Article: Financial Street Old Li

If we take a long-term perspective on everything, many doubts can be easily solved, and Buffett’s reduction of BYD is a case in point.

At the end of August, Buffett reduced his holdings of BYD twice in one week, and the market gave various interpretations. Many people thought that BYD’s market value might collapse after being sold by Buffett. However, BYD did not experience a big drop after Buffett reduced his holdings, and instead saw a rise this week after suffering from the turbulence of the broader market.

When Buffett was rumored to be selling his holdings in July, some analysts predicted that BYD’s market value would fall to 500 billion RMB. But as of today, BYD is still at the level of 800 billion RMB, beyond everyone’s expectations. Today, Old Li and his friends will discuss why Buffett reduced his holdings of BYD, why the stock god’s reduction did not impact the stock price, and why there is a battle for market value pricing power behind the reduction.

Why did the Stock God reduce his holdings of BYD?

Before discussing the recent market performance of BYD, let’s talk about Buffett’s reduction of his holdings. Although Buffett is the idol of many Chinese investors, he doesn’t have many stories with Chinese companies. The ones people are familiar with are BYD, representing new energy, and PetroChina, representing old energy.

Buffett’s recent reduction of BYD is similar to his previous reduction of PetroChina. Let’s begin with a timeline of Buffett’s reduction of BYD:

• In early July, the market has been speculating that Buffett was transferring his BYD shares to Citibank.

• On July 11th, the Hong Kong Stock Exchange’s CCASS (Central Clearing and Settlement System) showed that BYD’s holdings in Citibank had surged to 35.39%, and there is no accurate information on how much Buffett’s holdings were. On the same day, BYD announced its H1 2022 results on the A-share market.

• On August 24th, Buffett’s team reduced its holdings of BYD shares, with its stake declining from 225 million shares (the fourth-largest shareholder with a 7.73% stake) to 219 million shares.

• On August 29th, BYD announced its H1 2022 results, which exceeded expectations, but at this time, the external market and new energy vehicle prosperity were not good, and BYD’s market value did not perform well.

• On September 2nd, the HKEX disclosed that Buffett’s team continued to reduce its holdings of BYD shares on September 1st.## Sharing Information about H-Shares

In A-shares, information is relatively immediate, but H-shares have special disclosure rules. For example, the Hong Kong Stock Exchange requires disclosure only when the percentage of stocks held by major shareholders crosses a certain integer percentage point.

Simply put, when the shareholding percentage of major shareholders decreases from 7.1% to 6.9%, it is necessary to disclose the information to the market. However, when it drops from 6.9% to 6.1%, it can be optional to disclose. Therefore, the information we see about Buffett reducing his stake in BYD is actually outdated.

In summary, Buffett has cumulatively reduced his BYD holding by 17.86 million shares from the initial purchase of 225 million shares in 2008. He still holds 2.0714 billion shares of BYD, which is less than 10% of his total holdings. Although the market made a lot of noise, Buffett’s stake reduction is less than 10% of his shares.

Many friends have discussed why Buffett reduced his stake in BYD. In fact, except for the Buffett team, no one knows the real reason. Even if Buffett himself speaks, it must be in a certain context. So far, the answer with higher acceptance is that, in terms of return on investment, this “exploratory” reduction of his stake in BYD is the most favorable action for him.

In the face of BYD’s financial report, Chinese investors and American investors have different opinions. Chinese investors will see the “new energy” space represented by BYD under the trend of carbon neutrality, and the “growth” exhibited in the financial report.

The view of overseas investors is different from ours. Buffett has always had a special liking for energy, consumer, and manufacturing industries, in which “value” is more important than “growth”. BYD’s implicit financial indicators in the semi-annual report are not outstanding, and the current ratio and quick ratio have decreased compared to the previous period.

No stock can rise continuously, let alone always skyrocket. After BYD’s surge in the past two years, it is bound to usher in a shaking stage of time exchanging space. For Buffett, who has been holding for 14 years, time-exchanging space means the mean reversion of the long-term rate of return for 14 years. It is reasonable to reduce his stake. However, for most Chinese investors who have held BYD for less than four years, they cannot talk about mean reversion symbolized by time-exchanging space.

In July, there were rumors in the market that when Buffett reduced his stake, some researchers said that the market value of “B” family (an ambiguous reference to BYD in the secondary market) must have surged to 500 billion. However, the reality is that after a slight retreat, BYD continued to reverse back to 800 billion.

There is a famous saying in the TV drama “Young Marshal” by Zhang Zuolin: what is the world? It is not just about fighting; it’s about human relationships and skills. Being able to cope is already good enough. It is impossible to fully understand.Li believes that the financial market is the same. What is the stock market? The stock market is not a monopoly. It’s a game of subtraction and addition. It’s impossible to have it all.

Although Buffett’s continuous reduction of holdings of BYD caused a retreat in the stock price, many domestic investors took the opportunity to buy in, and many brokers also gave a “buy” rating. We should downgrade the rating of domestic brokers that say “buy” and hold onto their judgments.

Buffett’s investment philosophy has always been regarded as a model by global investors. But how many people are actually making profits through his investment philosophy? At least Li and his friends rarely profit from Buffett-style value investment.

