BYD's Net Suffers as Stimulus Wanes

By JOANNE CHIU

HONG KONG—BYD Co. reported lackluster earnings, reflecting a decline in car sales in China amid reduced government incentives and lower margins in the company's battery business.

Associated Press

Customers look at a BYD sedan at an auto sales fair in Beijing in September.

The car maker, based in Shenzhen, China, didn't break out third-quarter results, reporting a 3.8% rise in net profit for January through September to 2.43 billion Chinese yuan (US$365 million) from 2.34 billion yuan a year earlier..
Analysts said that suggested a tough third quarter, as BYD reported a profit of 2.42 billion yuan for the first half. The difference between BYD's nine-month and first-half results indicated that third-quarter net profit plunged to 11.34 million yuan from 1.16 billion yuan a year earlier.
Revenue for the nine-month period rose 31% to 34.5 billion yuan.
The news sent shares down 10% in Hong Kong to end at 51.05 Hong Kong dollars (US$6.58).

TO COME

"Investors were overoptimistic on BYD's performance, and I expect some downward earnings revisions going forward to reflect its margin squeeze amid intensifying competition for its battery division and slower growth of its auto business," said Johnny Wong, an analyst at Yuanta Research. Mr. Wong said BYD's third-quarter gross profit margin likely fell to 14.9% from 21.4% in the first half, in part because of rising labor costs.
Credit Suisse said sluggish auto sales coupled with margin deterioration severely affected BYD's third-quarter profit. "We do not expect a major turnaround in the medium term, given the structural problems within BYD's sales network," it said in a note to clients.
Some analysts had expressed concerns over BYD's relationship with its car dealers as slower auto sales and rising inventory levels in recent months have forced dealers to withdraw from BYD's sales network.

BYD's results were released just weeks after investor Warren Buffett made a high profile visit to BYD's operations in China to reaffirm his long-term interest in the company. Mr. Buffett described BYD as a "young and energetic" company and said he believes the company will play an important role in new energy technology. MidAmerican Energy Holdings Co., a unit of Mr. Buffett's Berkshire Hathaway Inc., holds a 9.89% stake in BYD.

The Chinese battery and car maker, which began as a manufacturer of rechargeable lithium-ion and nickel batteries and later branched out into producing cars and cellphone parts, caught the attention of Mr. Buffett because of its background in battery production.
Growth in Chinese auto sales remained healthy in the first half after the nation last year overtook the U.S. as the world's biggest auto market. But growth has begun to moderate as the Chinese government removed stimulus measures that supported car purchases. In August, softening domestic demand for automobiles prompted BYD to slash its 2010 auto sales target by 25% to 600,000.
BYD's domestic car sales rose a modest 4% in July from a year earlier. But sales fell 19% in August and dropped 25% last month even as the company launched new models.
Analysts said they expect only moderate growth in car sales for BYD in coming quarters, given strong competition against other domestic car makers and foreign joint ventures.
Analysts have also expressed concern that BYD has put too much attention on developing battery technology at the expense of focusing on the quality of its cars. BYD's cars, which are targeted mainly at first-time car buyers, tend to be less expensive than competing brands.