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.
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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
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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. Geely’s parent company owns Volvo and is Daimler’s largest shareholder, and a merger between Geely and Volvo 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.
1) Strategic market positioning
In China, we estimate that the conventional vehicle market is approximately 10 times the size of the EV market (BEVs and plug-in hybrid electric vehicles [PHEVs] combined). BEVs still account for less than 4% of the Chinese passenger vehicle market. Accordingly, we believe automakers that invest steadily in EV platforms by leveraging cash flow from conventional vehicles are well-positioned to capitalize on EV market growth and sustain earnings growth.
We expect EV market growth to be driven by the affordable premium segment (after-subsidy price: CNY200,000-250,000) and upper-mass segment (CNY150,000-200,000). We expect: 1) the selling prices of high-priced premium EVs to come down due to price competition and cost reductions; and 2) demand for low-end EVs to shift to quality low/mid-priced EVs in line with growing purchasing power.
From this perspective, Geely’s market positioning appears strong relative to its rivals. Geely has adopted a strategic focus on EVs—including joint platform development with Volvo—by leveraging its solid cash flow from conventional vehicles. Over the long term, we expect to see the earnings performances of major Chinese automakers diverge according to their market positioning and in-house brand sales mix.
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Figure 3. EV market positioning overview
Notes: Estimates for the Chinese conventional vehicle market are based on 11 listed companies that together account for 98% of total sales volume; EV ASP is assumed to be equivalent to 185% of conventional vehicle ASP; mass/premium EV segment size is calculated by multiplying individual models’ sales volume by avg. MSRP (before subsidies); models produced under joint ventures with foreign companies are included. Source: MarkLines, Bloomberg, company data, media reports, Mirae Asset Daewoo Research
Table 2. Positioning strategy by automaker Company Geely Focusing on mass conventional vehicles/EVs Expanding its presence in the upper-mass segment with the Lynk & Co brand Entering the premium EV market through affiliated companies (Volvo and Polestar) GAC and BAIC Strength in premium conventional vehicles due to joint ventures with Toyota/Honda (GAC) and Mercedes-Benz (BAIC) Top-selling in-house brands in the mass-market EV segment BYD Focusing on mass-market and premium EVs; no. 1 market share (18%) in BEVs Conventional vehicle models account for approximately 50% of sales SAIC Extensive presence in mass/premium segments through joint ventures with Volkswagen and GM No. 1 player in overall market (22% market share as of 1H20) NIO Directly competes against Tesla in the premium EV segment Source: Mirae Asset Daewoo Research
Notably, automakers are seeing growing EV sales despite government subsidy cuts, highlighting the market’s growth potential. Based on sales value, the conventional vehicle market has posted negative growth over the past three years, while the EV market has expanded.
By 2025, we estimate EVs will achieve price parity with conventional cars and account for more than 20% of total cars sold in China. Against this backdrop, we believe that competitive proprietary platforms and strong in-house brands will be key differentiating factors.
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Figure 4. China’s EV market size/penetration (passenger + commercial vehicles)
(US$bn) Conventional vehicle market (L) BEV + PHEV market (L) 250 BEV + PHEV contribution (R) BEV contribution (R) 10% 9% BEV + PHEV revenue contribution (R) 10 19 9% 21 220 8% 200 5 8% 206 197 218 7% 2 150 166 6% 1 4.9% 145 4% 4.4% 5% 100 4%
2% 2.4% 3% 3.2% 50 1% 2.7% 2% 1.2% 0.8% 1.6% 1% 0.9% 0 0.5% 0% 2014 2015 2016 2017 2018 2019
Notes: Based on total sales of 11 listed automakers that account for 98% of the market; BEV/PHEV ASP is assumed to be equivalent to 185% of conventional vehicle ASP; penetration rates are based on sales volume Source: Bloomberg, MarkLines, Mirae Asset Daewoo Research
In 1H20, China represented 41% of the global BEV market based on sales volume. China’s EV demand has contracted since 2019, when the government cut EV subsidies by half. While we do not anticipate a rapid market recovery in 2H20, we think EV penetration will continue to increase amid an increasing supply of new low/mid-end models.
The European market is showing rapid growth, supported by expanded EV subsidies and aggressive EV investments by major automakers (e.g., Volkswagen, Daimler, and BMW), as well as tighter regulations on conventional vehicle production. We expect China and Europe to drive global EV demand growth.
In 2019, passenger vehicles accounted for 83% of the Chinese auto market. The combined share of BEVs and PHEVs in the passenger vehicle segment was 5.2%, and the share of BEVs alone was 4.1%. These figures are, respectively, 1.8x and 1.9x the levels in the global passenger vehicle market in 2019 (2.9% and 2.2%).
Figure 5. BEV M/S by country: Passenger vehicle segment Figure 6. Sales volume and penetration by car type (China)
(%) (mn units) Passenger (L) 70 China US Western Europe Other 30 Commercial (L) 6% Passenger BEV + PHEV (L) 60 Passenger BEV (L) 25 5.2% 5% BEV + PHEV contribution to passenger (R) 50 BEV contribution to passenger (R) 20 4.1% 4% 40 15 3% 30 10 2% 20
10 5 1%
0 0 0% 2014 2015 2016 2017 2018 2019 1H20 2014 2015 2016 2017 2018 2019
Note: Western Europe include 17 countries (e.g., Germany, France, UK, Spain, Italy, and Note: Passenger vehicles include sedans, hatchbacks, SUVs, and MPVs. the Netherlands). Source: MarkLines, Mirae Asset Daewoo Research Source: MarkLines, Mirae Asset Daewoo Research
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2) Market share gains: Geely, Toyota, and Honda
We note that Geely has been steadily gaining market share on the back of its in-house brands. In 1H20, the automaker accounted for 7.7% (6.7% when excluding Volvo) of China’s automobile market. However, its share of local brand sales reached a lofty 24%. Compared to Chinese peers, Geely boasts stronger in-house brands.
Among foreign brands operating under joint ventures in China, Toyota and Honda have achieved particularly robust market share gains. As a result, FAW (Toyota’s partner) and GAC (Honda’s partner) saw their market shares hit 8.5% and 7.9%, respectively, in 1H20.
Figure 7. Passenger car M/S: In-house + foreign brands Figure 8. Passenger car M/S: In-house brands
SAIC FAW Dongfeng VW GM Toyota GAC Geely Changan Geely Honda Renault-Nissan BAIC Brilliance Great Wall Changan HMG Great Wall 30% Chery BYD 20% Daimler SAIC
25% 16%
20% 12%
15% 8% 10%
4% 5%
0% 0% 2014 2015 2016 2017 2018 2019 1H20 2014 2015 2016 2017 2018 2019 1H20
Notes: Passenger cars include sedan/hatchback + SUVs + MPVs + minivans; Geely’s Source: MarkLines, Mirae Asset Daewoo Research 1H20 China market share was 6.7% (7.7% when incl. the Volvo brand). Source: MarkLines, Mirae Asset Daewoo Research
Figure 9. M/S: Local players’ in-house brands Figure 10. M/S: Local players’ in-house brands (excl. global
(excl. international joint ventures) brands)
SAIC Changan BAIC GAC SAIC Changan BAIC GAC 10% Great Wall Geely Chery BYD 25% GW Geely Chery BYD
8% 20%
6% 15%
4% 10%
2% 5%
0% 0% 2014 2015 2016 2017 2018 2019 1H20 2014 2015 2016 2017 2018 2019 1H20
Source: MarkLines, Mirae Asset Daewoo Research Source: MarkLines, Mirae Asset Daewoo Research
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3) New car effects, cash-generating power, ROE analysis
New car effects: BYD and Geely
Relative to rivals, BYD and Geely enjoy stronger new model effects (i.e., higher sales volume contribution from new models), which means they are well positioned to win share once the market begins to pick up. They are also positioned to deliver higher margins than automakers displaying high exposure to foreign marques, with all of their new models coming from in- house brands.
In 2019, foreign brands accounted for nine of China’s 10 best-selling car models. However, local brands have been rapidly catching up, with four domestic models (manufactured by Geely, Changan, and Great Wall) making the top 10 list in 1H20. Notably, Geely saw two of its models enter the top 10.
In the EV space, local brands are dominant in the mass/upper-mass segments (priced at CNY200,000 or below). However, in the premium segment, the Tesla Model 3 has built an unrivaled lead, setting a new sales record for a single model (1H20). In the premium segment, local player NIO has been expanding its presence by pushing the ES6 (premium five-seater SUV). In 1H20, BYD claimed the top spot in total sales thanks to its well-diversified product mix (18% BEV market share). We expect local EV makers to further expand their presence in the EV market going forward.
Figure 11. New models as % of total sales by automaker
30% 2017 2018 2019
25%
20%
15%
10%
5%
0% BYD Geely Dongfeng SAIC Changan BAIC FAW GAC Great Wall Industry
Source: MarkLines, Mirae Asset Daewoo Research
Figure 12. Geely’s Lynk & Co 05: Released in May 2020 (starting at CNY180,000)
Source: Geely, Mirae Asset Daewoo Research
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Figure 13. BYD’s Han EV: Released in July 2020 (starting at CNY230,000)
Source: BYD, Mirae Asset Daewoo Research
Table 3. Conventional vehicles (passenger): Top 10 sellers in 1H20 and 2019 (Units) 1H20 rank Make Segment Model Sales volume 2019 rank Make Segment Model Sales volume 1 VW Sedan Lavida 170,624 1 VW Sedan Lavida 517,192 2 Toyota Sedan (New) Corolla 153,230 2 Great Wall SUV-D Haval H6 386,405 3 VW Sedan Bora 131,702 3 GM MPV Hongguang 374,878 4 Great Wall SUV-D Haval H6 121,771 4 Toyota Sedan (New) Corolla 357,798 5 VW Sedan Sagitar 117,896 5 Renault-Nissan Sedan Bluebird Sylphy 346,551 6 Renault-Nissan Sedan Bluebird Sylphy 117,470 6 VW Sedan (New) Bora 333,528 7 Changan SUV-C CS75 109,553 7 VW Sedan Sagitar 307,323 8 Geely Sedan Emgrand 104,083 8 GM Group Sedan Excelle GT 279,280 9 Geely SUV-C Bo Yue 101,054 9 VW Sedan (New) Santana 251,174 10 GM Sedan Excelle GT 100,550 10 Honda Sedan Civic 243,966 Note: Orange shading = local brands Source: MarkLines, Mirae Asset Daewoo Research
Table 4. EVs (passenger): Top 10 sellers in 1H20 and 2019 (Units) 1H20 rank Make Segment Model Sales volume 2019 rank Make Segment Model Sales volume 1 Tesla Sedan Model 3 47,078 1 BAIC Sedan Senova D50 80,879 2 BYD Sedan Qin Pro 21,231 2 BYD SUV-B Yuan 61,900 3 GAC Sedan Aion S 18,161 3 GM-SAIC Sedan Baojun E100 60,050 4 NIO SUV ES6 12,120 4 Chery Sedan eQ1 39,401 5 GM-SAIC Sedan Baojun E100 10,801 5 Tesla Sedan Model 3 33,873 6 Chery Sedan eQ1 9,788 6 GAC Sedan Aion S 31,929 7 BAIC Sedan Senova D50 9,415 7 SAIC Sedan Roewe Ei5 30,550 8 Great Wall Sedan ORA R1 9,372 8 BYD Sedan BYD E5 29,311 9 BYD SUV Yuan 8,758 9 Great Wall Sedan ORA R1 28,498 10 BYD Sedan e2 6,848 10 Geely Sedan Emgrand 28,450 Note: Orange shading = local brands Source: MarkLines, Mirae Asset Daewoo Research
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Solid cash-generating power: Geely and BAIC
Competitiveness also depends on solid cash flow, particularly in light of automakers’ growing focus on the cash-intensive EV business. The automakers that are best-positioned to thrive in the long term are those able to maintain stable cash flow even after continuing to invest in assets (tangible and intangible) using cash generated from conventional vehicles. Geely and BAIC are two such companies.
While Geely and SAIC have continued to make investments, both have capped their asset purchases at annual net profit levels. In contrast, investments have exceeded net profit levels at GAC, BAIC, BYD, and Great Wall.
Figure 14. NP and FCF (2019) Figure 15. FCF trends
(CNYbn) (CNYbn) SAIC BYD Geely 50 50 GAC Great Wall Changan Dongfeng BAIC FAW 40 40 30 30 20 20 10 10 0 0 -10
-10 -20 NP FCF NP FCF NP FCF NP FCF NP FCF NP FCF NP FCF NP FCF SAIC BAIC Geely Great Wall BYD Changan Dongfeng GAC -30 2015 2016 2017 2018 2019
Note: Based on standardized Bloomberg data Note: Based on standardized Bloomberg data Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Figure 16. NP and investments in tangible/intangible assets Figure 17. NP-to-investment ratio (2019)
(CNYbn) (x) SAIC BYD Geely 35 4.0 GAC Great Wall Changan Dongfeng BAIC 25
15 3.0 5 -5 2.0
NP NP NP NP NP NP NP NP
1.0
0.0
Capex + acq. of Capex+ acq. intangibles of Capex+ acq. intangibles of Capex+ acq. intangibles of Capex+ acq. intangibles of Capex+ acq. intangibles of Capex+ acq. intangibles of Capex+ acq. intangibles of Capex+ acq. intangibles 2016 2017 2018 2019 SAIC BYD BAIC GAC Geely Great Dongfeng Changan Wall -1.0
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
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Robust ROE: Geely
Based on DuPont analysis, Geely boasts the highest ROE among Chinese automakers. Geely’s asset turnover and net margin are relatively high, while its leverage is relatively low. GAC also has a high net margin and low leverage, but its asset turnover is low. BYD, which has a broader business portfolio (encompassing not just autos but also mobile components and batteries), displays a relatively low ROE.
Figure 18. DuPont ROE comparison Figure 19. Asset turnover comparison (revenue/assets)
2017 2018 2019 2020F 2021F 2015 2016 2017 2018 2019 160% 35% 140%
25% 120%
100% 15% 80%
5% 60%
40% -5% 20%
-15% 0% BYD BYD GAC GAC FAW FAW BAIC SAIC SAIC BAIC Geely Geely Changan Changan Dongfeng Dongfeng Great Wall Great Wall
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Figure 20. Leverage comparison (assets/equity) Figure 21. Net margin comparison
2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 350% 20%
300% 15%
250% 10% 200% 5% 150% 0% 100%
50% -5%
0% -10% BYD GAC FAW SAIC BAIC BYD GAC Geely FAW SAIC BAIC Geely Changan Dongfeng Changan Great Wall Great Dongfeng Great Wall Great
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
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4) Industry consolidation: Firms with strong in-house brands to dominate
The Chinese auto industry is undergoing consolidation. The players lacking viability and being forced out are generally those whose in-house brands have failed to make inroads. The leading players, meanwhile, are expanding their market shares on the back of steadily growing in-house brand sales. We believe this environment will persist for the time being.
Notably, the Chinese government is set to scrap foreign ownership caps on local automakers by 2022, opening up the passenger vehicle market. We thus expect foreign automakers to increase their stakes in joint ventures with local makers and clinch more M&A deals. Some foreign automakers, including BMW, have already increased their stakes in joint ventures. Against this backdrop, we expect top-tier players with strong in-house brand power to outperform.
In the EV market, where hundreds of players (including start-ups that have not even begun commercial production) are competing, we expect growing differentiation to emerge between winners and losers. Most EV makers are incurring losses due to high costs and limited demand (which limits economies of scale). Furthermore, subsidies have been cut. Some players (including Byton and Faraday Future) are facing financial difficulties or even bankruptcy despite having drawn significant market attention with flashy concept cars.
However, a small number of winners are also emerging. NIO, which was listed on the NYSE in 2018, is expanding commercial production. In July, Xpeng raised around US$500mn in a Series C+ round from venture capital and private-equity firms to further develop models tailored to China’s tech-savvy middle-class consumers. These two firms are strengthening their presence in the premium EV market currently dominated by Tesla.
