What is Warren Buffett doing with Berkshire Hathaway Inc.’s $8 billion stake in BYD Co.?

Bloomberg: What is Warren Buffett doing with Berkshire Hathaway Inc.’s $8 billion stake in BYD Co.?

The question is still swirling across trading desks more than a week after a BYD position matching the size of Berkshire’s appeared in Hong Kong’s stock-market clearing system.

While traders initially assumed Buffett was preparing to dump his stake in the high-flying Chinese electric car giant, now they’re not so sure.

With no clear signs that Buffett has exited BYD, other theories are starting to make the rounds. Maybe the 91-year-old billionaire is lending shares to short sellers for extra income, or simply wants to see how the market will respond to the idea of him selling. Or maybe there’s some other back-office explanation that has nothing at all to do with Buffett’s plans for the stock.

The Oracle of Omaha has been characteristically tight-lipped about his intentions, with multiple requests for comment to Berkshire as well as BYD representatives going unanswered. The upshot for now is that BYD’s stock is languishing: it’s down about 6% since fears of a Berkshire exit first emerged, even after the carmaker said its net income probably jumped as much as 207% in the first half. Hong Kong’s benchmark Hang Seng Index has slipped 2% in the same period.

“People feel it’s hard to make a clear call on this, despite all the theories,” said Daisy Li, fund manager at EFG Asset Management (HK) Ltd.

The stake in question appeared under a Citibank account in Hong Kong’s stock clearing system on July 11. That stoked speculation that Berkshire might be selling, because shares must enter the clearing system before they can change hands.

So far the amount of stock in the Citibank account hasn’t changed significantly, and there have been no regulatory filings to suggest Berkshire has cut its stake. According to exchange rules, there’s no deadline for a trade to take place after shares are moved into the clearing system.

Some market watchers have speculated the stake may have appeared in the system because it’s being made available for lending to short sellers, said Kenny Wen, head of investment research at KGI Asia in Hong Kong.

Yet it’s unclear whether demand from short sellers would be high enough to justify such a move, Wen added. While short interest in BYD was near the highest in two months as of Tuesday, it still only accounted for 1.3% of the free-floating shares in Hong Kong, IHS Markit data showed. That’s a far cry from the all-time high of more than 20% in 2010.

Future Sale
Other observers say the most likely scenario remains that Berkshire is laying the groundwork for its exit from BYD. After all, Buffett’s investment in the automaker has swelled to more than $8 billion as of Thursday’s close from $230 million when he first invested in the company in 2008.

There are reasons he may want to cash out. BYD is the world’s third-most valuable carmaker, yet it made a profit of just $472 million in 2021. That’s nearly 1/12th of Tesla’s. What’s more, BYD’s operating margin of 3.3% is small relative to Tesla’s 12%. BYD is also reportedly being probed after allegations related to pollution at one of its factories.

“We think it is more likely that Buffett is thinking on selling BYD shares,” said Andy Wong, fund manager at LW Asset Management Advisors Ltd. “We don’t think there is need for them to lend the shares for shorting purpose to earn interest. That is also not their trading style.”

If Buffett does sell his stake, he’ll have to disclose it in a timely fashion. Hong Kong regulations state that a shareholder who owns more than 5% of a listed company must notify the stock exchange within three business days of initiating a trade if that changes the percentage of the stake into the next whole number.

That would avoid the outcry that arose when Buffett informed the bourse two weeks after selling his holdings in PetroChina Co. in 2007. That sale, which was conducted through at least seven transactions over a period of about three months, was disclosed through postal mail — a method that’s no longer allowed.

For now, speculation about Berkshire’s exit may continue to dog BYD’s shares.

“While we await further clarification, we do not rule out” the possibility that Buffett’s firm is selling, Daiwa Securities Group Inc. analyst Kelvin Lau wrote in a note last week. “Berkshire Hathaway could be cautious on the overall economic outlook for the next few years, together with a likely slower growth for new-energy vehicles or autos.”

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