I just sold off a small investment I did during the crisis at the end of 2008: 500 BYD China shares in Hong Kong.
When I bought them the company was just starting with cars, but the reason I bought was that they were cheap and had a seemingly nice lithium battery and telephone assembly business. After 3 years the lithium battery business did not pick up and the assembly business neither, it actually was hit due to Nokia’s bad performance, Nokia being one of its big clients. BYD did not profit from the big growth of smartphones.
Worse of all was the fact that BYD massively overinvested in car factories and started selling cheap cars mainly due to help from the government via subsidies. The artificial sales and cheap money made them massively overinvest. But the government decided to stop the subsidies, and competitors, both foreigner and local came and built a lot of capacity, sales dumped but the investments remained, with quite a big capacity, but slow sales, and a HUGE amount of debt that could impair stockholders. Actually it did impair them, I invested 500 euros, they multiplied by 8, at that moment I failed to realize that it was due to the subsidies, artificial temporary high sales, and the huge marketing/propaganda about electric cars and about having Warren Buffett as an owner. They have been talking about massively selling electric cars since I started investing, but at the end of the day they have postponed every announced date and sold very few electric vehicles, and from what I’ve read, most of them are still just a bit better than a simple prototype. But the most worrisome is that they increased the debt to dangerously high levels. My error was not to have sold before, I believed too much in the Chinese car growth story. The stock I bought for 10.8 went up 85 and back down to 13 recently ! Now it partially recovered and I decided to sell a bit over 19. It’s one of the few times that one of the businesses I have invested in has changed so much for the worse, that’s the reason I sold out.
Buffett has also invested in BYD, a bit over 200 millions, making him a 10% owner of the company, he bought at 8 HKD/share, his investment was worth more than 2 billions at a certain point ! He still has not sold from what I know. Charlie Munger is also more or less a 3% owner. David Sokol visited the company and advised buying it. Buffett bought just before I did, that’s how I came to know the company.
Another thing I did not like about BYD, or Chinese companies in general, is their level of disclosures, which is not as big as I would like, it is hard to get a grasp on the business.
So now I am completely out of direct Chinese investments, I have never managed to make a lot of money there, I made 400 Euros now, more or less a 80% return, or a bit over 20% a year during 3 years, nothing spectacular considering I could have made 800% in 12 months. I also had invested in 2007 in Petrochina but sold off after earning 50% and 500 Euros or so, I did not like the way its parent company was behaving and it seemed overvalued.
The main problem I have with China is the way that the government interferes with companies, it is very difficult to predict and it completely screws up businesses. BYD was lead due to government subsidies and cheap money to invest badly and more than needed, based on false artificial demand. It was BYD’s fault to rely on their government and mine for not having taking that into account. Disclosures are so poor that it’s hard to see, but that’s also my fault, I should only invest where disclosures are good. Also at that moment I was not so well educated into how bad government interference can be. The good thing is that if you managed to buy at a discount even if you make mistakes you might manage to get out without losing money ! Now I am trying to get away from places where the government has a too much of a hand (that’s also why I am short in US Dollars), I believe free markets are much more efficient and powerful than subsidized ones, also better for investors.
This reinforces once again my belief that the more governments interfere, with companies, taxes, import/exports, or money supply/interest rates fixing etc.., the more they screw up.
With the proceeds in Hong Kong Dollars I bought Euros. I do not want to hold Hong Kong dollars because they suffer from inflation, they are pegged to the dollar, and most of all because I would not know what to do with them.
In conclusion now I have 900 euros more in cash, one less company to worry about, and see much safer places to invest.