Building on principles One-Asia Research | August 21, 2020 China Autos Driving the EV revolution Hyunwoo Jin [email protected] This publication was prepared by Mirae Asset Daewoo Co., Ltd. and/or its non-U.S. affiliates (“Mirae Asset Daewoo”). Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Mirae Asset Daewoo makes no guarantee, representation, or warranty, express or implied, as to the fairness, accuracy, or completeness of the information and opinions contained in this document. Mirae Asset Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opin- ions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed, or published in whole or in part for any purpose. Please see important disclosures & disclaimers in Appendix 1 at the end of this report. August 21, 2020 China Autos CONTENTS Executive summary 3 I. Investment points 5 1. Geely: Strong in-house brands and rising competitiveness in EVs 5 2. BYD and NIO: EV focus 14 3. GAC: Strategic market positioning (mass EVs + premium imported cars) 26 Other industry issues 30 Global company analysis 31 Geely Automobile (175 HK/Buy) 32 BYD (1211 HK/Buy) 51 NIO (NIO US/Buy) 64 Guangzhou Automobile Group (2238 HK/Trading Buy) 76 Mirae Asset Daewoo Research 2 August 21, 2020 China Autos Executive summary The next decade will bring radical changes to the global automotive market. The move toward electric vehicles (EVs) is nearing a tipping point, with automakers across the world intent on tapping the market’s huge potential with a bevy of new models targeting the mass market. Nowhere will this trend be more evident than in China. Between now and 2030, we project China’s battery electric vehicle (BEV) market to expand at a CAGR of 32%, with sales volume likely to reach 13mn units (45% of annual sales) in 2030. By 2035, we expect BEVs to account for more than 80% of China’s annual auto sales. China is at the center of the global EV value chain, having successfully localized the production of all the needed materials and parts (including batteries). And the potential demand is huge, owing to China’s massive population and expanding middle class. To satisfy growing demand in China, automakers are likely to roll out an increasing number of BEV models, creating a virtuous cycle for BEV penetration. Almost all major global automakers are expanding their exposure to China to tap into the market’s vast potential. Accordingly, we expect to see rapid rollouts of new EV models by leading global brands, on top of the new models actively being introduced by local automakers. Chinese consumers will soon have a wide choice of affordable, locally produced BEV models under both foreign and homegrown brands. We believe homegrown brands will prove highly competitive in this crowded arena, partly owing to their home-field advantage. The mass-market EV segment is already dominated by Chinese companies, such as Guangzhou Automobile Group (GAC). In the premium segment, BYD, NIO, Geely (Volvo), and Xpeng have been enhancing their cost and product competitiveness. The Chinese government has expanded its investments in EV charging stations and concentrated subsidies in the low/mid-end swappable battery segments, where Chinese companies have a competitive presence. Among Chinese automakers, we believe Geely looks the most attractive due to its strong brand power and ability to sustain earnings growth. Geely has a market share of 24% among local brands, and we believe it is poised to grab additional share with the release of compelling new models. Geely also reports high margins relative to its rivals, as it reduces development costs for its in-house brands through cooperation with global brands such as Volvo and Daimler. Geely’s parent company owns Volvo and is Daimler’s largest shareholder, and a merger between Geely and Volvo—which have jointly developed platforms—is likely. We believe Geely stands a strong chance of emerging as the victor in China’s EV market over the long term, given the growing competitiveness of its in-house brands. Meanwhile, BYD is the only company in the world capable of producing all three core EV components: batteries, power management systems, and motors. The company remains the no. 1 player in China’s BEV market (17% market share as of 7M20), supported by new car effects. We expect BYD’s market share to rise further with the release of new premium models. In addition, BYD is likely to expand sales of its in-house batteries, which have become increasingly competitive, to local automakers seeking to diversify their supply chains. Also, growing sales of insulated-gate