Figure 22. Chinese auto market: No. of players and combined M/S of top 10 players
78% Top 10 players' M/S (L) 35 No. of total players (Chinese firms incl. joint ventures, R) 76%
30 74%
72% 25 70%
68% 20
66%
64% 15 2016 2017 2018 2019 1H20
Note: No. of players is based on Chinese firms with annual sales volume of at least one unit. Source: MarkLines, Mirae Asset Daewoo Research
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2. BYD and NIO: EV focus
China has demonstrated a strong commitment to fostering EVs. The country is incentivized to promote the industry in order to boost GDP growth, nurture relevant technologies (including autonomous driving), lower its reliance on petroleum imports, and address environmental issues. We believe Chinese automakers stand a good chance of becoming major global EV players, leveraging their vast home market.
In this regard, we believe BYD (an established player with a proven track record) and NIO (a rising star in the industry) deserve particular attention. Despite intensifying competition, both companies have continued to expand their presence in the premium EV segment with the release of a series of globally competitive models. They are now setting their sights on the European market.
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, which consists of 20 major companies (including BYD, CATL, and Tianqi Lithium) in the EV value chain.
1) China-led transition to EVs
We expect the penetration of BEVs to increase more rapidly in China than in other markets. In 2019, China’s BEV penetration rate stood at 3.2% (the highest in the world), supported by local automakers’ low-end models. Although government subsidies have been the key driver of market growth in China, we expect EV demand to accelerate even without subsidies, driven by: 1) improvements in charging convenience; 2) the wide range of new models hitting the market; and 3) falling production costs/greater value for money (e.g., battery efficiency gains).
China, already a global production center for most auto parts, is now also at the center of the EV value chain. This is because China fostered the battery industry early on, helping CATL to become the world’s no. 1 EV battery maker. We believe China is now ready to foster a global leader among EV players. Nurturing the EV industry is key to winning the global race for technological leadership, particularly given the likely convergence of EV and self-driving technologies. With its competitive new EVs, China aims to become a leader in the auto export market (where Chinese companies have made little impact).
Figure 23. BEV penetration forecasts by country
China Western Europe US Korea Japan Global India 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Source: Mirae Asset Daewoo Research estimates
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We estimate BEVs will account for 45-50% of total cars sold in China in 2030 and nearly 90% in 2040, supported by the gradual phasing out of conventional vehicles and the spread of charging infrastructure. At end-2019, China set a goal of having new energy vehicles (NEVs)— i.e., BEVs, PHEVs, and fuel cell vehicles (FCVs)—account for 25% of overall vehicle sales by 2025. We expect NEV penetration to increase with the release of globally competitive BEV models.
Figure 24. China’s BEV sales volume and penetration
(mn units) BEV sales (L) % of total vehicle sales (R) 30 90%
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
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High share of BEVs in the new model mix
BEVs account for a high share of new models released in China. The percentage of BEVs among new releases increased to 50% in 2019 and is likely to reach 55% in 2020. Chinese companies are aggressively releasing low-end BEV models under their in-house brands, while also working to build platforms and volume production systems. Meanwhile, major global automakers are expanding their exposure to the Chinese EV market through joint ventures with Chinese brands and equity investments in Chinese battery companies. We believe these leading global brands will grab market share in China by quickly rolling out a series of new BEV models. As a result, Chinese consumers will soon have a wide choice of affordable, locally produced BEV models under both foreign and homegrown brands.
Figure 25. No. of new models by type
Conventional + hybrid (L) BEV (L) PHEV (L) BEV contribution (R) 160 60%
140 50% 120 40% 100
80 30%
60 20% 40 10% 20
0 0% 2015 2016 2017 2018 2019 2020F
Note: Based on the launch year in China Source: MarkLines, Mirae Asset Daewoo Research
Figure 26. No. of new BEV models released in China by company (2019)
7
4
3
2
1 VW NIO BYD GAC FAW BAIC HMG SAIC Tesla Yulon Geely SMEs Chery Honda Toyota Daimler Jiangling Changan Dongfeng Great Wall Great Renault-Nissan Anhui JianghuaiAnhui
Note: Based on the launch year in China Source: MarkLines, Mirae Asset Daewoo Research
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Expansion of charging infrastructure
The Chinese government, which designated NEV charging stations a key area of focus under its new infrastructure plan, has been aggressively expanding related investments. In 2019, there were 3.5 NEVs for each charging pole in China. The government plans to lower that ratio to three NEVs for each charging pole in 2020 by adding 600,000 charging points.
Private sector companies are also pushing to establish exclusive charging networks that maximize user convenience (a key selling point). Tesla plans to deploy 4,000 Superchargers in China in 2020 alone. (Tesla has installed a total of 2,500 Superchargers in China and 17,500 Superchargers globally over the past five years.) NIO, which sells EVs with swappable batteries, operates 135 swap stations as of June 2020. NIO has also introduced a mobile charging system (using a fleet of vans) and is teaming up with Xpeng on charging services, increasing the charging options available to owners of NIO and Xpeng models. Such efforts will undoubtedly stimulate EV market growth by improving the user experience.
Figure 27. Cumulative no. of NEVs and BEVs in China Figure 28. Ratio of NEVs to charging poles in China
('000 units) No. of NEVs No. of BEVs (x) 4,500 10
4,000 3,810 7.84 8 3,500 3,100 3,000 2,610 6 2,500 4.84 2,110 2,000 3.81 4 3.54 3.50 1,530 3.00 1,500 1,250 910 1,000 730 2 420 500 330
0 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2020F
Source: CAAM, KOTRA, Mirae Asset Daewoo Research Source: CAAM, KOTRA, Mirae Asset Daewoo Research
Figure 30. NIO’s mobile charging service: 10 minutes of Figure 29. Tesla’s Supercharger network in Asia charging provides 100km of range
Source: Tesla, Mirae Asset Daewoo Research Source: NIO, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 17 August 21, 2020 China Autos
Lower reliance on petroleum imports
From the standpoint of the Chinese government, nurturing the transition to EVs is an important way to decrease reliance on petroleum imports. China is the world’s top crude oil importer, meeting 70% of its demand with imports (mostly from Saudi Arabia, Russia, Iran, and Iraq). Volatility in crude oil prices is thus a major risk to China’s economy and energy security. China’s annual gasoline consumption is estimated at around 20% of local crude production and net oil imports combined. Accordingly, the switch to EVs is positive in terms of fiscal improvement, enhanced energy security, and eco-friendly energy use.
Figure 31. China’s reliance on crude oil imports Figure 32. China’s gasoline consumption
(mn tonnes) (mn tonnes) 800 Crude oil net imports (L) 80% 160 Gasoline consumption (L) 25% Crude oil production (L) % of crude oil net imports/production (R) 700 % of net imports (R) 70% 140 20% 600 60% 120
500 50% 100 15%
400 40% 80 300 30% 60 10%
200 20% 40 5% 100 10% 20
0 0% 0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* 2019*
Source: CEIC, National Bureau of Statistics of China, Mirae Asset Daewoo Research Source: CEIC, National Bureau of Statistics of China, Mirae Asset Daewoo Research
Value for money
From the standpoint of consumers, we believe that falling prices (amid rising competition among automakers and falling production costs), coupled with the expansion of charging infrastructure, will make BEVs increasingly appealing from a value-for-money standpoint.
We estimate that refueling costs for EVs are only 20-25% of the cost for conventional vehicles (assuming an annual driving distance of 20,000km). In addition, we expect the cost to produce EVs to continue to decline and match the level of conventional vehicles by 2023, supported by falling production costs for batteries and other key parts. Once the price premium is removed, the cost-saving benefits of EVs should attract greater attention.
EVs also cost less to maintain, having fewer parts than conventional vehicles. In addition, China exempts EVs from the 10% purchase tax it levies on conventional vehicles and freely awards license plates to EV owners, allowing them to bypass the lottery system. (Conventional vehicle owners pay more than W10mn for license plates, which in major cities are issued through a highly competitive lottery system with long wait times.)
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Balanced development
The development of China’s EV industry is well-balanced between market demand and policy measures. According to McKinsey & Company's Electric Vehicle Index, China outperforms major DMs in most industry categories, including incentives (purchase subsidies and tax benefits), infrastructure, number of available EV models, corporate investments, and self- sufficiency in manufacturing of key parts (e.g., batteries and motors).
China has also seen an increase in the proportion of consumers willing to buy an NEV in recent years. According to a 2019 McKinsey & Company survey, about 50% of Chinese consumers are considering an EV as their next vehicle. The proportion of consumers willing to buy an EV increases with household income.
Figure 33. Well-balanced development of China’s EV industry Figure 34. Consumers increasingly willing to purchase EVs
Source: McKinsey & Company, Mirae Asset Daewoo Research Source: McKinsey & Company, Mirae Asset Daewoo Research
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2) BEV market share dynamics
Rapid growth of BYD, NIO, and Tesla: Gap between winners and losers to widen
BYD, NIO, and Tesla are rapidly making gains in China. Tesla’s Model 3 was the top-selling EV in 1H20 (47,000 units), and BYD and NIO are rolling out premium EV models to take on the reigning champion.
In Jul. 2020, BYD launched the Han EV, the first vehicle to be equipped with its proprietary Blade Battery. In our view, the model boast strong competitiveness in terms of performance, design, and pricing. (Starting at CNY230,000 after subsidies, the model is roughly 17% cheaper than the Model 3.) With the scheduled launch of the Song Plus (SUV) in 4Q20-1Q21, we believe the automaker will gain further traction in the premium segment. Currently, BYD is slightly ahead of Tesla with an 18% BEV market share.
Meanwhile, NIO’s premium SUV sales are growing sharply. With the combined sales volume of the ES6 and the ES8 topping 4,000 units/month (15,000 units in 1H20), the automaker’s market share jumped from 2% in 2019 to 6% in 1H20.
SUVs to drive competition in 2021
In 2021, we expect premium EV competition to be driven by SUVs, as a slew of new models are set to released, including Tesla’s Model Y, BYD’s Song Plus EV, and NIO’s EC6. European brands such as Volkswagen, Audi, and BMW are also planning to roll out new SUVs in China.
In the mass-market segment (CNY150,000 or cheaper), GAC is rapidly winning market share, with its Aion S sedan recording cumulative sales of 18,000 units 1H20 (third place). The automaker’s market share jumped to 8% in 1H20 (up from 0% in 2018 and 5% in 2019), and will likely climb further thanks to the June release of the Aion V (SUV).
Geely is also seeking to cement its position in the mass market. After rolling out the Geometry C (compact SUV) in July, the automaker is planning to launch Lynk & Co’s first BEV model targeting the growing upper-mass segment (CNY150,000-200,000).
Figure 35. BEV M/S of BYD and NIO on the rise Figure 36. BEV M/S trends by automaker
Other (R) Tesla (L) BYD + NIO (L) BYD Tesla GAC BAIC BYD (L) NIO (L) GM SAIC NIO Geely 25% 100% Chery VW 25%
20% 80% 20%
15% 60% 15%
10% 40% 10%
5% 20% 5%
0% 0% 0% 2014 2015 2016 2017 2018 2019 1H20 2014 2015 2016 2017 2018 2019 1H20
Source: MarkLines, SNE Research, Mirae Asset Daewoo Research Source: MarkLines, SNE Research, Mirae Asset Daewoo Research
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Table 5. New EV model comparison (mass market)
Make Geely Xpeng WM GAC Model Geometry C G3 EX5 Aion V Price (after incentives, CNY) 139,800- 135,800- 139,800-189,800 159,600-239,600 Length/width/height/wheelbase 4,432/1,833/1,560/ 2,700 4,450/1,820/1,610/2,625 4,585/1,835/1,672/2,703 4,585/1,920/1,728/2,830 (mm) Max power/torque 150kW/310N-m 145kW 300N-m 160kW/315N-m 135kW/350N-m Top speed 150km/h 170km/h 160km/h 175km/h Battery capacity 51.9, 61.9kWh 66.5kWh 52.5, 69kWh 70, 80kWh Driving range (NEDC) 400/550km 520km 400/520km 400/600km km/kWh calculation 7.7-8.1 7.8 7.5-7.6 5.7-7.5 Note: km/kWh figures are simple calculations based on published materials. Source: Respective company data, press releases, Mirae Asset Daewoo Research
Table 6. Comparison of new EV models (premium; mid-CNY200,000+)
Manufacturer BYD Tesla Tesla Xpeng VW VW NIO Model Han Model 3 standard Model 3 LFP ver. P7 ID4 ID3 ET7 Launch Jul. 2020 Dec. 2019 2H20 Apr. 2020 Oct. 2020 4Q20-2021 2021 Price after incentives 250,000 250,000 250,000 229,800 271,550 229,900 N/A (CNY) (*est.) (est.) (est.) Max power (kW) 163-363 (AWD) 211 202 196 150 150 160-400kW (AWD) Battery capacity (kWh) 65, 77 53 50-60 (est.) 81 58 58 80-85 Driving range (km) 506, 605 (NEDC) 445 (WLTP) 465 (WLTP) 586 (NEDC) 420 (WLTP) 420 (WLTP) 550 (NEDC) Note: Estimates are based on data for corresponding models released outside of China and competing models. Source: Company data, press releases, Mirae Asset Daewoo Research
Table 7. Comparison of new EV models (premium SUVs)
Manufacturer BYD Tesla VW NIO Audi BMW Model Song Plus Model Y ID6 EC6 Q4 e-tron iX3 Launch 4Q20-1Q21 2021 2021 2H20 2021 4Q20-2021 Price after 450,000-500,000 450,000-500,000 450,000-550,000 N/A 488,000-535,000 N/A incentives (CNY) (est.) (est.) (est.) Max power (kW) N/A N/A 225, 300 -400 225 210 Battery capacity (kWh) 65+ N/A 77, 111 100 82 74~80 Driving range (km) 500+ (NEDC) 505 (WLTP) 450, 600 (WLTP) 615 (NEDC) 450~500 (WLTP) 440~456 (WLTP) Note: Estimates are based on data for corresponding models released outside of China and competing models. Source: Company data, press releases, Mirae Asset Daewoo Research
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[Reference] Growth of upper-mass segment and local brands in the smartphone market
Going forward, we expect local automakers to fare well in the upper-mass EV segment. Notably, a deep dive into China’s smartphone market (smartphones, like cars, are consumer discretionary goods) seems to support our view.
In China, the smartphone market is not yet mature, with penetration estimated at 60%. Significantly, four local brands—rather than Apple/Samsung Electronics—have established dominance (combined market share of 80%) by offering well-performing products at appealing price points. The best-selling models of Oppo and Vivo are priced at around W200- 300,000. Meanwhile, Huawei, China’s top smartphone vendor, offers products for both the mass and upper-mass (W600,000 or higher) segments.
We see similar dynamics taking shape in the EV market. Amid rising income levels and low vehicle ownership rates (around 20%) in China, we see strong upside to EVs’ upper-mass segment, which is likely to grow faster than other segments as car demand increases. And we believe that local automakers, which are already rolling out models that offer “bang for the buck”, are likely to be the biggest beneficiaries.
Figure 37. Chinese smartphone M/S by maker
Huawei Vivo Oppo Xiaomi Apple Other 100% 8% 11% 7% 9% 7% 9% 8% 9% 6% 14% 80% 8% 12% 11% 11% 9% 18% 15% 60% 18% 19% 16% 19% 17% 19% 18% 17% 40%
20% 40% 41% 34% 35% 35%
0% 1Q19 2Q19 3Q19 4Q19 1Q20
Source: Mobile Devices Monitor, Mirae Asset Daewoo Research
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3) OP margin and cost analysis
We project that most EV makers will swing to an operating profit sometime around 2023, supported by: 1) scale effects; 2) capex execution/plant conversion to support EV production; and 3) falling production costs (batteries, etc.)
OP margins of Tesla and BYD (economies of scale)
Our analysis of Tesla’s sales volume, property, plant, and equipment (PP&E), and OP margin shows that the automaker turned a profit once annual sales volume exceeded 300,000 units (based on W10tr in PP&E). Meanwhile, BYD was able to swing to black at a sales volume level of 220,000 units. We attribute this disparity to the fact that BYD utilizes some of its conventional vehicle assembly lines for EV production.
(The PP&E of BYD’s automotive division stood at roughly W21tr in 2019; in view of the 40-50% sales volume mix of PHEVs and BEVs, we estimated PP&E at W10tr for EVs, and more than W10tr for conventional vehicles.)
