Red Hot Profits from Green China: Electric Vehicles

By Travis Johnson, Stock Gumshoe, January 21, 2009

This is a little quickie from Green Chip International, a newsletter that is, like so many others, apparently boasting of more big discounts in their subscription rate — don’t know if anyone ever actually paid the “official” $995 subscription rate, but now they’re trying to get you to subscribe for $300.

Still, that’s quite a handful of greenbacks for a newsletter that hasn’t had much opportunity to prove itself yet — so let’s see if we can figure out some of what they’re touting for us today.

The big spiel is all about what they’re calling …

“China’s $555 Billion ‘Environmental Liability Insurance’ …

“Here’s how you can use it to grab ahold of 3 easy windfall “payouts”… the first one starting as early as today…”

“Payouts” in quotes, of course. No need to check the mailbox for your envelope full of cash just yet.

The broad investment thesis is that China is investing heavily in cutting pollution and cleaning up their environment — though we might imagine that a nice economic slowdown that shutters many of their factories might do more good for the water and air than any investment in wind power in the near term, and China’s interest in going “green” has not been tested any more than ours has, so we’ll see how a faltering economy impacts these policies and goals.

But if we assume that this investment and this change will come, the folks at Green Chip International have a few stock ideas they think we should jump on … let’s look at one of them:

“The Burgeoning Electric Vehicle Market

“Globally, the hybrid vehicle market is expected to surge by 18-20% per year from 2009-2012. Moreover, hybrid and electric vehicles will account for an estimated 10% of all auto sales by 2015.

“And for its part, China is leading the pack when it comes to plug-in vehicles. The country has even begun taking advantage of the Western auto-industry slump to draft some of the recently laid-off engineering talent.

“Now China is anxious to take on the global market, and plans to enter the American market as soon as 2010…

“…And one little-known Chinese firm is getting some very high-profile assistance from an American investment legend.

“It hasn’t made many front-page headlines, but one of America’s most successful businessmen has already pumped $230 million into China’s electric auto industry, and it’s all gone to this one small-cap company…”

Now of course, most of us assume that the long-term future of electric vehicles and hybrids will be strong, though there’s plenty of debate over which technologies or standards or strategies will win (I’d probably bet on whichever one gets a US infrastructure built up most quickly, but that’s still more future speculation). And in the meantime, no one’s buying the hybrids that are available now — with gas under $2 a gallon and household budgets a bit creaky, it’s hard to justify the extra cost. Toyota has postponed its plans for a big new Prius plant in the US, so the fortunes that may be made might go to the patient.

Jeff Siegel goes on to say that “You may not know the name of that company now, but you soon will…”

He means, of course, that you’ll know after signing up for your subscription … but since you’re here, you can just read the next paragraph instead (and if you want to sign up for a subscription later, hey, don’t let me stop you — just have a better reason than the discovery of a “secret” stock idea).

This company is BYD (1211 for the H shares in Hong Kong, BYDDF for the 1:1 shares on the pink sheets, where the volume is very light. There is also a 10:1 ADR listed on the pink sheets at BYDDY, with each one representing 10 shares in Hong Kong, also with light volume.)

BYD is indeed partly owned by “one of America’s most successful businessmen” — MidAmerican Energy bought 10% of the company back in September, and MidAmerican is, of course, the energy holding company for Warren Buffett’s Berkshire Hathaway. I have never heard Buffett take a personal interest in this investment, but David Sokol, the very highly respected head of MidAmerican, has talked about it before — and the idea apparently initially came from Charlie Munger, who is Yin to Buffett’s Yang (or vice versa). Sokol said they wanted to buy more than 10% but were rebuffed … so far.

Sokol said that he was interested in BYD because of its battery technology, which may have potential beyond vehciles, but BYD is also developing its own plug-in electric cars — hoping to get to the US market by 2011, which seems to be the real target year for most of the “next wave” of plug-in vehicles in this country. BYD has also said that they’re “open” to licensing their battery technology to other car manufacturers, so they do seem to have an eye on the potential profits, wherever they may lie. The info about MidAmerican’s investment in September is here, an article from the Detroit Auto Show that quotes Sokol is here, if you’d like to read up a bit more on these guys.

Of course, most of the electric vehicle rollout plans were firmed up in 2006 and 2007, when it seemed like oil would never stop going up, so we’ll see what happens if oil is still trading at these prices in a year’s time.

So … are you interested in a Chinese battery company? The shares had a nice spike up on the MidAmerican news last Fall, but have also been generally quite steady for the whole of the market collapse since last Summer, so there’s certainly still optimism about their prospects. The company is profitable, but not necessarily cheap on current earnings — over the last year (through June of 08, they haven’t released second half results for 2008 yet) they earned .6 Renmimbi per share. The current share price of BYD is 13.42 in Hong Kong Dollars (US$1.73), which makes it about 11.80 in Renmimbi at the current exchange rate, so you get a trailing PE ratio of about 20.

There are other Chinese battery companies we’ve looked at before, notably China BAK Battery (CBAK) back when Tony Sagami was touting the shares pretty aggressively, and BYD has certainly done far, far better than CBAK over the past nine months or so since Sagami’s tout graced the pages of Stock Gumshoe. Doesn’t mean that it will continue to outperform, of course, but maybe it’s worth a look as you search for your own green investing ideas.

Full disclosure: I continue to own shares of Berkshire Hathaway, but do not own any other investment mentioned above, and will not trade in any stock mentioned for at least three days.

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