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Buffett-Backed BYD Falls After Forecasting Profit Drop

BYD Co. (1211), the Chinese automaker partially owned by Warren Buffett’s Berkshire Hathaway Inc. (BRK/B), fell the most in a month in Hong Kong trading after the company forecast profit may decline as much as 98 percent this year.

BYD dropped as much as 7 percent, the biggest slump since Sept. 26, to HK$14.60, before trading at HK$14.98 as of 1:13 p.m. in Hong Kong. The company’s Shenzhen-traded shares fell as much as 1.7 percent to 14.10 yuan.

A slowing economy damped demand for its solar-energy products and major customers, including Nokia Oyj (NOK1V), ordered fewer lithium-ion batteries to power mobile devices, the company said. Shenzhen-based BYD, which gets about half its revenue from autos, also faced faltering car sales in China amid increasing competition.

“The solar division is to blame for the poor results and we see no quick turnaround in this troubled division,” Ronnie Ho and Candy Tai, analysts at CCB International, said in a report after the results, cutting their investment rating on the Hong Kong listed stock to ’‘underperform’’ from “neutral.”

Net income for the year ending Dec. 31 may drop to between 27.7 million yuan ($4.4 million) and 110 million yuan, BYD said in a statement to the Shenzhen stock exchange yesterday.

The company, led by chairman Wang Chuanfu, also amassed 15.5 billion yuan in net debt at the end of the third quarter, Mizuho Financial Group Inc. said in a report today. The rising debt, up 1.1 billion yuan from the end of last year, should be a source of concern for investors, wrote Ole Hui, a Hong Kong- based analyst at Mizuho.

Executives Quit

Based on Chinese accounting standards, BYD’s third-quarter profit slid 94 percent to 4.6 million yuan, from 77.4 million yuan a year ago. Sales fell 11 percent to 10.5 billion yuan from 11.8 billion yuan. The company forecast on Aug. 27 earnings in the period may slide as much as 95 percent.

“Sales in the Chinese car industry started to slow this year as the economy’s growth prospects dimmed, and the company faced a lot of competitive pressure in the market,” BYD said in a filing yesterday. “Global demand for solar energy was also weak, leading to a big fall in our sales.”

A weak solar-energy business and the difficulty in winning back car sales due to increased competition in China will weigh on BYD’s operations in the near term, analysts from CCB said.

The company’s shares have slumped 38 percent in Shenzhen this year as executives sold stock or left BYD. Vice President Yang Longzhong resigned for unspecified personal reasons and changes in company structure, BYD said on Sept. 27.

Sales Bottom

Five executives and an investor sold more than 100 million yuan of Shenzhen-listed shares for personal reasons, John Li, company secretary at BYD, said on Aug. 1. The company’s Hong Kong-listed shares have fallen 19 percent this year.

BYD said its vehicle sales fell 18 percent in the third quarter to 77,004 units. This compares with a 21 percent gain for Volkswagen AG (VOW) to 704,991 vehicles, the German company reported last month.

Auto sales will bottom out in 2012 and rise 6 percent next year as BYD, which manufactures the S6 sport-utility vehicle and the F3 sedan, benefits from improvements in technology and quality, Yankun Hou and Ming Xu, analysts at UBS AG (UBSN), wrote in an Oct. 24 report.

Still, the company faces challenges winning over customers because the brand sold a “massive volume of low-quality cars” in 2009 and 2010, and as rivals release more-competitive offerings, the UBS analysts wrote.

No Buys

None of the 21 analysts tracked by Bloomberg who cover BYD recommend investors buy its Hong Kong stock. Eleven analysts have a sell rating, with the remaining 10 recommending a hold.

MidAmerican Energy Holdings Co., a unit of Buffett’s Berkshire Hathaway, bought 9.9 percent of BYD in September 2008 to tap rising demand for clean technology. BYD shares surged more than ninefold after Buffett’s investment, reaching a record close of HK$85.50 on Oct. 23, 2009. MidAmerican is the Hong Kong-listed stock’s second-largest shareholder with a 28 percent stake, according to data compiled by Bloomberg.

The automaker said on Oct. 24 it had signed an initial agreement to supply a company in London with 50 electric e6 vehicles for trial use as minicabs.

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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