Table 8. EV OP margin estimates 1Q18-4Q18 2Q18-1Q19 3Q18-2Q19 4Q18-3Q19 1Q19-4Q19 2Q19-1Q20 1Q19-4Q19 Tesla Tesla Tesla Tesla Tesla Tesla *BYD EV PP&E (Wtr) 11 11 11 11 11 11 10 EV sales volume (units) 245,203 278,225 332,841 346,527 367,656 393,133 219,353 EV revenue (Wbn) 21,771 23,404 25,826 24,931 24,985 26,675 7,019 EV OP (Wbn) -242 -260 630 446 388 1,192 189 EV OP margin -1.1% -1.1% 2.4% 1.8% 1.6% 4.5% 2.7% Notes: We adjusted up Tesla’s 2Q19 OP margin to the 3Q19 level of 4% (from -3%) after stripping away one-off items (restructuring expenses and inventory valuation losses; all BYD figures are our estimates; we assumed that EVs account for 40% of the automotive division’s profits, 49% of sales volume, and 50% of PP&E (2019). Source: Tesla, BYD, Mirae Asset Daewoo Research
Figure 38. Tesla: EV sales volume and OP margin (PP&E of W11tr)
5.0% [OP margin] Assuming PP&E of W11tr
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
[EV sales volume] -2.0% 200,000 250,000 300,000 350,000 400,000 450,000
Note: We adjusted up Tesla’s 2Q19 OP margin to the 3Q19 level of 4% (from -3%) after stripping away one-off items (restructuring expenses and inventory valuation losses). Source: Tesla, Mirae Asset Daewoo Research
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Volkswagen’s plant conversion
Volkswagen is revamping its Zwickau factory for EV production. For the factory conversion, the automaker is investing a total of EUR1.2bn (W1.6tr) over three years (2018 to end-2020). Upon completion, the automaker’s annual EV production capacity will increase to 330,000 units (up from 300,000 units).
Based on the figures for Volkswagen, we estimate that capex of W1tr is needed to build (or convert) lines for the annual production of 200-300,000 EVs. For Chinese automakers, this figure could be lower, assuming cheaper land/equipment prices.
Geely’s capex was roughly W930bn in 2018-19. Assuming the company’s capex is concentrated in EV lines in 2020-22, we project that a total of W1tr will be invested in assembly line conversion, with annual EV production capacity rising to 200,000 units (150,000 BEV sales; proportion of BEVs in total production to exceed 10%) by 2023. If the automaker operates dual-purpose (EV/conventional) assembly lines as BYD does, it will likely swing to an operating profit in 2023.
Figure 39. Volkswagen’s Zwickau EV factory (ID.3)
Source: Volkswagen, Mirae Asset Daewoo Research
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EV battery prices to continue falling
Falling production costs (batteries, etc.) also support our view that major EV manufacturers will turn a profit starting in 2023. We estimate that batteries account for 30-45% of BEV production costs (which are believed to be at least 20% higher than conventional vehicle costs). Accordingly, lower battery prices should lead to significant savings. Global battery prices are currently estimated at US$120-130/kWh, down from US$159/kWh in 2019 (Bloomberg). And prices are expected to fall further to US$100/kWh, at which point EVs should be able to approach production cost parity with conventional vehicles.
We forecast that major Chinese EV manufacturers will eventually be on par with, or ahead of, developed market competitors in terms of cost competitiveness, as they mostly source locally-produced batteries from CATL and BYD. In our view, local battery prices will likely remain lower than the global average.
CATL (49% market share) has proved its global competitiveness by supplying LFP batteries for Tesla's Model 3 (after improving battery energy density using cell-to-pack technology this year). In addition, the company also supplies NCM batteries to NIO. Meanwhile, BYD (16% market share) has started to equip its EVs with the Blade Battery, which has higher energy density, and is cheaper to produce, than existing LFP batteries. As the competitiveness of local battery suppliers strengthens, so too will the cost competitiveness of local EV manufacturers.
Figure 40. BEV production cost breakdown (est.)
Battery pack Power elec. (inverter 40-50%, motor 35-45%) 5-10% Body/chassis Equipment Other 15-25% 30-45%
15-25%
20%
Source: Mirae Asset Daewoo Research
Figure 41. Production cost comparison: EVs vs. conventional Figure 42. Battery prices expected to continue falling vehicles (2019)
(US$/kWh) 180
160
140
120
100
80
60
40
20
0 2019 2020F 2021F 2022F 2023F 2024F 2025F
Source: BNEF, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research estimates
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3. GAC: Strategic market positioning (mass EVs + premium imported cars)
Despite the current sluggishness, we see reasons to be optimistic on the Chinese automobile market. For example, the mass-market EV segment—which is currently dominated by local brands and estimated to be four to five times greater than the premium segment (as of 2019)—is expected to show structural growth in line with an increase in vehicle ownership rates. In addition, the market for premium conventional vehicles, which is led by German and Japanese brands, is also enjoying robust growth.
We note that GAC has been rapidly winning domestic market share following its mass-market EV rollouts under joint ventures with Honda and Toyota. However, if foreign ownership limits are lifted in 2022, setting the stage for foreign automakers to operate directly in China, firms with high exposure to foreign marques would be adversely affected.
1) Mass EV segment
We believe that mass-market EVs will increasingly come into focus, as the segment will likely grow rapidly in line with increasing vehicle ownership rates. For EVs marketed in China through end-2020, we define mass-market models as those costing CNY250,000 or less (before subsidies). For EVs to be sold from 2021 onwards, however, we lower our mass- market price ceiling to CNY200,000 (after subsidies), given the high likelihood of intensifying competition and production cost reductions.
The mass segment tends to be less resilient than the premium segment in the face of economic downturns. From Jan. to Apr. 2020, when the COVID-19 pandemic wreaked havoc on China’s automobile market, mass-market EV sales sharply contracted YoY, while premium EV sales remained almost flat YoY.
Figure 43. EV market: Mass segment vs. premium segment (est.)
(US$bn) 17.1 18 Mass-market EV (≤CNY250,000, before subsidies) 16 Premium EV (≥CNY250,000, before subsidies) 14
12
10
8
6 3.5 4 2.0 1.8 2
0 2019 4M20
Note: Sales volume x average MSRP (before subsidies) Source: MarkLines, Mirae Asset Daewoo Research
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China’s mass EV segment is currently dominated by local automakers. Indeed, while foreign automakers (e.g., Tesla) have been expanding their presence in the premium segment, local players have been focusing on more affordable vehicles. In the mass EV segment, which is still in the early stages of development and boasts ample growth potential, local players producing quality low-end EVs have a competitive advantage over global players.
From 2H20 onwards, we expect competition in the electric SUV segment to heat up. A number of local automakers (Geely, Xpeng, Weltmeister, GAC) have rolled out new electric SUVs with starting prices of CNY140,000-160,000, and we expect future market share dynamics to hinge largely on the sales of these models. Thus far, GAC has displayed the strongest market share gains (among local players), on the back of solid sales of the Aion S sedan.
Figure 44. BEV M/S of major local players
20% BYD GAC 18% BAIC SAIC 17% 17% Chery Great Wall 16% Changan Geely Dongfeng FAW
12%
8% 8% 7% 6% 5% 6% 6% 5% 4% 4% 4% 4% 4% 4% 3% 3% 2% 1% 1%
0% 2019 1H20
Source: MarkLines, Mirae Asset Daewoo Research
Figure 45. EV price range by automaker
(CNY) 900,000 800,000 Premium market (≥CNY250,000, before subsidies): 700,000 Global players competing 600,000 500,000 Mass/upper-mass market (≤CNY200,000): 400,000 Local players competing 300,000 EVs eligible for subsidies ↓ (≥300km range; up to 2mn units) 200,000 100,000 0
Source: MarkLines, WattEV2Buy, company data, press materials, Mirae Asset Daewoo Research
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Table 9. Comparison of new mass-market electric SUVs
Make Geely Xpeng Weltmeister GAC Model Geometry C G3 EX5 Aion V Price (after incentives, CNY) 139,800- 135,800- 139,800-189,800 159,600-239,600 Length/width/height/wheelbase (mm) 4,432/1,833/1,560/2,700 4,450/1,820/1,610/2,625 4,585/1,835/1,672/2,703 4,585/1,920/1,728/2,830 Max power/torque 150kW/310N-m 145kW/300N-m 160kW/315N-m 135kW/350N-m Top speed 150km/h 170km/h 160km/h 175km/h Battery capacity 51.9, 61.9kWh 66.5kWh 52.5, 69kWh 70, 80kWh Driving range (NEDC) 400/550km 520km 400/520km 400/600km km/kWh calculation 7.7-8.1 7.8 7.5-7.6 5.7-7.5 Source: Company data, press materials, Mirae Asset Daewoo Research
Local Chinese players are capable of producing quality EVs with favorable economics that can still compete with foreign brands in terms of performance and range. For example, the latest EV models of Geely, GAC, and BAIC offer 8km/kWh under New European Driving Cycle (NEDC) standards. We expect leading local players to export their EVs to Asian EMs over the long term.
Figure 46. Comparison of EVs produced by local players in terms of pricing and battery efficiency (released before May 2020)
(CNY) Price range (L) Battery efficiency (R) (km/kWh) 500,000 10
High battery efficiency 400,000 8
300,000 6
200,000 4
Targeting the mass market 100,000 2
0 0 NIO JAC BYD JMC GAC FAW BAIC Geely Chery Changan
Notes: Prices are based on starting prices (before subsidies); battery efficiency figures are based on maximum NEDC range divided by battery capacity; PHEV models are included. Source: Company data, WattEV2Buy, press materials, Mirae Asset Daewoo Research
Figure 47. EV price-driving range matrix
Source: McKinsey & Company, Mirae Asset Daewoo Research
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2) Premium conventional vehicle market (joint ventures with foreign makers)
In China’s premium conventional vehicle market, we expect Toyota, Honda, Daimler, and BMW to continue to expand their market shares. GAC, which has joint ventures with Toyota and Honda, is also likely to enjoy market share gains. Toyota and Honda should remain popular as brands with high functional value, while Daimler and BMW should further strengthen their premium positioning.
GAC has already achieved robust market share gains with its Toyota/Honda joint ventures. FAW, which partners with Toyota and Volkswagen, has also increased its market share. On the other hand, SAIC, which has joint ventures with Volkswagen and GM, has been losing market share.
The sales volume of foreign brands in China is 20-40% higher than that of local brands. Foreign brands also have higher ASPs. For these reasons, local makers with high revenue contributions from foreign brands have tended to fare better. But high foreign brand exposure also entails risks in the long run, given that the Chinese auto market is set to open up completely in 2022. Once that happens, foreign firms will be able to set up wholly-owned operations (currently allowed only for BEV/PHEV and commercial vehicle businesses).
Figure 48. In-house brand sales volume in China: Local vs. foreign automakers
(mn units) Major local players: Sales volume (L) Major foreign players: Sales volume (L) 16 Major local players YoY (R) Major foreign players YoY (R) 30%
14 20% 12 10% 10
8 0%
6 -10% 4 -20% 2
0 -30% 2014 2015 2016 2017 2018 2019 1H20
Source: MarkLines, Mirae Asset Daewoo Research
Figure 49. Chinese M/S by brand Figure 50. Chinese M/S by automaker
VW GM Toyota SAIC FAW Dongfeng 20% Honda Renault-Nissan Daimler 30% GAC BAIC Brilliance BMW
25% 16%
20% 12% 15%
8% 10%
4% 5%
0% 0% 2014 2015 2016 2017 2018 2019 1H20 2014 2015 2016 2017 2018 2019 1H20
Source: MarkLines, Mirae Asset Daewoo Research Source: MarkLines, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 29 August 21, 2020 China Autos
Other industry issues
1) Increased investments by global automakers
Starting with the construction of Tesla’s Shanghai factory in 2019, global automakers have markedly increased their investments across China’s EV ecosystem, due to: 1) the government’s aggressive measures to expand infrastructure; 2) the Chinese EV market’s high growth potential (with sales volume expected to reach 13mn units in 2030); and 3) China’s well-established EV value chain (encompassing raw materials, batteries, and parts).
In May, Volkswagen purchased a 26.5% stake in Gotion High-Tech for EUR1.1bn, becoming the largest shareholder of China’s no. 3 battery supplier. With this acquisition, Volkswagen aims to ensure stable battery supply and expand its EV business in China full-swing. In addition, Daimler established a smart car/EV joint venture with Geely (total registered capital of close to W1tr), while Tesla, BMW, and NIO have spent massive amounts of money to expand charging infrastructure in the hopes of stimulating EV demand.
2) US-China trade friction
We believe that US-China trade tensions will have only a modest impact on local automakers, given that: 1) 80% of auto parts are domestically sourced; 2) the local addressable market is huge in scale (with EV sales volume expected to reach 13mn units in 2030); and 3) Chinese players are seeking to expand into the European market via partnerships with European automakers. Rather, we think trade friction should lead to local automakers taking share from US players. Indeed, the combined Chinese market share of Ford and GM shrank from 19% in 2017 to 13% 1H20.
3) Industry capex
We see ample room for additional EV capex, judging by the 1H20 spending of nine major Chinese automakers. For these automakers, capex as a percentage of tangible assets (PP&E) is nearing a seven-year low. However, we expect most firms to cut capex by 10% YoY this year due to the COVID-19 pandemic.
Figure 51. Nine Chinese automakers’ capex in 1H20
(CNYbn) Net PP&E (L) Capex (L) Capex/net PP&E (R) Capex/revenue (R) 350 30%
300 25%
250 20% 200 15% 150 10% 100
50 5%
0 0% 2014 2015 2016 2017 2018 2019
Note: Based on nine Chinese automakers that together accounted for 93% of total sales volume in 1H20: Geely, FAW, Dongfeng, GAC, SAIC, Changan, BAIC, Brilliance, and Great Wall Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 30 August 21, 2020 China Autos
Global company analysis
Geely Automobile (175 HK/Buy) A leading player
BYD (1211 HK/Buy) Leadership and expansion
NIO (NIO US/Buy) A rising star in the premium EV segment
Guangzhou Automobile Group (2238 HK/Trading Buy) Savvy growth strategy
Mirae Asset Daewoo Research 31 [China] Autos August 21, 2020
Geely Automobile Buy (175 HK) (Initiate)
A leading player TP: HK$20.0 Upside: 28.7%
Mirae Asset Daewoo Co., Ltd. Hyunwoo Jin [email protected]
Valuation and recommendation Initiate coverage with Buy rating and TP of HK$20.0 Target P/E of 18x and 2021F EPS of CNY1.02 Pickup in EPS growth (-2.8% in 2020F; 18.0% in 2021F) and increasing EV/export competitiveness
Investment points Strengthening global competitiveness in EVs Joint platform development with Volvo, cost advantages, and mass production on new EV platform (2021-22) Joint venture with Daimler for development of premium EVs and autonomous vehicles; partnership with Waymo Battery joint ventures with CATL and LG Chem (stable supply and cost benefits) Advance into low/mid-end EV segment Lynk & Co’s first pure EV model (early 2021 rollout) and Geometry lineup expansion (current: one sedan and one SUV) Strongest brand power in the low/mid-end segment, which is characterized by lower levels of competition relative to the premium segment (Tesla and NIO) Cost competitiveness to be maintained in EVs (as well as in conventional vehicles) China’s best-selling local brand: Mass-market success No. 1 local brand (M/S), with growth entirely supported by in-house brands (rather than by joint ventures) Lineup expansion (full-size SUV/SUV coupe); stronger new model effects relative to rivals Unrivaled ROIC and steady expansion of net cash holdings (CAGR of 14% in 2019-22F)
Events Planned listing on STAR Market: New share issuance equivalent to less than 15% of equity capital; currency/investor diversification Benefits of planned merger with Volvo: 1) Technological/cost advantages; 2) enhanced export competitiveness; and 3) new distribution networks in Europe and the US
Risks 1) Delays to recovery in car demand; 2) intensifying competition with foreign automakers; and 3) valuation of Volvo
Key data
500 Geely Auto HIS Index Current price (8/20/20, HK$) 15.54 Market cap (HK$bn) 152.5 Exchange Hong Kong Market cap (Wtr) 23.4 400 EPS growth (21F, %) 18.0 Shares outstanding (mn) 5,736.9 300 P/E (21F, x) 16.7 52-week low (HK$) 10.00 200 Market P/E (21F, x) 9.9 52-week high (HK$) 19.36 100 Dividend yield (%) 1.6 0 17.1 17.7 18.1 18.7 19.1 19.7 20.1 20.7
Share performance Earnings and valuation metrics (%) 1M 6M 12M FY (Dec.) 12/17 12/18 12/19 12/20F 12/21F 12/22F Absolute -3.6 2.9 40.0 Revenue (CNYmn) 92,760.7 106,595.1 97,401.2 103,387.6 116,795.8 132,144.6 Relative -2.6 14.6 48.1 OP (CNYmn) 12,836.9 14,894.6 9,533.7 9,646.5 11,320.9 13,079.9 OP margin (%) 13.8 14.0 9.8 9.3 9.7 9.9 NP (CNYmn) 10,633.7 12,553.2 8,189.6 8,153.8 11,066.4 12,641.4 EPS (CNY) 1.16 1.37 0.89 0.87 1.02 1.18 ROE (%) 30.9 27.9 15.0 12.3 13.1 13.5 P/E (x) 19.0 8.7 15.1 19.7 16.7 14.5 P/B (x) 5.9 2.4 2.4 2.4 2.2 1.9 Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 21, 2020 China Autos
I. Investment points
1. Mass-market success with unrivaled ROE and ROIC
Geely Automobile (Geely) is the biggest homegrown automaker in China, accounting for 24% of local brand sales volume (vs. 8% when including foreign brands; Jan.-May 2020). Recently, the company has solidified its position in SUVs (already an area of strength) with the rollouts of the Haoyue (midsize) and Lynk & Co 05 (SUV coupe) and 06 (subcompact). Going forward, we expect the firm to make further gains in the segment.
