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Buffett-backed BYD shares recover after baffling crash

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Shares of Warren Buffett-backed electric car maker BYD rebounded as much as 19 percent Friday, recovering from a record-plunge a day earlier after management sought to reassure investors that all business operations were continuing as normal.

BYD's stock slumped 28.8 percent to close at HK$25.05 Thursday, after plunging as much as 47 percent in afternoon trade, in its biggest one-day percentage fall since the company's listing in 2002. The move baffled markets as there was no apparent trigger for the selloff.

The Shenzhen-based company, which held a conference call Thursday afternoon to clarify market concerns, confirmed its three business segments - autos, mobile handset components and batteries - are running smoothly.

It allayed concerns over the impact of Russia's economic crisis on its business, noting that it has limited exposure to the market. The company has generated just $700,000 in revenue from Russia year to date, less than 1 percent of total revenue over this period, according to Barclays.

Management also said it had no knowledge of whether Buffett might have sold any of his 9.9 percent stake in the company.

Despite reassurances from the company, some analysts recommended staying clear of the stock for now.

"We believe it is too early to bottom fish and maintain our underperform rating," Janet Lewis, analyst at Macquarie, wrote in a note, citing the company's rich valuation even after its correction.

BYD shares were trading on price-to-earnings ratio of 85 before the share price plunge. At the closing price of HK$25.05, the valuation remains stretched at 62, said Lewis.

Macquarie has a 12-month price target of HK$20.00 for the stock – down 30 percent from current levels. The stock last traded at HK$29.35.

"Until we get greater clarity on how it can improve profitability in a meaningful way, we cannot recommend the shares," Lewis said. "Investors looking for exposure to the NEV [neighborhood electric vehicle] thematic are better off focusing on component suppliers, especially in the battery food-chain, and NEV infrastructure-related companies," she added.

BYD's auto business has struggled this year, with overall volumes down 16 percent, led by a plunge in conventional vehicles amid increased competition in its home market, China.

In October, the company posted a 26 percent drop in third-quarter profit, and warned that it expects this year's profits to decline by up to 22 percent.

Yang Song, an analyst at Barclays, also maintained a cautious view on the stock following Thursday's selloff.

"Given BYD's still-high valuation post correction and uncertainty over the Chinese government's policy direction regarding electric buses, we do not expect any sharp recovery in the share price," Song said.

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Earlier this month, local media reported that Chinese government is preparing to gradually shift its focus away from electric buses - due to the high infrastructure investment cost, high maintenance cost and smaller-than-expected driving range.

This would be negative for BYD given the sizable resources, such as plans to build factories in multiple Chinese cities, it has committed to develop the electric bus. In addition, the electric bus is the highest margin product for BYD.

Barclays has an underweight rating on the stock with a 12-month target of HK$31.00.