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CHINA: BYD Fined, Factories Confiscated By China in Land Dispute Case

by Liza LinBloomberg News
October 15th, 2010

BYD Co., the Chinese carmaker part- owned by billionaire Warren Buffett’s Berkshire Hathaway Inc., was fined and ordered to surrender seven factories in central China after the government said it used land illegally.

BYD will pay 2.95 million yuan ($443,000) and the factories in Xi’an, Shaanxi province, will be confiscated, the Ministry of Land and Resources said on its website today.

“This will affect their capacity expansion in the medium to long term,” said Yu Bing, an auto analyst with Pingan Securities Co. in Shanghai. “If you consider their production requirements in the next two to three years, they will need to bolster their capacity now.”

The decision adds to setbacks for the Shenzhen-based automaker that include declining domestic sales and scaled-back plans to sell electric cars in California. BYD, China’s fastest- growing carmaker by sales last year, reported a 25 percent drop in September auto sales today, even as deliveries rose at rivals SAIC Motor Co. and General Motors Co.

The company’s earnings and operations won’t be affected by the confiscation, John Lee, BYD’s head of investor relations, said by phone from Shenzhen. In a later filing to Hong Kong’s stock exchange, BYD said the land and buildings were part of an expansion project and hadn’t yet contributed any production, sales or profit. Construction was at an initial stage, it said.

Current capacity of 700,000 cars will be enough to meet demand this year, and BYD will boost production at existing plants in China if market demand increases, Lee said. In the statement, BYD said it expected no “material adverse impact.”

Shares Drop

BYD, the maker of China’s best-selling F3 compact car, fell 0.7 percent to HK$56.50 at the 4 p.m. close in Hong Kong trading. The stock has dropped 17 percent this year, while the benchmark Hang Seng Index has gained 7.3 percent.

The company in August slashed its 2010 sales outlook by 25 percent to 600,000 vehicles. Buffett affirmed his support for BYD last month when he visited the automaker in Shenzhen, saying it will be a leader in electric cars.

BYD unlawfully built seven factories on 112 acres of farmland it agreed to buy from an economic development agency in Xi’an, the land ministry said July 15. The company built the plants even though 92 percent of the land was still zoned for agriculture, according to the ministry.

A decision on whether to punish the company was to be made by Sept. 30, the ministry said at the time.

Spending on Plant

BYD spent 149 million yuan on the plant construction as of June 30, according to its interim report issued Sept. 19. The factories would have had a combined capacity of 200,000 cars when completed, it said.

Berkshire Hathaway owns about 10 percent of the automaker through Des Moines, Iowa-based MidAmerican Energy Holdings Co.

BYD, headed by Chairman Wang Chuanfu, started expanding its production as China surpassed the U.S. last year to become the world’s biggest auto market. Its existing Xi’an factory, built in 2005, can assemble 300,000 of its 3-series cars, including the F3 and G3 models, annually.

The carmaker planned to invest 5 billion yuan in a new factory in Xi’an with the same capacity, Wang said in August.

Even as domestic brands such as BYD have expanded capacity more aggressively this year, this may not translate into higher sales, Hungbin Toh, an analyst at Credit Suisse Group AG, wrote in a report this month. The automaker may miss its reduced sales forecast for this year, Toh wrote.

The government decision announced today may help bring BYD relief with regard to its plans for an A-share listing in China, Pingan Securities’ Yu said.

Share Sale Delayed

A day before the ministry announcement in July, BYD said it may delay the share sale to wait for “better timing” after stock markets fell. BYD planned to raise 2.85 billion yuan for projects including the development of lithium- and solar-powered batteries.

Wang said Aug. 23 the company is proceeding with the listing and hopes to sell the shares later this year.

“A resolution to the case will end the uncertainty surrounding the stock for investors,” Yu said. “Investors like BYD for their new energy business, and it is still a very recognized company.”

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