Geely also reports high ROE and ROIC relative to rivals. The automaker has cut product development costs through cooperation with global brands such as Volvo (platform sharing) and Daimler, and it reinvests a significant portion of its profits. We expect Geely’s net cash holdings to expand at a CAGR of 14% during the 2019-22 period.
1) China’s best-selling local brand
Geely has steadily gained market share with its in-house brands, selling low/mid-priced cars catering to the mass market. Looking ahead, we expect the company to benefit from an uptrend in the Chinese vehicle ownership rate, which currently stands at just 20%.
Figure 1. M/S of Chinese automakers (including international Figure 2. M/S of Chinese automakers (local brands only) joint ventures)
20% 10% VW GM 16% 8% SAIC Toyota Changan Geely BAIC 12% Honda 6% GAC Renault-Nissan GW 8% Changan 4% Geely HMG Chery Great Wall 4% 2% BYD Daimler SAIC 0% 0% 2014 2015 2016 2017 2018 2019 1H20 2014 2015 2016 2017 2018 2019 1H20
Note: Geely data include Lynk & Co and Volvo. Note: Geely data include Lynk & Co and Volvo. Source: MarkLines, Mirae Asset Daewoo Research Source: MarkLines, Mirae Asset Daewoo Research
Figure 3. SUV M/S (top five players)
14% VW Geely Great Wall Honda Changan GM
12%
10%
8%
6%
4%
2%
0% 2014 2015 2016 2017 2018 2019 5M20
Source: MarkLines, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 33 August 21, 2020 China Autos
2) Beefing up the SUV lineup We expect Geely to gain market share in midsize and large SUVs. In June, the automaker rolled out the Haoyue to capture growing D-segment demand, and June-July cumulative sales reached 5,400 vehicles. Going forward, Geely may manufacture vehicles using Volvo’s Scalable Product Architecture (SPA), a highly competitive platform on which Volvo’s midsize SUVs (the XC60 and XC90) are built.
The company has also beefed up its lineup of SUVs, releasing the Lynk & Co 05 (SUV coupe) in May and the Lynk & Co 06 (subcompact SUV) in June. Starting at around CNY200,000, these models target the mass market. Looking ahead, we expect Geely to further strengthen its position in the mass market (mainly in the SUV segment).
Figure 4. Growing share of D-segment SUVs in China’s car sales Figure 5. Geely: Low sales of D-segment SUVs
D C A B E ('000 units) 100% 100 Sedan-D SUV-C SUV-D 90 80% 80 70 61% 60% 60% 61% 64% 62% 60 63% 50 40% 40 30 20% 20 31% 34% 35% 25% 30% 22% 10 0% 0 2015 2016 2017 2018 2019 5M20 TTM 6/18 11/18 4/19 9/19 2/20
Source: MarkLines, Mirae Asset Daewoo Research Source: MarkLines, Mirae Asset Daewoo Research
Figure 6. Haoyue (D-segment SUV): Released in July 2020 with a base price of CNY100,000 (W18mn)
Source: Company materials, Mirae Asset Daewoo Research
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Figure 7. Lynk & Co 05 (SUV coupe): Released in May 2020 with a base price of CNY180,000 (W30mn)
Source: Lynk & Co, Mirae Asset Daewoo Research
3) Strong new model effects
Relative to rivals, Geely enjoys stronger new model effects. Looking ahead to 2H20-2021, new model effects should increase further, as management plans to ramp up rollouts in time for a potential recovery in car demand. With China’s auto market growth projected to recover to around 5% in 2021, we expect the firm to further strengthen its product competitiveness via partnerships with Volvo (platform sharing) and Daimler (technological cooperation).
We forecast new models to represent 10-15% of total sales in 2020-22, which should translate into above-industry volume growth.
Figure 8. Share of new models in total sales (%)
30% 2017 2018 2019
25%
20%
15%
10%
5%
0% BYD Geely Dongfeng SAIC Changan BAIC FAW GAC Great Wall Industry
Source: Company data, MarkLines, Mirae Asset Daewoo Research
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4) High returns and stable cash flow
Geely boasts high ROIC relative to rivals, largely thanks to low product development costs stemming from partnerships with Volvo and Daimler. Notably, Geely’s founder is the largest shareholder of Daimler, having acquired a 9.7% stake in 2018.
Despite sharp top-line growth, management has focused on maintaining a healthy bottom line, taking a conservative approach to debt financing and capping asset purchases (tangible and intangible) at annual net profit levels. Geely’s superior cash allocation/generation capabilities should come in handy as the more cash-intensive EV/smart car-oriented business environment takes further hold.
Figure 9. DuPont ROE by company Figure 10. Geely: ROIC trend
20% 35% 2016 2017 2018 2019 2020F 2021F
19% 25%
18% 15%
17% 5%
16% -5%
15% -15% BYD GAC FAW SAIC BAIC Geely 14% Changan Dongfeng
Great Wall 2019 2020F 2021F 2022F
Source: Bloomberg, Mirae Asset Daewoo Research Note: Based on NOPAT (excl. subsidies and joint venture income) Source: Company data, Mirae Asset Daewoo Research
Figure 11. Geely: Cash flow waterfall chart Figure 12. Geely: Net cash holdings
(CNYbn) (CNYbn) 70 25 60 50 20 40 30 20 15 10
0 10 NP D&A Dividends NWC chg. 5 Other activities Equity issuance Net long-term debt Net short-term debt Ending cash - 2019
Beginning cash - 2015 0 Capex/acq. of intangibles
Investments injoint ventures 2015 2016 2017 2018 2019 2020F 2021F 2022F
Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 36 August 21, 2020 China Autos
2. Strengthening competitiveness in EVs and autonomous vehicles
Geely’s EV competitiveness will likely strengthen as mass production on the Pure Electric Modular Architecture (PMA) platform begins in 2021-22. The company, which has secured a strong position in the local market by selling quality low/mid-priced vehicles, is now aiming to become China’s first automaker to gain a global reputation via a strategic focus on EVs and autonomous vehicles and acquisitions of stakes in foreign OEMs.
1) PMA platform developed jointly with Volvo Following the success of Compact Modular Architecture (CMA), Geely is once again partnering with Volvo on the PMA platform. The firm is scheduled to roll out the first PMA-based Lynk & Co model at the 2020 Beijing Auto Show, followed by around 10 additional PMA-based models. Geely aims to maintain its cost advantage in the EV space through the development of proprietary platforms.
In 2010, Geely’s parent company acquired Volvo (Cars) from AB Volvo for US$1.8bn (100%). Since then, Volvo and Geely have jointly developed platforms to enhance competitiveness. Geely’s parent company also owns 8.2% of AB Volvo.
Figure 13. Geely: Ownership structure
Note: Geely’s parent company owns Volvo Cars through Shanghai Geely Investment, Geely Sweden, etc. Source: Company data, Bloomberg, Mirae Asset Daewoo Research
Figure 14. Geely: Next-generation PMA platform to be adopted across all segments (large/midsize/compact)
Source: Press materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 37 August 21, 2020 China Autos
1-1) Merger with Volvo
Despite engaging in joint development efforts, Geely and Volvo have thus far remained two separate entities. However, with a tie-up planned for this year, we expect to see increased earnings momentum stemming from: 1) further reductions in production/development costs (increased scale effects and acceleration in platform development); 2) sales volume growth (addition of Volvo and Polestar brands); and 3) enhanced product competitiveness through technological cooperation.
In addition, the merger is widely anticipated to boost Geely’s export capabilities, given Volvo’s strong brand power and distribution networks in Europe. For Chinese EV makers, Europe is the single most important export market, as demand is growing quickly in the region. The addition of Volvo and Polestar to Geely’s portfolio after the merger will significantly strengthen export competitiveness, widening the gap with local rivals.
We estimate the equity value of Volvo (unlisted) at US$16-22bn, equivalent to 9-13x 2019 EV/EBIT. Geely’s current market cap stands at around US$21bn (14.5x 2019 EV/EBIT).
Table 1. Volvo valuation (US$mn)
EV/EBIT (2019) 8x 9x 10x 11x 12x 13x 14x EV 11,706 13,170 14,633 16,096 17,559 19,023 20,486 Net cash 2,836 2,836 2,836 2,836 2,836 2,836 2,836 Equity value 14,542 16,006 17,469 18,932 20,396 21,859 23,322 Notes: SEK/CNY = 0.73 (2019 avg.); CNY/USD = 0.14 Source: Mirae Asset Daewoo Research
Table 2. Volvo and Geely: Income statement overview (2019) (CNYmn) Volvo Geely. Pro forma Vehicle sales (mn units) 694,831 1,361,560 2,056,391 Net revenue (CNYmn) 200,313 97,401 297,714 COGS -162,263 -80,485 -242,747 Gross profit 38,051 16,917 54,967 Margin 19.0% 17.4% 18.5% R&D expenses -8,364 -3,067 -11,431 Selling expenses -12,633 -4,332 -16,965 Administrative expenses -6,934 -2,055 -8,989 Share in income of joint ventures/associates -123 664 541 Other income 455 1,408 1,863 EBIT 10,452 9,534 19,986 Margin 5.2% 9.8% 6.7% Financial income 420 236 656 Financial expenses -1,250 -133 -1,383 PBT 9,623 9,636 19,259 Margin 4.8% 9.9% 6.5% Income tax -2,605 -1,375 -3,980 NP 7,017 8,261 15,279 Margin 3.5% 8.5% 5.1% NP attributable to owners of the parent 5,199 8,190 13,389 Minority interests 1,818 72 1,890 Note: Based on 2019 avg. CNY/SEK rate Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 38 August 21, 2020 China Autos
Table 3. Volvo and Geely: Balance sheet overview (end-2019) (CNYmn) Volvo Geely Pro forma Cash/equivalents 40,568 19,281 59,849 Accounts receivable 9,677 19,764 29,441 Inventory 28,435 4,821 33,255 Other 7,192 6,148 13,340 Current assets 85,872 50,014 135,886 PP&E 50,962 27,070 78,032 Intangible assets 23,959 17,640 41,599 Investments in joint ventures/associates 5,413 8,837 14,251 Other 10,319 4,365 14,684 Non-current assets 90,653 57,914 148,566 Total assets 176,525 107,928 284,452 Accounts payable 32,793 33,758 66,551 Contract liabilities 14,964 0 14,964 Short-term debt 784 0 784 Other 36,033 14,768 50,801 Current liabilities 84,575 48,526 133,101 Contract liabilities 3,807 0 3,807 Long-term debt 19,525 4,176 23,701 Provisions 14,523 0 14,523 Other 7,583 301 7,884 Non-current liabilities 45,438 4,477 49,915 Total liabilities 130,013 53,003 183,017 Equity attributable to owners of the parent 39,375 54,436 93,811 Minority interests 7,136 489 7,625 Total equity 46,511 54,924 101,436 Total liabilities and equity 176,525 107,928 284,452 Note: Based on 2019 avg. CNY/SEK rate Source: Company data, Mirae Asset Daewoo Research
Figure 15. Models built on the CMA platform
Note: Geely Preface, Lynk & Co 01, Volvo XC40, and CMA platform (clockwise from top left) Source: Company materials, Volvo, press materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 39 August 21, 2020 China Autos
Figure 16. Volvo: Annual sales growth (‘000 units) Figure 17. Global sales volume of Volvo XC40 (CMA platform)
('000 units) (Units) Europe China US Other 800 14,000 705 CAGR: 9% 700 12,000 642 101 600 572 95 535 10,000 504 77 108 500 466 70 98 70 82 8,000 74 83 155 400 70 131 56 114 6,000 82 91 300 82 4,000 200 341 299 318 254 282 291 100 2,000
0 0 2014 2015 2016 2017 2018 2019 12/17 4/18 8/18 12/18 4/19 8/19 12/19 4/20
Source: Volvo, Mirae Asset Daewoo Research Source: MarkLines, Mirae Asset Daewoo Research
Polestar is a Chinese-Swedish marque jointly owned (50/50) by Volvo and Zhejiang Geely Holding. Recently, the brand released the Polestar 2, a premium EV model with a price tag of around US$60,000 (EUR50,000-60,000 in Europe, CNY460,000 in China). By leveraging Volvo’s strong reputation, we believe that Polestar will be able to push into the premium car segment in the US and Europe. Notably, the Polestar 2 stands apart from other EV models in that it comes equipped with the new Android Automotive OS; this means that drivers can use all of their favorite Google and third-party apps on the vehicle's infotainment system without having to sync a smartphone.
Volvo plans to generate 50% of its sales volume from BEVs by 2025 and increase the number of its BEV models to six by next year. (Currently, Volvo has only one BEV model, the XC40.)
Figure 18. Polestar 2 (2021)
Source: Polestar, Mirae Asset Daewoo Research
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2) Autonomous vehicles: Partnerships with Daimler and Waymo
Geely is placing a strategic focus on EVs and autonomous cars. In Feb. 2018, Li Shufu, the Chinese automaker’s founder and chairman, bought a 9.7% stake in Daimler for US$9bn (five times the firm’s investment in Volvo) in order to secure global competitiveness in EVs and autonomous cars. Currently, Li is Daimler’s largest shareholder. Going forward, we expect the Geely-Daimler strategic alliance (R&D, etc.) for next-generation vehicles to deepen.
In Jan. 2020, Zhejiang Geely Holding and Daimler formed a joint venture (50/50; CNY5.4bn). While Daimler also collaborates with Beijing Automobile Works (BAW) and BYD, we believe that Geely will emerge as the German automaker’s key Chinese partner, given its stellar track record of winning market share.
The joint venture is focusing on the development of premium EVs and autonomous cars (primarily designed by Mercedes-Benz) for the global market. While the venture is based in China, it has operational and sales arms in both China and Germany.
Meanwhile, Volvo, with its Polestar and Lynk & Co brands, has signed a partnership with Waymo, one of the top autonomous driving technology developers (along with Cruise and Tesla). Currently pursuing Level 4 driving technology, Volvo and Waymo are aiming to launch the world’s first electric robo-taxi. Under the partnership, Volvo is responsible for EV design/production, while Waymo is handling the development of AI, camera, LiDAR, and radar technologies.
Table 4. Key executives of Smart Automobile (Zhejiang Geely Holding-Daimler joint venture) Title Company Name Position/role Director Daimler Hubertus Troska (Current) Responsible for China activities Britta Seeger (Current) Mercedes-Benz marketing/sales Markus Schäfer (Current) Mercedes-Benz R&D Zhejiang Geely Holding Li Shufu (Current) Chairman (Current) President of Zhejiang Geely Holding and president and CEO of An Conghui Geely Auto Daniel Donghui Li (Current) Vice president and CFO of Zhejiang Geely Holding CEO Smart Automobile Tong Xiangbei (Current) 2015-: Smart Automobile CEO (Former) 1998-2015: Ford (US, China, Asia Pacific) Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 41 August 21, 2020 China Autos
3) EV batteries: Partnerships with CATL and LG Chem
In 2019, Geely established joint ventures with CATL and LG Chem to secure a stable supply of high-quality EV batteries. We believe that the automaker’s joint ventures with top-tier battery suppliers will ensure stable EV production as well as cost benefits.
