BYD: The Art of Profit Management

BYD Company Limited (BYD) manufactured rechargeable batteries, mobile phone components, and automobiles. In 2008, the company caught the attention of Warren Buffet’s investment group, and their investment in BYD caused BYD’s share price to increase 917.86 per cent over just a year, setting Chinese investors’ expectations high for BYD’s release of A-shares, planned for June 2011. <br><br>BYD’s 2010 annual report showed that the company’s performance had already taken a dip, but its prospectus was optimistic about the market prospects. The first quarter report for 2011, issued the day before the A-shares were to be released, was not as optimistic. BYD’s A-shares fared well on the first day of release, but the company’s net profits declined remarkably, and reports forecasted further decline. However, the company’s 2011 annual report showed a drop in operating profits of just 49.04 per cent year over year—just slightly less than the 50 per cent decline that would have triggered intervention by the securities regulators. <br><br>Was the company making a remarkable recovery? Were BYD’s A-shares still a sound investment, or had the company “managed” its financial statements to protect itself and its securities underwriters?

This case is best used in courses on financial statements analysis in graduate and executive MBA programs and with executive audiences. Given the nature of the fundamentals involved, the case can also be adapted for use in more advanced courses such as mergers and acquisitions.<br><br>The purpose of the case is to teach students how to read and analyze a prospectus and financial statements from an outsider’s perspective. After completing the case, students should be able to do the following:<br><ul><li>Analyze financial statements and detect business problems using relevant information.</li><li>Explore and identify the application of discretionary accounting methods in financial statements.</li><li>Discuss possible regulatory improvements to deal with similar profit management issues.</li></ul>

• profit management, IPO, BYD