a dozen competitors, many of them joint ventures with global automakers, in the battery race.
Certainly, sales of gasoline powered cars are buying the company some time while such questions are ironed out, and they offer BYD a robust fallback if it does stumble on the electric car front.
They won't, though, be enough to sustain the stock price at this kind of valuation.
Write to Andrew Peaple at andrew.peaple@dowjones.com