The registered capital of the CATL joint venture is around W170bn (49% stake), while that of the LG Chem joint venture is W200bn (50%). Last year, battery supply from CATL totaled 2.7GWh (SNE Research), satisfying most of Geely’s battery needs. The joint venture with LG Chem is targeting annual production of 10GWh by end-2021, with supply beginning in 2022. We believe a diversified supply chain will lead to more stable EV production.
Figure 19. Geely: Battery supply by manufacturer (2019)
(GWh)
3.0
2.5
2.0
1.5
1.0
0.5
0.0 CATL Sunwoda EVE Energy Gotion High-Tech
Source: SNE Research, Mirae Asset Daewoo Research
3. Strategic market positioning
In China, demand for low/mid-priced vehicles is growing along with rising income levels. As such, Geely is expanding its presence in the upper-mass market with its Lynk & Co brand. In the EV space, the company has also entered the low/mid-end segment, where competition is less fierce relative to the premium segment (in which Tesla, BYD, and NIO are vying for market share). Geely has the strongest brand power in the local brand-dominated low/mid-end segment.
Figure 20. EV price range by manufacturer: Mass-market segment is dominated by local brands
(CNY) 900,000 800,000 Premium market (≥CNY250,000, before subsidies): 700,000 Global players competing 600,000 500,000 Mass/upper-mass market (≤CNY200,000): 400,000 Local players competing 300,000 EVs eligible for subsidies ↓ (≥300km range; up to 2mn units) 200,000 100,000 0
Notes: Excl. joint ventures; based on pre-subsidy prices Source: Company data, press materials, WattEV2Buy, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 42 August 21, 2020 China Autos
Geely is also strengthening its BEV lineup. Lynk & Co is scheduled to roll out its first BEV model around end-2020 or early-2021, and Geometry, Geely’s pure EV sub-brand, plans to add more models. As the production mix of EVs rises with the full-fledged deployment of the PMA platform from 2022 (upper-mass segment), the automaker’s cost/product competitiveness should increase.
Currently, the Geometry brand has two models: 1) the Geometry A, a sedan released in Apr. 2019 with cumulative sales of around 15,000 units; and 2) the Geometry C, a compact SUV hatchback rolled out in Jun. 2020 with competitive pricing and performance.
Table 5. Geometry C and major competitors (compact SUV hatchback)
Make Geely Xpeng Weltmeister GAC Model Geometry C G3 EX5 Aion V Price (after incentives, CNY) 139,800- 135,800- 139,800-189,800 159,600-239,600 Length/width/height/wheelbase 4,432/1,833/1,560/2,700 4,450/1,820/1,610/2,625 4,585/1,835/1,672/2,703 4,585/1,920/1,728/2,830 (mm) Max power/torque 150kW/310N-m 145kW/300N-m 160kW/315N-m 135kW/350N-m Top speed 150km/h 170km/h 160km/h 175km/h Battery capacity 51.9/61.9kWh 66.5kWh 52.5/69kWh 70/80kWh Driving range (NEDC) 400/550km 520km 400/520km 400/600km km/kWh calculation 7.7-8.1 7.8 7.5-7.6 5.7-7.5 Note: km/kWh figures are simple calculations based on published reports. Source: Company data, press releases, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 43 August 21, 2020 China Autos
Sustainable growth
Geely has leveraged its solid cash flow from conventional vehicles to move into the less competitive mass-market EV segment. Now, the automaker is gearing up to expand its presence in higher-end segments and developed markets. Compared to Tesla, NIO, BYD, GAC, and BAW, Geely holds a negligible share of the Chinese EV market. Nevertheless, we think the company’s prospects for sustainable growth are solid (relative to peers lacking strong homegrown brands), considering that: 1) the market is still in the fledgling stages (3% penetration for pure EVs); and 2) new EV entrants generally need some time to find their bearings.
Figure 21. Geely: Cash from conventional car business Investments in upper-mass-market and affordable premium EVs
Source: Mirae Asset Daewoo Research
Figure 22. Geometry C (Jun. 2020): Starting at CNY140,000 (roughly W24mn)
Source: Company materials, Mirae Asset Daewoo Research
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II. Earnings and forecasts
Table 6. Geely: Earnings and forecasts 2015 2016 2017 2018 2019 2020F 2021F 2022F Sales volume (units) 522,380 767,151 1,248,004 1,500,838 1,361,560 1,428,500 1,582,119 1,754,935 YoY 46.9% 62.7% 20.3% -9.3% 4.9% 10.8% 10.9% ASP (pretax, ex-factory price; CNY) 56,564 68,993 73,895 79,510 79,532 80,327 81,934 83,573 YoY 22.0% 7.1% 7.6% 0.0% 1.0% 2.0% 2.0% Revenue (CNYmn) 30,138 53,722 92,761 106,595 97,401 103,388 116,796 132,145 YoY 78.3% 72.7% 14.9% -8.6% 6.1% 13.0% 13.1% Vehicles 28,853 52,846 91,283 102,651 91,843 97,535 110,185 124,665 Components/licensing 1,285 876 1,478 3,944 5,558 5,852 6,611 7,480 Ex-VAT/sales tax/discounts 2.4% 0.2% 1.0% 14.0% 15.2% 15.0% 15.0% 15.0% COGS 24,668 43,880 74,779 85,082 80,485 85,295 95,773 107,698 Gross profit 5,471 9,842 17,981 21,513 16,917 18,093 21,023 24,447 YoY 79.9% 82.7% 19.6% -21.4% 7.0% 16.2% 16.3% Margin 18.2% 18.3% 19.4% 20.2% 17.4% 17.5% 18.0% 18.5% Selling/marketing expenses -1,568 -2,503 -4,056 -4,523 -4,332 -4,581 -5,291 -6,119 G&A expenses -2,176 -2,560 -2,923 -1,851 -2,055 -2,068 -2,102 -2,379 R&D expenses 0 0 0 -1,926 -3,067 -3,619 -4,088 -4,625 OP 1,727 4,779 11,003 13,213 7,462 7,826 9,542 11,324 YoY 176.7% 130.2% 20.1% -43.5% 4.9% 21.9% 18.7% Margin 5.7% 8.9% 11.9% 12.4% 7.7% 7.6% 8.2% 8.6% Other income 1,066 1,130 1,229 1,237 1,225 1,102 992 893 Share in profits/losses of associates 42 31 39 -60 38 30 30 30 Share in profits/losses of joint ventures 108 -40 3 505 626 688 757 833 Gains on disposal of subsidiaries 0 1 563 0 183 0 0 0 Gains on disposal of joint venture shares 0 374 0 0 0 0 0 0 EBIT 2,943 6,276 12,837 14,895 9,534 9,647 11,321 13,080 YoY 113.3% 104.5% 16.0% -36.0% 1.2% 17.4% 15.5% Margin 9.8% 11.7% 13.8% 14.0% 9.8% 9.3% 9.7% 9.9% EBITDA 4,086 7,931 14,775 17,308 13,267 13,855 15,926 18,248 YoY 94.1% 86.3% 17.1% -23.3% 4.4% 14.9% 14.6% Margin 13.6% 14.8% 15.9% 16.2% 13.6% 13.4% 13.6% 13.8% Depreciation 589 734743 978 1,517 1,624 1,685 1,864 Amortization 554 921 1,195 1,435 2,217 2,585 2,920 3,304 Net financial income -6 -30 -35 79 108 147 231 213 Financial income 97 85 127 193 236 289 373 391 Financial expenses -103 -116 -162 -114 -128 -142 -142 -178 Share-based payments -62 -42 -28 -15 -5 -10 -10 -10 PBT 2,875 6,204 12,774 14,959 9,636 9,784 11,542 13,283 Margin 9.5% 11.5% 13.8% 14.0% 9.9% 9.5% 9.9% 10.1% Tax 586 1,034 2,039 2,285 1,375 1,468 1,731 1,992 NP 2,289 5,170 10,735 12,674 8,261 8,316 9,811 11,291 Margin 7.6% 9.6% 11.6% 11.9% 8.5% 8.0% 8.4% 8.5% YoY 125.9% 107.6% 18.1% -34.8% 0.7% 18.0% 15.1% Owners of the parent 2,261 5,112 10,634 12,553 8,190 8,233 9,713 11,178 Minority interests 28 58 102 121 72 83 98 113 EPS (diluted, CNY) 0.26 0.57 1.16 1.37 0.89 0.87 1.02 1.18 YoY 123.4% 102.6% 17.8% -34.8% -2.8% 18.0% 15.1% Source: Company data, Mirae Asset Daewoo Research
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Table 7. Geely: Sales and forecasts 2015 2016 2017 2018 2019 2020F 2021F 2022F China Total sales (units) 24,597,583 28,028,175 28,878,904 28,080,577 25,756,922 23,181,230 24,340,291 25,070,500 YoY 4.7% 13.9% 3.0% -2.8% -8.3% -10.0% 5.0% 3.0% BEV sales (% of total) 0.5% 0.9% 1.6% 2.8% 3.4% 3.5% 5.0% 7.0%
Geely Auto M/S 2.1% 2.7% 4.3% 5.3% 5.3% 6.2% 6.5% 7.0% BEV M/S 8.3% 7.2% 5.1% 5.0% 5.9% 6.8% 7.2% 9.0% Total sales (units) 522,380 767,151 1,248,004 1,500,838 1,361,560 1,428,500 1,582,119 1,754,935 BEV sales 49,952 49,218 80,553 58,454 54,013 55,000 87,017 157,944 % of total 9.6% 6.4% 6.5% 3.9% 4.0% 3.9% 5.5% 9.0% New model sales (units) 43,041 490,176 93,352 209,213 153,291 176,000 213,586 263,240 % of total 8.2% 63.9% 7.5% 13.9% 11.3% 12.3% 13.5% 15.0% Note: Volvo sales not included Source: MarkLines, Mirae Asset Daewoo Research
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III. Valuation
Target price of HK$20.0 (+29% upside)
We initiate our coverage on Geely with a Buy rating and target price of HK$20.0. In deriving our target price, we applied a P/E of 18x (to 2021F EPS of CNY1.02) to reflect: 1) accelerating EPS growth (-2.8% in 2020F 18.0% in 2021F); and 2) strengthening competitiveness in EVs/exports. The stock is currently trading at 20x 2020F P/E and 17x 2021F P/E.
Our projection for faster EPS growth is based on the following assumptions: 1) solid volume growth of around 10% annually; 2) ASP growth (increasing sales mix of upper-mass models); 3) margin improvements (platform sharing and joint technology development with Volvo and Daimler); and 4) increasing equity-method gains from Lynk & Co.
Multiple expansion will likely be driven by: 1) strengthening global competitiveness arising from the production of EVs on the PMA platform; 2) meaningful earnings in the European market after the merger with Volvo; and 3) domestic market share gains via Lynk & Co and Geometry (upper-mass brands). Geely is seeking to build on its domestic success to explore overseas opportunities.
Geely is already trading at a premium to its Asian peers (65% higher than the 2021F median P/E). As the automaker remains the top seller (among local brands) in the domestic market and enjoys significant upside potential (China’s vehicle ownership rate stands at just 20%), we see ample upside to EPS growth.
Looking ahead, we expect the stock’s valuation premium to remain intact, as China’s BEV market has strong growth potential (relative to other markets). Moreover, the company is expected to gain market share in the upper-mass segment and become China’s first automaker to export EVs to DMs.
Our 2021F EPS estimates do not reflect potential changes following the likely merger with Volvo. Geely and Volvo already maintain a collaborative relationship, but a tie-up would help unlock deeper synergies in terms of cost reductions (production and development) and distribution. In 2019, sales volume was 1.36mn units for Geely and 690,000 units for Volvo, while net margin attributable to owners of the parent was 8.5% for Geely and 3.5% for Volvo.
Table 8. Geely: Valuation 2019 2020F 2021F EPS growth -34.8% -2.8% 18.0% EPS (CNY) 0.89 0.87 1.02 Current P/E (x) 16.9 20.1 17.0 Target P/E (x) 18.0 Fair price (HK$) 20.2 TP (HK$) 20.0 Current price 15.5 Upside 28.7% Note: CNY/HKD = 1.12 Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 47 August 21, 2020 China Autos
Figure 23. Geely: P/E band chart (12-month forward) Figure 24. Geely: P/B band chart (12-month forward)
(x) (x) 25 7.0 +2 SD 6.0 20 +1 SD 5.0 +2 SD 15 4.0 5Y avg. +1 SD
10 3.0 -1 SD 5Y avg. 2.0 5 -1 SD -2 SD 1.0
0 0.0 -2 SD 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2015 2016 2017 2018 2019 2020
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Table 9. Peer valuation table
Share price Market cap P/E (x) P/B (x) ROE (%) EPS growth (%) Company Ticker (local) (US$mn) 2020F 2021F 2020F 2021F 2020F 2021F 2020F 2021F China GAC 2238 HK 7.17 13,625 9.8 8.0 0.9 0.8 8.1 9.3 3.2 22.3 BAIC 1958 HK 3.79 3,920 8.5 6.3 0.5 0.5 6.0 7.5 (29.3) 34.0 Brilliance 1114 HK 7.20 4,687 4.5 4.0 0.8 0.7 19.6 20.0 2.3 13.9 BYD 1211 HK 70.20 28,865 72.4 62.5 2.9 2.8 4.0 4.5 46.3 15.9 Great Wall 2333 HK 7.68 15,109 15.4 11.8 1.1 1.0 7.4 9.1 (15.4) 30.4 Dongfeng 489 HK 5.44 6,048 3.8 3.3 0.3 0.3 8.3 9.1 (15.2) 16.6 SAIC 600104 CH 18.16 30,654 9.8 7.8 0.8 0.8 8.3 9.7 (14.6) 25.5 FAW 000800 CH 13.71 9,131 11.2 10.5 1.9 1.9 7.9 7.4 (1804.0) 6.6 Changan 200625 CH 4.19 6,929 4.8 4.3 0.4 0.3 7.1 7.4 (204.9) 11.6 China avg. 15.6 13.2 1.1 1.0 8.5 9.3 (28.5)* 19.6 China median 9.8 7.8 0.8 0.8 7.9 9.1 (15.2 ) 16.6 Geely 175 HK 15.54 19,676 19.7 16.7 2.4 2.2 12.3 13.1 -2.8) 18.0 Korea Hyundai Motor 005380 KS 155,000 27,870 14.3 8.5 0.6 0.6 3.9 6.1 (9.0) 67.7 Kia 000270 KS 40,250 13,730 11.3 6.9 0.5 0.5 4.9 7.6 (26.2) 64.0 Japan Nissan 7201 JP 416 16,561 NA 22.9 0.5 0.4 -14.2 1.5 83.3 (114.6) Toyota 7203 JP 7,084 218,026 17.1 10.9 0.9 0.9 5.6 8.5 (44.8) 57.4 Mitsubishi 7211 JP 246 3,458 NA 105.5 0.6 0.6 -32.8 -1.1 717.8 (101.7) Mazda 7261 JP 646 3,850 NA 35.4 0.4 0.4 -6.7 0.6 (581.4) (116.1) Honda 7267 JP 2,655 45,363 20.5 8.5 0.6 0.5 2.6 6.1 (50.1) 140.1 Subaru 7270 JP 2,187 15,867 21.7 10.9 1.0 0.9 3.8 8.5 (50.4) 99.4 Yamaha 7272 JP 1,668 5,508 29.3 9.7 0.9 0.8 2.3 7.7 (73.5) 203.7 India Tata TTMT IN 122 5,323 NA 16.0 0.8 0.7 -12.1 5.6 (35.2) (142.6) Hero MotoCorp HMCL IN 2,947 7,837 19.4 19.7 NA NA NA NA (10.8) (1.4) China/Korea/Japan/India avg. 17.1 18.7 0.9 0.8 1.8 7.1 (105.6) 16.6 China/Korea/Japan/India median 12.8 10.1 0.8 0.7 4.9 7.5 (20.8) 19.5 Geely 175 HK 15.54 19,676 19.7 16.7 2.4 2.2 12.3 13.1 (2.8) 18.0 Note: *China avg. excludes FAW data (outlier). Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 48 August 21, 2020 China Autos
IV. Company overview
China’s leading local car brand
At present, Geely accounts for one in four local-brand cars on the road in China. Mass-market models have driven the automaker’s rapid growth, but the company is now working to expand its presence in the upper-mass segment with its Lynk & Co brand. Notably, Lynk & Co shares the CMA platform with Volvo (acquired by Zhejiang Geely Holding in 2010).