The reason is that in the global stock market, there are different ways to play in the US stock market, Hong Kong stocks, and A-shares. For investors, Buffett has his own playing method, public fund has its own strategy, foreign investors have their own approach, speculative capital has its own methods, and retail investors have their own methods. In summary, each market has its own characteristics, and each individual investor has its own limitations.

What is the difference between Buffett and Chinese investors? Li believes that the difference lies in decision-making, because the position of investors affects their decision-making.

The essence of investment is research. Chinese investors conduct research in China. Overseas investors also conduct research in this country. They will build Chinese teams, absorb local talents, and conduct local research. There is no difference between them.

When facing major trends, everyone’s views are not much different. Li’s partner experienced Buffett’s reduction of China Petroleum in the past. Starting from 2003, Buffett bought China Petroleum H shares from HKD1.6 per share and became the second largest shareholder. Four years later, he sold them in batches at about HKD10-12 per share, with a compound annual return of over 60%. Since then, the China Petroleum H shares have gone through the financial crisis in 2008, the rebound from 2009 to 2012, and ultimately they went towards the decline of old energy. At the same time, Buffett invested in BYD and completed the switch from “old energy” to “new energy”.

China investors did not follow the shift from “old energy” to “new energy”, said the partner named Lao Li. In fact, back in 2009, Chinese investors also saw that “new energy” was the future. However, everyone thought it was too early. At that time, from the power generation end (photovoltaic) to the power transmission end (smart grid), from the power storage end (energy storage) to the power utilization end (new energy vehicles), Chinese outstanding enterprises could not be found, and even the advantages of Chinese enterprises were not seen on the entire track. Obviously, they could not make money in the short term.

Everyone’s research level is similar, but due to different positions, everyone will have different decisions for the same industry and the same company. Buffett’s team has a conservative and steady investment style, which favors consumption and energy in its investment system, and can achieve long-term investments exceeding 10 years. This is why they invested in BYD in 2008, but Chinese companies cannot do so.

On the other hand, when it comes to A-share investment, they may not be as good as domestic funds; when it comes to thematic speculation, they may not be as good as Chinese retail investors. To put it more harshly, Buffett’s choices are not always right. The stock god likes bank stocks, but how many people have made money by buying bank stocks?

Financial pricing power behind market value

There is relatively little discussion about financial pricing power. Many friends ask what is the relationship between Buffett reducing holdings of BYD and financial pricing power.

Lao Li believes that from the company to the industry to the country, it is essentially a progression relationship. The same behavior placed between small individuals and large groups will often have significant differences.

If a small family does not consume, they can save money. If all families do not consume, the country’s economy will decline.

If a small family reduces its holdings of BYD, it can cash out and exit. If all families reduce their holdings of BYD, BYD will be in a crisis, and then China’s new energy industry will be in a crisis.

If a region does not develop the new energy industry, there will be a situation of mutual restraint, and old energy will prevail in the regional competition.

The competition between global regions is often a competition between finance and industry, and the development of industry cannot be separated from finance. Whoever has the pricing power of market value can lead the development of the industry.

Imagine that a leading company in China’s new energy field is greatly cashed out by foreign capital. In the relatively illiquid Hong Kong stock market, the impact on the enterprise and the industry’s fund situation is undoubtedly huge. Moreover, it will affect everyone’s confidence in a completely new industry. Essentially, BYD’s reduction of its holdings is a confrontation between the confidence of old and new energy.For years, Chinese investors had no pricing power in the global energy and technology sectors due to the lack of leading companies. Chinese supporting companies could only follow the likes of “Apple” and “Tesla”, which resulted in the formation of the “Apple supply chain” and “Tesla supply chain”. Chinese funds may have profited from these industries, but the big players remained overseas.

In recent years, we have created many paths for industrial upgrading, such as new energy, intelligent manufacturing, innovative medicine, and Chinese chips. These companies have unique advantages on the ChiNext board and the STAR Market. In this fertile land, Chinese investors have absolute pricing power, and companies like CATL have emerged to break into overseas markets. As the most strategically important and competitive sector among many industries, new energy is an important breakthrough for Chinese investors to compete with overseas markets in terms of pricing power. From this perspective, there is no need to worry about BYD.

The drop in the new energy vehicle industry is evident to all, although Buffett’s reduction in holdings had a certain impact on the market, the recent bearish sentiment is mainly due to doubts about next year’s demand for the new energy vehicle sector. Many people thought that the new energy vehicle sector would enter a peak season in mid-to-late August, but last week’s (August 29-September 4) new energy vehicle sales report was disappointing. Although the year-on-year growth rate was good, the month-on-month growth rate was poor, and even showed negative growth. Looking ahead, due to economic downturn and subsidy cancellations, the market is highly divided over the increment of new energy vehicles next year.

Old Li’s idea is that as long as A-share’s growth and value styles do not switch, new energy vehicles will always be a relatively competitive subdivision field in the new energy industry. Funds will continue to flow between energy storage, photovoltaic, wind power, and new energy vehicles. If one focuses too much on short-term fluctuations, they may miss long-term opportunities because the big players’ reduction of holdings will not have a decisive impact on us.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.