bipolar transistors (IGBTs; power conversion semiconductors) by subsidiary BYD Semiconductor should boost BYD’s value. In the premium EV segment, NIO boasts a highly competitive product lineup. In 1H20, NIO expanded its share of the Chinese EV market to 6%, with its premium SUV models recording monthly sales of over 4,000 units. At end-July, NIO became the first player in China to release an electric coupe-like crossover SUV. The company has also pioneered battery swapping and mobile charging systems to maximize EV charging convenience. Although NIO’s SUV models are above the subsidy-qualifying price range, the government has carved out an exception for premium EVs with swappable batteries. Recently, NIO received a local government investment worth W1.2tr, easing funding concerns. GAC is also gaining market share, supported by both in-house brands and joint ventures. The automaker’s models under the Toyota and Honda brands are likely to continue sales growth, while its in-house brands are competitive in the mass-market EV segment. The Chinese EV industry is on the cusp of rapid growth, but with high growth potential comes elevated risk. For investors wishing to distribute risk, we recommend the Global X China EV ETF (9845 HK), which comprises 20 major companies (including BYD, CATL, and Tianqi Lithium) in the EV value chain. Mirae Asset Daewoo Research 3 August 21, 2020 China Autos Figure 1. China: BEV sales and penetration (mn units) 30 BEV sales (L) 90% % to total vehicle sales (R) 80% 25 70% 20 60% 50% 15 40% 10 30% 20% 5 10% 0 0% 2015 2020 2025 2030 2035 Source: Mirae Asset Daewoo Research estimates Figure 2. Global X China EV ETF (9845 HK) price trend (US$) 12 11 10 9 8 7 6 5 4 1/20 2/20 3/20 4/20 5/20 6/20 7/20 8/20 Source: Bloomberg, Mirae Asset Daewoo Research Table 1. Global X China EV ETF (9845 HK) constituents (%) Ticker Company name Weight Business areas Ticker Company name Weight Business areas 300124 CH Shenzhen Inovance 9.69 Converters, PLCs, etc. 300001 CH Qingdao Tgood Electric 3.96 Elec. transformers 300750 CH CATL 9.44 Batteries 300457 CH Shenzhen Yinghe Technology 3.94 Battery equip. 002594 CH BYD 9.26 EVs, batteries 002074 CH Gotion High-Tech 3.73 Batteries 300014 CH EVE Energy 8.88 Batteries 300073 CH Beijing Easpring Material 3.66 Battery chemicals 300699 CH Weihai Guangwei Composites 8.57 Chemicals 603659 CH Shanghai Putailai New Energy 2.30 Battery chemicals 300450 CH Wuxi Lead Intelligent Equipment 7.51 Batteries, elec. equip. 002709 CH Guangzhou Tinci Materials 1.61 Battery chemicals 002460 CH Ganfeng Lithium 6.94 Lithium NIU US NIU Technologies 1.26 Electric scooters 300207 CH Sunwoda Electronic 6.85 Battery modules 002326 CH Zhejiang Yongtai Technology 1.10 LCD, chemicals 002466 CH Tianqi Lithium 4.93 Lithium 002850 CH Shenzhen Kedali Industry 0.92 Metal hardware 300037 CH Shenzhen Capchem Technology 4.59 Elec., chemicals 603305 CH Ningbo Xusheng 0.86 Auto parts Note: As of Aug. 6, 2020 Source: Bloomberg, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 4 August 21, 2020 China Autos I. Investment points 1. Geely: Strong in-house brands and rising competitiveness in EVs In the Chinese auto industry, in-house brands are becoming more important, as international joint ventures alone are no longer sufficient to drive margin expansion and market share gains. Furthermore, Chinese automakers need to strengthen their competitiveness in EVs to compete against the likes of Tesla and Volkswagen. We expect the Chinese EV market to expand, driven by the affordable premium segment (after-subsidy price: CNY200,000-250,000) and the upper-mass segment (CNY150,000- 200,000). We believe the automakers best positioned to thrive in this market are those that can leverage solid cash flow from conventional vehicles to invest in EV platforms. Competing in the EV market requires a long-term approach, as it takes time to build infrastructure and drive demand growth. Automakers that can continue to make investments on the back of stable cash flow are favorably positioned. China’s EV market is still in the fledgling stages (4% penetration for BEVs), and we believe the real growth is yet to come. We believe Geely Automobile (Geely) has stronger fundamentals than its local rivals. By market share, it ranks no. 1 (24%) among local players and no. 5 (8%) among all brands, and its share is likely to rise further with the release of competitive new models (both conventional and EV). Geely also reports high margins relative to its peers, as it reduces R&D costs through collaboration with Volvo and Daimler.