In 2021, Geely will start producing BEVs on the PMA platform, which was jointly developed with Volvo. In addition, the Chinese automaker’s cooperation with Daimler is gaining momentum following the establishment of a joint venture in early 2020 for the development of EVs and autonomous cars. (Geely’s founder/chairman Li Shufu became Daimler’s largest shareholder after purchasing a 9.7% stake in 2018.) Going forward, we believe that the planned merger with Volvo could serve as an important catalyst, boosting Geely’s brand power and EV competitiveness and granting key advantages in overseas markets.
Figure 25. Geely: Revenue, NP, and net margin Figure 26. Geely: Operating cash flow and free cash flow
(CNYbn) (%) (CNYbn) 120 Revenue NP Net margin 14 16 OCF FCF
14 100 12 12 10 80 10 8 60 8 6 6 40 4 4 20 2 2
0 0 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Figure 27. Geely: Ownership structure Figure 28. Geely: Revenue by region (2019)
(%) (%) 2.8 1.6 0.5 26.9
49.4
8.1
4.6 3.9
3.0 95.1 1.9 2.2 Proper Glory Holdings Zhejiang Geely Holding BlackRock JPMorgan Chase Shanghai Maple Zhejiang Haoqing Automobile China Malaysia Europe Other Vanguard Group Other
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 49 August 21, 2020 China Autos
Geely Automobile (175 HK)
Income statement (summarized) Balance sheet (summarized) (CNYmn) 2019 2020F 2021F 2022F (CNYmn) 2019 2020F 2021F 2022F Revenue 97,401 103,388 116,796 132,145 Current assets 50,014 65,947 70,224 74,899 COGS 80,485 85,295 95,773 107,698 Cash & equivalents 19,281 24,877 26,067 27,473 Gross profit 16,917 18,093 21,023 24,447 AR & other receivables 19,764 28,325 30,399 32,584 Selling & marketing -4,332 -4,581 -5,291 -6,119 Inventory 4,821 6,232 6,400 6,517 G&A -2,055 -2,068 -2,102 -2,379 Other current assets 6,148 6,513 7,358 8,325 R&D -3,067 -3,619 -4,088 -4,625 Non-current assets 57,914 58,081 65,987 76,034 OP 7,462 7,826 9,542 11,324 PP&E 27,070 28,088 31,075 35,817 Other income 1,225 1,102 992 893 Intangible assets 17,640 19,155 22,075 25,379 Share in profits/losses of JVs/associates 664 718 787 863 Investments in JVs/associates 8,837 10,837 12,837 14,837 Gains on disposal of JV/subsidiaries 183 0 0 0 Other non-current assets 4,365 5,169 6,424 7,929 EBITDA 13,267 13,855 15,926 18,248 Total assets 107,928 129,197 142,635 158,861 Depreciation 1,517 1,624 1,685 1,864 Current liabilities 48,526 57,415 63,159 70,533 Amortization 2,217 2,585 2,920 3,304 AP & other payables 33,758 42,488 46,398 50,686 EBIT 9,534 9,647 11,321 13,080 Short-term financial liabilities 0 0 0 1,000 Financial income 236 289 373 391 Other current liabilities 14,768 14,927 16,760 18,847 Financial costs -128 -142 -142 -178 Non-current liabilities 4,477 4,476 4,496 4,516 Pretax profit 9,636 9,784 11,542 13,283 Long-term financial liabilities 4,176 4,176 4,176 4,176 Income tax 1,375 1,468 1,731 1,992 Other non-current liabilities 301 300 320 340 NP 8,261 8,316 9,811 11,291 Total liabilities 53,003 61,890 67,654 75,048 Attributable to owners 8,190 8,233 9,713 11,178 Common stock 168 179 179 179 Attributable to minority interests 72 83 98 113 Perpetual capital securities 3,413 3,413 3,413 3,413 EBITDA margin (%) 13.6 13.4 13.6 13.8 Reserves (incl. share premium) 50,855 63,143 70,719 79,438 OP margin (%) 7.7 7.6 8.2 8.6 Minority interests 489 572 670 783 Net margin (%) 8.5 8.0 8.4 8.5 Total equity 54,924 67,307 74,981 83,813 Total liabilities & equity 107,928 129,197 142,635 158,861
Cash flow statement (summarized) Key valuation metrics/ratios (CNYmn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F Cash flow from operating activities 12,538 10,378 15,839 18,080 P/E (x) 15.1 21.3 18.0 15.7 NP 8,261 8,316 9,811 11,291 P/B (x) 2.4 2.6 2.3 2.1 Depreciation 1,517 1,624 1,685 1,864 EV/EBITDA (x) 11.8 9.5 8.3 7.2 Amortization 2,217 2,585 2,920 3,304 EPS (CNY) 0.89 0.87 1.02 1.18 Chg. in working capital 1,977 -1,242 1,669 1,986 BPS (CNY) 5.98 7.09 7.90 8.83 NP from JVs/associates -664 -718 -787 -863 DPS (CNY) 0.31 0.19 0.23 0.26 Other -770 -283 542 498 Dividend payout ratio (%) 22.4 22.0 22.0 22.0 Cash flow from investing activities -10,791 -8,741 -12,512 -15,214 Dividend yield (%) 1.6 1.2 1.4 1.7 Capex -2,969 -2,642 -4,672 -6,607 Revenue growth (%) -8.6 6.1 13.0 13.1 Acq. of intangibles -4,606 -4,099 -5,840 -6,607 EBITDA growth (%) -23.3 4.4 14.9 14.6 Investments in JVs/associates -3,117 -2,000 -2,000 -2,000 OP growth (%) -43.5 4.9 21.9 18.7 Other -99 0 00 EPS growth (%) -34.8 -2.8 18.0 15.1 Cash flow from financing activities 1,763 4,055 -2,137 -1,459 AR collection period in days 74.1 100.0 95.0 90.0 Issuance/repayment of ST debt 688 0 0 0 Inventory days outstanding 18.1 22.0 20.0 18.0 Issuance/repayment of LT debt 0 0 0 0 AP days outstanding 153.1 150.0 145.0 140.0 Issuance of common shares 0 5,867 0 0 ROA (%) 7.6 6.4 6.8 7.0 Issuance of preferred shares/options 4,053 0 0 0 ROE (%) 15.2 12.3 13.1 13.5 Dividends paid -2,806 -1,811 -2,137 -2,459 ROIC (%) 17.1 16.2 17.9 18.8 Other -171 0 00 Debt-to-equity ratio (%) 7.76.3 5.6 6.2 Net chg. in cash 3,510 5,692 1,191 1,406 Current ratio (%) 103.1 114.9 111.2 106.2 Beginning cash balance 15,771 19,281 24,877 26,067 Net debt-to-equity ratio (%) -27.7 -31.0 -29.5 -26.9 Ending cash balance 19,281 24,877 26,067 27,473 Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 50 [China] Autos
BYD Buy (1211 HK) (Initiate)
Leadership and expansion TP: HK$90.0 Upside: 28.2%
Mirae Asset Daewoo Co., Ltd. Hyunwoo Jin [email protected]
Valuation and recommendation Initiate coverage with Buy and TP of HK$90.0 Our target price corresponds to 80x our 2021F EPS of HK$1.12. Major 2021 assumptions: 1) Chinese BEV M/S of at least 20% and annual sales volume of 250,000 units; 2) 15% of EV batteries sold to external customers; 3) battery OP margin of around 6%
Investment points No. 1 BEV maker among local players; growing cost competitiveness In the first seven months of 2020, BYD displayed an EV market share of 17%. The company’s Han EV luxury sedan went on sale in China in early July with a starting price of CNY230,000 (vs. Tesla Model 3’s CNY270,000). For its EV models, BYD is adopting its own Blade Battery and sourcing insulated-gate bipolar transistors (IGBTs)—an integral power control system component—from its subsidiary BYD Semiconductor. We estimate batteries and IGBTs account for more than 30% and 10% of EV production costs, respectively. Differentiated capabilities: In-house production of key EV parts; IGBT mass production BYD is the world’s only company that is capable of producing all three core EV components, i.e., batteries, motors, and power control systems (IGBTs). BYD Semiconductor is likely to display growth potential, driven by robust IGBT demand (2019- 25F CAGR to exceed 10%). BYD Semiconductor has received equity investments from a coalition of diverse investors; this should allow the company to advance its technology and strengthen its market position as a key supplier. Battery business to drive earnings growth BYD is set to supply batteries to Changan, Ford, Toyota, and Denza and is well-positioned to acquire European customers. With the battery industry becoming increasingly concentrated, we expect leading players like BYD to widen their lead over laggards in terms of market share and production capacity. Blade Battery competitiveness: Low cost (US$90/kWh), long range (Han EV: 506-605km) Subsidy cuts to highlight BYD’s cost competitiveness
Risks 1) Intensifying price competition; 2) changes in EV subsidy policies; and 3) BYD Semiconductor’s spin-off/listing
Key data
250 BYD HIS Index Current price (8/20/20, HK$) 70.20 Market cap (HK$bn) 223.7
200 Exchange Hong Kong Market cap (Wtr) 34.3
150 EPS growth (21F, %) 15.9 Shares outstanding (mn) 688.5 P/E (21F, x) 62.5 52-week low (HK$) 33.5 100 Market P/E (21F, x) 9.9 52-week high (HK$) 90.0 50 Dividend yield (%) 0.1 0 17.1 17.7 18.1 18.7 19.1 19.7 20.1 20.7
Share performance Earnings and valuation metrics (%) 1M 6M 12M FY (Dec.) 12/17 12/18 12/19 12/20F 12/21F 12/22F Absolute -9.4 31.0 61.2 Revenue (CNYmn) 102,650.6 121,790.9 121,778.1 135,437.4 153,554.8 174,923.1 Relative -8.4 45.9 70.6 OP (CNYmn) 7,963.4 7,504.4 5,918.5 7,287.3 8,295.9 9,367.5 OP margin (%) 7.8 6.2 4.9 5.4 5.4 5.4 NP (CNYmn) 4,066.5 2,780.2 1,614.5 2,362.4 2,736.8 3,213.6 EPS (CNY) 1.49 1.02 0.59 0.87 1.00 1.18 ROE (%) 7.4 5.0 2.8 4.0 4.5 5.1 P/E (x) 40.5 47.2 69.5 72.4 62.5 53.2 P/B (x) 3.0 2.3 1.8 2.9 2.8 2.7 Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 21, 2020 China Autos
I. Investment thesis
1. China’s no. 1 pure EV maker; growing cost competitiveness
We expect BYD to continue to grab market share, given its first-mover advantage and ability to win over Chinese consumers with competitively priced models that feature solid driving performance and appealing interiors/exteriors. In the first seven months of 2020, BYD ranked first in EV market share (17%) among local players.
BYD stands to enhance its cost competitiveness on the back of volume growth. Notably, BYD internally sources EV batteries and IGBTs (a key power management system component) and is the world’s only automaker capable of mass-producing IGBTs (via BYD Semiconductor). We estimate batteries and IGBTs account for more than 30% and 10% of EV production costs, respectively.
BYD’s Han EV luxury sedan went on sale in China in early July with a starting (after-subsidy) price of CNY230,000. The Han EV is 17% cheaper than the Tesla Model 3 (its main rival) and priced similarly to the P7 model of EV start-up Xpeng. The Han EV’s NEDC-based range is 506- 605km, and its maximum power output is 163kW (single-motor two-wheel drive version)/363kW (dual-motor four-wheel drive version).
BYD is set to launch the Song Plus EV, a premium SUV model, in 4Q20 or 1Q21. We expect BYD to apply its own Blade Battery to the model, leading to competitive pricing and performance. The Song Plus EV will hit the Chinese market earlier than its rival SUV, the Tesla Model Y. Despite rising competition—including from new SUV models and a more affordable version of the Tesla Model 3 featuring LFP batteries—we believe the Han and the Song Plus will appeal to Chinese consumers in terms of pricing, performance, and design.
Figure 1. Han EV interior
Source: Company materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 52 August 21, 2020 China Autos
Figure 2. BYD: BEV sales volume and M/S Figure 3. EV cost breakdown
('000 units) Battery pack 160 BEV sales volume (L) 20% Power elec. (inverter 40-50%, motor 35-45%) BEV M/S (R) 140 Body/chassis 18% Equipment 5-10% 120 Other
100 16% 15-25% 30-45% 80
60 14% 15-25% 40 12% 20
0 10% 20% 2017 2018 2019 1H20
Source: MarkLines, Mirae Asset Daewoo Research Source: ResearchGate, industry data, Mirae Asset Daewoo Research
Figure 4. Han EV exterior
Source: Company materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 53 August 21, 2020 China Autos
Table 1. Han EV’s major rivals
Make BYD Tesla Tesla Xpeng VW VW NIO Model 3 Standard Model Han Model 3 LFP P7 ID.4 ID.3 ET7 Range Launch Jul. 20 Dec. 19 2H20 Apr. 20 Oct. 20 4Q20-2021 2021
Price after incentives 250,000 250,000 250,000 229,800 271,550 229,900 N/A (CNY) (est.) (est.) (est.)
Max power (kW) 163/363 (AWD) 211 202 196 150 150 160/400 (AWD)
Battery capacity (kWh) 65, 77 53 50-60 (est.) 81 58 58 80-85
Driving range (km) 506-605 (NEDC) 445 (WLTP) 465 (WLTP) 586 (NEDC) 420 (WLTP) 420 (WLTP) 550 (NEDC) Note: Price estimates are based on data for models released outside of China. Source: Company data, press reports, Mirae Asset Daewoo Research
Table 2. Song Plus EV’s major rivals
Make BYD Tesla VW NIO Audi BMW Model Song Plus Model Y ID6 EC6 Q4 e-tron iX3 Launch 4Q20-1Q21 2021 2021 2H20 2021 4Q20-2021
450,000- 450,000- 450,000- Price after 488,000- N/A 500,000 *350,000~ 500,000 550,000 incentives (CNY) 535,000 (est.) (est.) (est.)
Max power (kW) N/A N/A 225, 300 400 225 210 Battery capacity (kWh) 65+ N/A 77, 111 100 82 74-80 Driving range (km) 500+ (NEDC) 505 (WLTP) 450, 600 (WLTP) 615 (NEDC) 450-500 (WLTP) 440-456 (WLTP) Note: Price estimates are based on data for models released outside of China; NIO EC6’s ex-subsidy price starts from CNY368,000. Source: Company data, press reports, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 54 August 21, 2020 China Autos
2. Differentiated capabilities: In-house production of key EV parts; IGBT mass production
1) Fast-growing demand for IGBTs
We estimate global IGBT demand to display a five-year CAGR of more than 10%. IGBTs are an integral semiconductor component in EVs' power management systems. We expect demand for power management systems to expand as EV production increases; demand should especially grow from 2025, considering EVs’ steadily growing share in the new model mix.
IGBTs account for more than 40% of power management system costs and 10% of total EV production costs. By controlling the conversion between direct current and alternating current, IGBTs play a key role in driving performance (determining the EV’s maximum power output and torque). IGBTs are also used for power conversion in home appliances, railways, and solar/wind power generation facilities.
2) Supplier of key EV parts and only automaker capable of mass-producing IGBTs
BYD has conducted R&D on IGBTs since 2005 and is currently the only automaker capable of mass-producing them. As a supplier, BYD offers packaged solutions encompassing power management systems (including IGBTs), batteries, and motors.
BYD produces IGBTs through its subsidiary BYD Semiconductor, which in 2019 was the no. 2 player in China (18% market share) behind Germany’s Infineon (58% market share). The IGBT market is oligopolistic, with high entry barriers. Recently, BYD Semiconductor received an equity investment from a coalition of 30-40 companies spanning the semiconductor, mobile, PC manufacturing, and FI segments. Having such a diverse group of investors is favorable to BYD in terms of solidifying its standing as a key supplier and developing advanced EV technology.
