BYD Shares Get A Jolt As Company's Electric Vehicles Find Continued Government Support

| About: BYD Co., (BYDDF)

BYD Co. (OTCPK:BYDDF), the Chinese battery and vehicle maker partly owned by Warren Buffett's Berkshire Hathaway Inc. (NYSE:BRK.B) has been appreciating lately, as a flurry of good news has come to the company. Most recently, two major positive developments were announced, including a Chinese plan to encourage use of alternative energy vehicles and the European Union granting BYD approval to sell electric buses to EU nation-states without first obtaining permission on a nation by nation basis.

These recent positive announcements, as well as a general turn-around for Chinese equities, have pushed BYD to its highest trading levels since the first quarter of 2012. Last weekend, China's cabinet announced plans to ease traffic congestion with the goal of public transportation eventually accounting for 60 percent of vehicle use in cities and large towns. The plan includes government encouragement of alternative energy vehicles by the public transportation system, which is likely to benefit BYD and its fleet of electric vehicles that are designed for use as buses and taxis.

Similarly, the European Union's approval of BYD's selling electric busses throughout the European continent can be seen as a major boon to BYD. The company has had success in selling its electric buses to many developing markets, but has yet to find success in the much of the developed world.

BYD's automobile division appeared to be in the downward part of a product cycle in 2012. The company faced negative publicity from concerns over vehicle battery flammability after an investigation into a taxi that caught on fire, but BYD's batteries were ruled out as the cause and the influence of that fire risk is likely mostly over now. Nonetheless, such concern likely prompted BYD to enact measures to improve vehicle quality and safety, while also continuing to offer interesting added technological features, like the ability to drive some BYD vehicles with a remote control.

Some of BYD's electric cars have already found a market in Europe. In the second half of 2012, BYD received an order to supply 50 e6 electric cabs to Greentomatocars, London's second-largest minicab company, in 2013. Greentomatocars previously composed its fleet of Toyota (NYSE:TM) Prius hybrid vehicles, but the e6 is all electric and therefore theoretically greener. If the e6 is successful for the minicab company, many citizens of London, competing taxi services and tourists, may grow more comfortable with the brand.

Similarly, BYD has begun to find traction in its international sale of electric buses, including signing some large multi-year orders. In 2012, BYD inked one deal with Israel's Dan Bus for 700 electric buses and an order for 500 buses from the government of Uruguay. Mayor Gilberto Kassab of Sao Paulo, Brazil, also indicated that Sao Paulo is interested in BYD's electric buses, and that it may soon contract to obtain some. This international interest in BYD's buses indicates the company may soon procure bus orders within Europe.

Beyond vehicles, BYD's lithium-ion battery and handset component businesses have also been under fire during the last several quarters, as demand for batteries and phone parts declined. The problem is not one of quality or performance regarding BYD's lithium-ion batteries and components, but rather due to declining market share by many of its customers, causing them to buy less components than they otherwise would.

For example, one of BYD's largest customers for mobile phone batteries and related components is Nokia (NYSE:NOK), which has seen its product line lose share to smartphones including Apple's (NASDAQ:AAPL) iPhone and the many options running a version of Google's (NASDAQ:GOOG) Android OS. Other major customers of BYD's mobile components and batteries include Huawei Technologies and ZTE, both of which came under scrutiny by the U.S. House Intelligence Committee. Huawei was subsequently left out of the Microsoft Windows Phone 8 device launch. This could cause further weakness in lithium-ion battery demand for BYD from Huawei in the near term.

While Nokia and Huawei may have immediate problems, their issues could resolve themselves in due time. Alternatively, if these buyers of BYD's batteries and components cannot get their respective houses in order, other customers will likely emerge and lay claim to BYD's battery and device component supply chain. Other major customers of BYD's handset component and assembly business already include Apple (AAPL), Google's (GOOG) Motorola, HTC and ZTE, among others, and any of these component customers could expand their relationship with BYD in the coming quarters, especially if their market share increases.

Given BYD's somewhat substantial appreciation over the last three months, with shares in the company gaining about 80 percent, it would not be surprising to see shares correct to the downside in the near-term as some investors realize some of their profit. Nonetheless, it appears likely that more positive headwinds will likely be announced for BYD in 2013, and that the company's recent performance should to continue.

Disclosure: I am long OTCPK:BYDDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.