3) Growing value of BYD Semiconductor (spin-off/listing planned)
In May and June, BYD Semiconductor completed series A and A+ financing rounds, raising CNY2.7bn from strategic investors at a valuation of CNY10.2bn. Investors included Xiaomi, SMIC, ARM, Lenovo, Sequoia Capital, Himalaya Capital, CICC Capital, and SK China (1.5%). As a result of the financing rounds, BYD’s stake in the subsidiary declined to 72.3% (CNY7.4bn). The funds raised will go toward talent recruitment and R&D.
Figure 5. BYD is capable of producing three core EV parts (batteries, IGBTs, and motors)
Source: US Department of Energy, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 55 August 21, 2020 China Autos
Figure 6. Global IGBT market outlook Figure 7. China to lead IGBT market growth (EV)
(US$bn) 10 9.4
CAGR: 9.6% 8
6 5.4
4
2
0 2019 2020 2021 2022 2023 2024 2025 Source: Mordor Intelligence, Mirae Asset Daewoo Research Source: Mordor Intelligence, Mirae Asset Daewoo Research
3. Battery business to drive earnings growth
We expect BYD to achieve earnings growth by expanding battery sales. According to SNE Research, the share of BYD’s EV batteries sold to external customers increased from 1-2% during 2018-19 to 4% in 1H20, and this figure is likely to continue to rise to 15% in 2021.
The Chinese battery market is becoming increasingly concentrated, with the combined market share of the top six players growing from 74% in 2018 to 87% in May 2020 (based on SNE Research). We expect leading players, including BYD, to see their margins improve as the gap between them and latecomers widens further.
1) Increasing EV battery supply to Toyota and Ford
We expect Toyota to procure more EV batteries from BYD in line with the automaker’s growing sales mix of BEV models. (In May, BYD and Toyota launched a 50/50 joint venture to conduct R&D on BEVs. During 2018 and 2019, Toyota’s auto sales in China expanded 15% YoY and 9% YoY, respectively. That said, BEV models account for a meager 1% of Toyota’s sales in China, compared with 13% for PHEV/hybrid models. We believe that Toyota will endeavor to steadily expand its BEV sales mix in China in collaboration with BYD. Indeed, Toyota aims to have half of its global sales come from EVs by 2025.
BYD is also set to increase its battery supply to Ford—specifically to the PHEV models being produced by Changan Ford, the 50/50 joint venture between Changan and Ford. In June, Ford sought approval from the Ministry of Industry and Information Technology (MIIT) to market PHEV models equipped with BYD's batteries in China. Through its collaboration with BYD, Ford aims to revive its sales in China, which have slumped in recent years. (Its sales volume in China fell from 840,000 units in 2017 to 240,000 units in 2019.)
Meanwhile, BYD is set to increase its EV battery supply to Denza, the BYD-Daimler joint venture, and win new customers from Europe.
2) A likely beneficiary of Chinese automakers’ supply diversification
Changan, which previously depended on CATL, has diversified its battery supply chain to include BYD and Gotion High-Tech (no. 2 and no. 3 players in the Chinese EV battery market). We expect BYD to secure battery supply contracts from other Chinese automakers seeking vendor diversification.
3) Blade Battery competitiveness: Low cost (US$90/kWh) and longer range (Han EV: 506-605km) In April 2020, BYD launched its Blade Battery, a battery pack that offers greater energy density and improved space utilization at a 30% lower cost compared to conventional LFP batteries. Assuming the average LFP battery price at US$130/kWh, the Blade Battery is priced at US$90/kWh. The Blade Battery is being applied first to BYD’s flagship Han EV model and will also be adopted by the Song Plus (SUV model scheduled for release in 2021). Han has a competitive NECD range of between 506km (65kWh) and 605km (77kWh).
Mirae Asset Daewoo Research 56 August 21, 2020 China Autos
Figure 8. EV battery M/S trends Figure 9. Global lithium-ion battery market outlook
(GWh) 100% Top six BYD CATL LG Chem 2,500 xEV ESS Other 87% 81% 80% 74% 2,000
2019-30F CAGR: 29% 60% 1,500
40% 1,000
20% 500
0% 0 2018 2019 1H20 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Source: SNE Research, Mirae Asset Daewoo Research Note: Other includes mobile, tablet, laptop, and wearable applications Source: Mirae Asset Daewoo Research
Figure 11. Toyota’s sales volume in China and sales mix of Figure 10. Changan’s battery vendor diversification NEVs
(MWh) (mn units) 700 CATL BYD Gotion 1.6 Vehicle sales % of HV + PHEV 14% 625 600 1.4 12% 526 1.2 500 10% 1.0 400 8% 0.8 300 6% 0.6 200 4% 0.4 110 100 2% 35 0.2 0 0 2 1 11 0 0.0 0% 2018 2019 5M20 2014 2015 2016 2017 2018 2019
Source: SNE Research, Mirae Asset Daewoo Research Note: Toyota’s BEV sales mix is less than 1%. Source: MarkLines, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 57 August 21, 2020 China Autos
4. Subsidy cuts to highlight BYD’s cost competitiveness
The Chinese government’s EV subsidy program is set to expire at the end of 2020. Without subsidies, small players are likely to come under increasing margin pressure and be squeezed out of the market. On the other hand, leading players, which enjoy cost competitiveness and high sales volumes, can achieve margin growth over the long term. We believe BYD stands to benefit from tighter NEV credit regulations by trading excess credits.
[Reference] Tightening of the NEV credit system
China is tightening NEV credit regulations by increasing NEV sales quotas for automakers by 2%p each year—from 12% of annual sales in 2020 to 18% in 2023. Meanwhile, the number of credits assigned to each NEV is being reduced by 20-50%; this requires automakers to manufacture more NEVs to avoid credit deficits. Automakers with credit deficits need to purchase excess credits from others to avoid penalties. BYD’s sales mix of NEVs exceeds 40% (vs. China’s average of 5%). Excess credits can be sold to other automakers that fail to meet the NEV or corporate-average fuel consumption (CAFC) criteria.
[Reference] Subsidy policy
The government’s subsidy program is applicable to: 1) EVs with a list price of less than CNY300,000; 2) up to 2mn units per year; and 3) EVs with a minimum range of 300km on a single charge. The maximum amount of EV subsidies will be scaled back from CNY22,500 (-10% YoY) in 2020 to CNY18,000 (-20% YoY) in 2021 and CNY12,600 (-30% YoY) in 2022.
Mirae Asset Daewoo Research 58 August 21, 2020 China Autos
II. Earnings and forecasts
Table 3. BYD: Earnings outlook 2015 2016 2017 2018 2019 2020F 2021F 2022F Revenue (CNYmn) 77,612 100,208 102,651 121,791 121,778 135,437 153,555 174,923 YoY 29.1% 2.4% 18.6% 0.0% 11.2% 13.4% 13.9% Autos 38,934 55,022 54,501 71,769 59,537 59,932 64,606 72,811 YoY 41% -1% 32% -17% 1% 8% 13% Mobile components 32,928 38,083 39,708 41,341 52,522 65,128 76,851 86,841 YoY 16% 4% 4% 27% 24% 18% 13% Batteries/PV 5,750 7,103 8,442 8,681 9,719 10,378 12,098 15,270 YoY 15% 24% 19% 3% 12% 7% 17% 26% COGS (65,753) (81,189) (84,716) (103,724) (103,702) (115,122) (129,907) (147,810) Gross profit 11,859 19,018 17,935 18,067 18,076 20,316 23,647 27,113 Margin 19.0% 17.5% 14.8% 14.8% 15.0% 15.4% 15.5% YoY 60.4% -5.7% 0.7% 0.1% 12.4% 16.4% 14.7% Selling/distribution expenses (2,868) (4,196) (4,925) (4,729) (4,346) (4,740) (5,374) (6,122) Admin. expenses (3,429) (3,690) (3,048) (3,826) (4,232) (4,469) (5,067) (5,772) R&D (1,998) (3,172) (3,739) (4,989) (5,629) (5,553) (6,603) (7,522) Gov’t grants/subsidies 581 711 1,276 2,333 1,708 1,519 1,378 1,256 Net other income 1,410 297 690 875 765 500 500 500 Share in profits/losses) Joint ventures (246) (620) (271) (278) (435) (300) (200) (100) Associates 3 20 46 53 13 15 15 15 EBIT 5,312 8,368 7,963 7,504 5,919 7,287 8,296 9,367 Margin 6.8% 8.4% 7.8% 6.2% 4.9% 5.4% 5.4% 5.4% YoY 57.5% -4.8% -5.8% -21.1% 23.1% 13.8% 12.9% EBITDA 10,626 15,285 14,927 16,786 15,387 17,561 19,637 21,762 Margin 13.7% 15.3% 14.5% 13.8% 12.6% 13.0% 12.8% 12.4% YoY 43.8% -2.3% 12.5% -8.3% 14.1% 11.8% 10.8% Depreciation 4,486 5,309 5,759 7,615 8,147 8,803 9,674 10,495 Amortization 828 1,608 1,204 1,666 1,322 1,470 1,667 1,899 Financial expenses (1,517) (1,800) (2,343) (3,119) (3,487) (3,532) (3,824) (4,117) PBT 3,795 6,568 5,621 4,386 2,431 3,756 4,472 5,251 Margin 4.9% 6.6% 5.5% 3.6% 2.0% 2.8% 2.9% 3.0% YoY 73.1% -14.4% -22.0% -44.6% 54.5% 19.1% 17.4% Tax expenses (657) (1,088) (704) (829) (312) (563) (671) (788) NP 3,138 5,480 4,917 3,556 2,119 3,192 3,801 4,463 Margin 4.0% 5.5% 4.8% 2.9% 1.7% 2.4% 2.5% 2.6% YoY 74.6% -10.3% -27.7% -40.4% 50.7% 19.1% 17.4% Owners of the 2,823 5,052 4,066 2,780 1,614 2,362 2,737 3,214 parent Minority interests 315 428 850 776 504 830 1,064 1,250 Shares outstanding 2,476 2,540 2,728 2,728 2,728 2,728 2,728 2,728 (mn) EPS (CNY) 1.14 1.99 1.49 1.02 0.59 0.87 1.00 1.18 EPS (HK$) 1.28 2.23 1.67 1.14 0.66 0.97 1.12 1.32 YoY 74.4% -25.1% -31.6% -41.9% 46.3% 15.9% 17.4% Note: CNY/HKD = 1.12 Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 59 August 21, 2020 China Autos
Table 4. Key auto sales volume assumptions 2015 2016 2017 2018 2019 2020F 2021F 2022F China Total sales (units) 24,597,583 28,028,175 28,878,904 28,080,577 25,756,922 23,181,230 24,340,291 25,070,500 YoY 4.7% 13.9% 3.0% -2.8% -8.3% -10.0% 5.0% 3.0% BEV share 0.5% 0.9% 1.6% 2.8% 3.4% 3.5% 5.0% 7.0%
BYD: Autos M/S 1.8% 1.8% 1.5% 1.9% 1.8% 2.0% 2.1% 2.3% BEV M/S 7.5% 38.8% 14.5% 14.3% 17.7% 20.3% 21.0% 21.8% Total sales (units) 447,330 507,817 419,851 520,687 461,399 464,456 510,902 587,537 BEV sales 9,551 92,738 66,229 109,425 147,185 165,103 255,451 381,899 % of total 2.1% 18.3% 15.8% 21.0% 31.9% 35.5% 50.0% 65.0% Source: MarkLines, Mirae Asset Daewoo Research
Table 5. BYD: Profit by segment (based on company disclosures) (CNYmn, %) 2015 2016 2017 2018 2019 2020F 2021F 2022F Total profit 5,957 9,109 7,780 6,105 4,950 5,910 7,292 9,081 Margin 7.7% 9.1% 7.6% 5.0% 4.1% 4.4% 4.7% 5.2% Autos 3,691 6,074 3,480 2,888 2,785 3,176 3,876 4,733 Margin 9.5% 11.0% 6.4% 4.0% 4.7% 5.3% 6.0% 6.5% % of total profit 62% 67% 45% 47% 56% 58% 60% 60% Mobile components 1,277 1,746 3,141 2,649 1,765 2,214 2,690 3,126 Margin 3.9% 4.6% 7.9% 6.4% 3.4% 3.4% 3.5% 3.6% % of total profit 21% 19% 40% 43% 36% 34% 31% 30% Batteries/PV 988 1,288 1,153 530 399 519 726 1,222 Margin 17.2% 18.1% 13.7% 6.1% 4.1% 5.0% 6.0% 8.0% % of total profit 17% 14% 15% 9% 8% 8% 9% 10% Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 60 August 21, 2020 China Autos
III. Valuation
TP of HK$90.0 (28% upside)
We initiate our coverage on BYD with a Buy rating and target price of HK$90. We derived our target price by applying a multiple of 80x to our 2021F EPS of HK$1.12. The stock is currently trading at 72x 2020F P/E and 63x 2021F P/E. In modeling our EPS growth forecasts, we reflected the following assumptions for 2021: 1) Chinese BEV market share of at least 20% (vs. 17% in 7M20) and sales volume of 250,000 units (vs. 150,000 units in 2019); 2) an increase in the battery unit’s OP margin to around 6% (vs. 4% in 2019) amid expanding exposure to external customers (4% in 1H20 15%); and 3) mobile component earnings growth stemming from capacity expansion (capex: +59% YoY in 2019) and order growth (from Apple and Samsung Electronics).
Our target P/E of 80x is around two standard deviations above the five-year average. We believe this multiple is justified, as BYD’s technological and price competitiveness should come into greater focus amid rising EV penetration. BYD’s BEV sales contribution will likely climb sharply from 32% in 2019 to 50% in 2021. In addition, margin improvement should gain momentum thanks to the internal sourcing of key EV components and increasing exposure to external EV battery sales. Of note, Tesla’s 2021F P/E stands at 120x (based on Bloomberg consensus).
Table 6. BYD: Valuation 2019 2020F 2021F EPS (HK$) 0.66 0.97 1.12 Growth -41.9% 46.3% 15.9% Current P/E (x) 63.5 72.4 62.5 Target P/E (x) 80.0 Fair price (HK$) 89.2 TP (HK$) 90.0 Current price (HK$) 70.2 Upside 28.2% Source: Mirae Asset Daewoo Research
Figure 12. BYD: P/E band chart Figure. 13. BYD: P/E ±2 SD
(HK$) (x) 250 90 80 +2 SD 200 70
60 +1 SD 150 50
5Y avg. 40 100x 100 79x 30 -1 SD 58x 20 50 37x 10 -2 SD 15x 0 0 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020
Source: WISEfn, Mirae Asset Daewoo Research Source: WISEfn, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 61 August 21, 2020 China Autos
IV. Company overview
In-house production of key EV components
BYD is unique among EV makers in its ability to produce all three core EV components (i.e., batteries, motors, and power control systems) in-house. Notably, the automaker has adopted its newly developed Blade Battery in its Han EV luxury sedan (launched in early July). We believe the Han EV, which starts at CNY230,000 (after subsidies) and boasts a range of up to 605km (NEDC), is highly price-competitive in the premium EV market.
Battery earnings are picking up thanks to increasing supply to external customers. Until last year, 99% of BYD’s battery production was consumed in-house. However, the company’s EV battery exposure to external customers reached 4% in 1H20. Going forward, we expect this figure to steadily rise, aided by: 1) local players’ moves to diversify their battery supply chains; and 2) new supply contracts with foreign players. With the auto industry undergoing a paradigm shift, we believe that BYD is well-positioned to further solidify its presence in the EV space.
Figure 14. BYD: Revenue and NP Figure 15. BYD: Operating cash flow and free cash flow
(CNYbn) (%) (CNYbn) 140 Revenue (L) 6 15 OCF FCF NP (L) Net margin (R) 120 5 10
100 5 4 80 0 3 60 -5 2 40 -10
20 1 -15
0 0 -20 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Figure 16. BYD: Ownership structure Figure 17. BYD: Revenue breakdown by business (2019)
0.4
Berkshire Hathaway 15.7 24.6 Himalaya Capital Citigroup Autos/related 45.4 Mobile components 54.7 JPMorgan Chase Battery/PV 8.2 Vanguard Group Corporate/other BlackRock 38.5 5.0 Other
2.8 1.8 2.8
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 62 August 21, 2020 China Autos
BYD (1211 HK)
Income statement (summarized) Balance sheet (summarized) (CNYmn) 2019 2020F 2021F 2022F (CNYmn) 2019 2020F 2021F 2022F Revenue 121,778 135,437 153,555 174,923 Current assets 106,967 112,488 121,978 129,558 COGS -103,702 -115,122 -129,907 -147,810 Cash & equivalents 12,650 10,984 14,001 16,912 Gross profit 18,076 20,316 23,647 27,113 AR & other receivables 47,144 50,093 54,691 57,509 Selling & marketing -4,346 -4,740 -5,374 -6,122 Inventory 25,572 28,386 30,252 32,397 G&A -4,232 -4,469 -5,067 -5,772 Other current assets 21,601 23,024 23,033 22,740 R&D -5,629 -5,553 -6,603 -7,522 Non-current assets 88,675 96,917 105,432 113,230 Government subsidies/grants 1,708 1,519 1,378 1,256 PP&E 62,634 68,729 74,410 79,658 Other net income 765 500 500 500 Intangible assets 11,888 13,126 14,531 16,130 Share in profits losses of JVs/associates -423 -285 -185 -85 Investments in JVs/associates 5,982 6,482 7,482 7,982 EBITDA 15,387 17,561 19,637 21,762 Other non-current assets 8,171 8,579 9,008 9,459 Depreciation 8,147 8,803 9,674 10,495 Total assets 195,642 209,404 227,410 242,787 Amortization 1,322 1,470 1,667 1,899 Current liabilities 108,029 114,591 125,412 133,225 EBIT 5,919 7,287 8,296 9,367 AP & other payables 45,989 51,726 58,369 64,793 Financial costs -3,487 -3,532 -3,824 -4,117 Short-term financial liabilities 10,649 12,616 14,236 16,198 Pretax profit 2,431 3,756 4,472 5,251 Other current liabilities 54,062 54,062 57,062 57,062 Income tax -312 -563 -671 -788 Non-current liabilities 25,011 30,011 35,011 40,011 NP 2,119 3,192 3,801 4,463 Long-term financial liabilities 21,916 26,916 31,916 36,916 Attributable to owners 1,614 2,362 2,737 3,214 Other non-current liabilities 3,095 3,095 3,095 3,095 Attributable to minority interests 504 830 1,064 1,250 Total liabilities 133,040 144,602 160,424 173,237 EBITDA margin (%) 12.6 13.0 12.8 12.4 Share capital 2,728 2,728 2,728 2,728 EBIT margin (%) 4.9 5.4 5.4 5.4 Reserves 49,640 51,523 53,500 55,821 Net margin (%) -40.4 50.7 19.1 17.4 Perpetual loans 4,395 4,395 4,395 4,395 Minority interests 5,839 6,156 6,364 6,607 Total equity 62,601 64,802 66,986 69,551 Total liabilities & equity 195,642 209,404 227,410 242,787
Cash flow statement (summarized) Key valuation metrics/ratios (CNYmn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F Cash flow from operating activities 14,741 13,919 17,204 20,545 P/E (x) 69.5 72.4 62.5 53.2 NP 2,119 3,192 3,801 4,463 P/B (x) 1.8 2.9 2.8 2.7 Depreciation 8,147 8,803 9,674 10,495 EV/EBITDA (x) 12.6 16.7 15.0 13.5 Amortization 1,322 1,470 1,667 1,899 EPS (CNY) 0.59 0.87 1.00 1.18 Chg. in working capital -6,617 -27 180 1,462 BPS (CNY) 20.81 21.50 22.22 23.07 NP from JVs/associates 423 285 185 85 DPS (CNY) 0.26 0.18 0.28 0.33 Government subsidies and grants -1,708 -1,519 -1,378 -1,256 Dividend payout ratio (%) 43.8 15.0 20.0 20.0 Others 11,056 1,715 3,076 3,397 Dividend yield (%) 0.1 0.3 0.4 0.5 Cash flow from investing activities -20,881 -18,107 -19,427 -19,742 Revenue growth (%) 0.0 11.2 13.4 13.9 Capex -17,721 -14,898 -15,355 -15,743 EBITDA growth (%) -8.3 14.1 11.8 10.8 Asset sales 413 0 0 0 EBIT growth (%) -21.1 23.1 13.8 12.9 Acquisition of intangibles -2,906 -2,709 -3,071 -3,498 EPS growth (%) -41.9 46.3 15.9 17.4 Investment in JVs/associates -736 -500 -1,000 -500 AR collection period in days 141 135 130 120 Others 68 0 0 0 Inventory days outstanding 90 90 85 80 Cash flow from financing activities 6,610 2,521 5,240 2,107 AP days outstanding 124 124 124 120 Issuance/repayment of ST debt -508 0 3,000 0 ROA (%) 0.8 1.1 1.2 1.3 Issuance/repayment of LT debt 10,855 5,000 5,000 5,000 ROE (%) 2.8 4.0 4.5 5.1 Issuance of common shares 0 0 0 0 ROIC (%) 5.5 6.2 6.6 7.1 Dividends paid -707 -479 -760 -893 Debt-to-equity ratio (%) 133.9 138.1 146.8 149.3 Others -3,030 -2,000 -2,000 -2,000 Current ratio (%) 99.0 98.2 97.3 97.2 Net chg. in cash 470 -1,666 3,018 2,910 Net debt-to-equity ratio (%) 111.6 119.4 123.7 122.4 Beginning cash balance 12,180 12,650 10,984 14,001 Ending cash balance 12,650 10,984 14,001 16,912 Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 63 [China] Autos August 21, 2020
NIO Buy (NIO US) (Initiate)
A rising star in the premium EV segment TP: US$17.0 Upside: 20.9%
Mirae Asset Daewoo Co., Ltd. Hyunwoo Jin [email protected]
Valuation and recommendation Initiate coverage with a Buy rating and TP of US$17.0 Our DCF valuation assumes a terminal growth rate (beyond 2030) of 2% and WACC of 9% (COE of 18% and 30% weight). We forecast NIO’s 2021 sales volume to match Tesla’s level in 2015. In valuing the automaker, we applied an EV/sales multiple of 5.7x, which represents a 30% discount to Tesla’s 2015 multiple (8.1x). Our discount reflects NIO’s low gross margin compared to Tesla and the presence of new competitors.
Investment points Sales volume growth to accelerate EC6 (SUV coupe) released at end-July; robust growth of existing SUV models (monthly sales volume of 4,000 units; 6% share of the Chinese BEV market) Battery leasing/swapping: Differentiated convenience, lower up-front costs (for consumers), and subscription service revenue - Five-minute battery swap service + van-based mobile charging service (100km range on a 10- minute charge) + super chargers/public charging points We project NIO’s sales volume to expand at a CAGR of 32% over the next decade (20,000 units in 2019 40,000 units in 2020F 660,000 units in 2030F). Stable cash flow; likely to turn a profit and report positive free cash flow in 4Q22 or 2023 NIO attracted CNY7bn from a local government-led group of strategic investors, thus securing sufficient funding for working capital and business expansion through 4Q22. Gross margin expansion: 5% in 2020F 22% in 2022F Falling R&D and SG&A expenses as a percentage of revenue: 20-25% in 2020F 6-8% in 2030F Conservative capex thanks to flexible production capacity (via outsourcing) - Annual production capacity of 130,000 units (in-house production: 60,000 units); estimated sales volume: 40,000-50,000 units in 2020F 120,000 units in 2022F Favorably positioned for tax benefits and low-rate loans due to local government’s stake Subsidies (for which EV models with swappable batteries are eligible, regardless of price) + R&D subsidies
Risks 1) Burdensome multiple expansion driven by rapid EV penetration; 2) serious production disruptions; and 3) intensifying competition in the premium BEV segment
Key data
300 Current price (8/19/20, US$) 14.06 Market cap (US$bn) 16.8 NIO SPX 250 Exchange NYSE Market cap (Wtr) 20.0 200 EPS growth (21F, %) NM Shares outstanding (mn) 914.7 150 P/E (21F, x) NM 52-week low (US$) 1.2 100 Market P/E (21F, x) 20.5 52-week high (US$) 16.4 50
0 18.9 19.3 19.9 20.3
Share performance Earnings and valuation metrics (%) 1M 6M 12M FY (Dec.) 12/17 12/18 12/19 12/20F 12/21F 12/22F Absolute 9.7 230.0 344.9 Revenue (CNYmn) 0.0 4,951.2 7,825.4 15,171.0 26,018.3 43,710.7 Relative 5.7 229.9 282.4 OP (CNYmn) -4,953.6 -9,596.4 -11,079.2 -6,068.4 -4,943.5 -874.2 OP margin (%) NM -193.8 -141.6 -40.0 -19.0 -2.0 NP (CNYmn) -7,561.7 -23,328.7 -11,413.1 -6,593.8 -4,151.3 -1,067.6 EPS (CNY) -363.33 -43.42 -10.79 -5.95 -3.75 -0.96 Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 21, 2020 China Autos
I. Investment points
1. Sales volume growth to accelerate
We expect NIO’s sales volume growth to accelerate, given the company’s: 1) superior product development capabilities in the high-end segment (CNY300,000 or higher) relative to local peers; and 2) price competitiveness (favorable subsidy policies and low up-front battery costs for consumers).
NIO’s EC6 hit the market earlier than competitors
NIO released the EC6, a coupe-style electric SUV, at end-July—entering the market ahead of competitors. Starting at CNY350,000 (after subsidies), the EC6 is likely to have a lower price tag than rival high-end models (e.g., Tesla Model Y, Audi e-tron, and BMW iX3). Unlike major competitors, the EC6 comes with a swappable battery and is thus eligible for government subsidies. The EC6 also offers strong performance in terms of maximum driving range (615km) and horsepower.
We estimate NIO’s total sales volume amounted to 20,000 units in 2019. Over the next decade, we project sales volume to expand at a CAGR of 32% (from 40,000 units in 2020 to 275,000 units in 2025 and 660,000 units in 2030). This year, sales growth should be driven by the release of the EC6 and the sustained growth in ES8 (large-sized SUV) sales. NIO continues to expand its distribution network and charging infrastructure (battery swap stations, mobile charging service, and supercharger networks).
Figure 1. NIO: ES6 and ES8 monthly sales volume
(Units) 4,500 ES8 ES6 4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0 1/19 2/19 3/19 4/19 5/19 6/19 7/19 8/19 9/19 1/20 2/20 3/20 4/20 5/20 6/20 10/19 11/19 12/19
Source: Company data, MarkLines, Mirae Asset Daewoo Research
Figure 2. NIO: Total sales volume
('000 units) 300 Sales volume (L) YoY (R) 120%
250 100%
200 80%
150 60%
100 40%
50 20%
0 0% 2018 2019F 2020F 2021F 2022F 2023F 2024F 2025F
Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 65 August 21, 2020 China Autos
Table 1. NIO EC6 vs. key competitors
Make NIO Tesla Volkswagen BYD Audi BMW Model EC6 Model Y ID.6 Song Plus Q4 e-tron iX3 Launch Jul. 20 1Q21 2021 4Q20-1Q21 2021 4Q20-2021 450,000 450,000 450,000 Price after 488,000 350,000- -500,000 N/A -500,000 -550,000 incentives (CNY) ~535,000 (*est.) (est.) (est.) Max power (kW) Approx. 400 340 225, 300 N/A 225 210 Battery size (kWh) 100 81 77, 111 65+ 82 74~80 Driving range (km) 615 (NEDC) 505 (WLTP) 450, 600 (WLTP) 500+ (NEDC) 450-500 (WLTP) 440-456 (WLTP) Note: Price estimates are based on data for models released outside China; NIO EC6’s ex-subsidy price starts from CNY368,000. Source: Company data, media reports, Mirae Asset Daewoo Research
Figure 3. NIO EC6 interior
Source: Company materials, Mirae Asset Daewoo Research
Figure 4. NIO EC6 exterior
Source: Company materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 66 August 21, 2020 China Autos
“Battery as a service”: Lower up-front costs and subscription service revenue Unlike its competitors, NIO uses a subscription-based battery swapping model that allows customers to lease and replace batteries. By removing the cost of battery ownership, NIO is able to entice customers with lower vehicle prices; instead, NIO generates service (subscription) revenue. This “battery as a service” model establishes a new revenue stream while reducing consumer concerns over battery performance/maintenance. We expect the average annual price of NIO’s battery swap subscription service (currently CNY10,800) to increase, given battery upgrade services and continuous improvements in charging convenience (expansion of battery swap stations and charging network). We expect the revenue mix of services to increase to approximately 10% (vs. 6% in 2019). Apart from battery services, NIO also offers a “worry-free service” package that includes door- to-door maintenance/repair services, 15GB of mobile data per month, insurance, and designated driver services. The package is priced at CNY14,800 per year, and we estimate the subscription rate is as high as 80%.
Differentiated charging convenience NIO offers a differentiated customer experience by giving customers access to: 1) swap stations, where a battery can be replaced in five minutes; 2) a mobile charging service (call-in service; 10 minutes of charging provides 100km of range); and 3) super chargers/public charging stations. We expect the swap station count to increase to 170 (50 major cities and highways across China) by the end of 2020. We estimate NIO’s 2019 charging infrastructure capex at around CNY100mn and note that the company plans to increase spending in line with sales volume growth.
Figure 5. NIO: Battery swap station (full battery swap in five minutes)
Source: Company materials, Mirae Asset Daewoo Research
Figure 6. NIO: Mobile charging service (10 minutes of charging provides 100km of range)
Source: Company materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 67 August 21, 2020 China Autos
2. Stabilizing cash flow
NIO has secured sufficient funds for working capital and investments through 2022
At end-April, a group of strategic investors led by the government of Hefei invested CNY7bn in NIO China for a 24.1% stake. As a result, NIO US’s stake in NIO China fell to 75.9%. We believe NIO China has secured sufficient funds for working capital and facility investments through 2022. We estimate NIO’s cash assets at CNY800mn in 4Q22, on par with the end-2019 level. To accelerate business expansion, NIO US plans to inject CNY4.3bn in NIO China.
Figure 7. Investments in NIO China
NIO US (NIO Inc.): 75.90% Strategic investors: 24.10% - NIO NextEV (50.03%) - Hefei City Construction and Investment (17.22%) - NIO User Enterprise (24.69%) - CMG-SDIC Capital Management (3.44%) - NIO Power Express (1.18%) - Anhui Provincial Emerging Industry Investment (3.44%)
CNY4.26bn CNY7bn (planned) 75.9% 24.1%
NIO China
Source: Company data, Mirae Asset Daewoo Research
Figure 8. NIO’s governance structure: NIO US and NIO China
Source: Company materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 68 August 21, 2020 China Autos
Likely to turn a profit and report positive free cash flow in 2023
We expect NIO to turn a profit beginning in 2023. Accordingly, free cash flow is likely to turn positive, making outside funding less necessary, except for refinancing. We expect NIO’s cash holdings to gradually increase, supported by reinvestments and continuous margin expansion.
NIO’s margins are likely to improve on the back of: 1) economies of scale; 2) production cost cuts (e.g., batteries); and 3) a decline in R&D and SG&A expenses as a percentage of revenue. Tesla’s sales totaled 250,000 units in 2018. In 2025, we estimate NIO’s sales volume will reach 280,000 units. As NIO’s sales volume approaches 250,000 units, we expect its gross margin to match or exceed the level of Tesla in 2018, given: 1) further reductions in battery pack costs; and 2) low labor expenses in China.
Figure 9. NIO: Free cash flow
(CNYbn) 6
4
2
0
-2
-4
-6
-8
-10
-12 2016 2017 2018 2019 2020F 2021F 2022F 2023F 2024F 2025F
Source: Company data, Mirae Asset Daewoo Research
Figure 10. NIO: OP and OP margin
(CNYbn) 8 OP (L) OP margin (R) 6.5% 50% 6 -2.0% 3.0% 0% 4 2 -50% 0 -2 -100% -4 -150% -6 -8 -200% -10 -12 -250% 2016 2017 2018 2019 2020F 2021F 2022F 2023F 2024F 2025F
Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 69 August 21, 2020 China Autos
Figure 11. NIO: Gross margin and R&D/SG&A expenses as % of Figure 12. Tesla: Gross margin and R&D/SG&A expenses as % revenue of revenue
Sales volume (R) Gross margin (L) ('000 units) ('000 units) 80% 300 35% Sales volume (R) Auto gross margin (L) 300 R&D/revenue (L) SG&A/revenue (L) 275 R&D/revenue (L) SG&A/revenue (L) 70% 30% 245 250 250 60% 25% 50% 200 23% 200 40% 20% 30% 150 150 24% 15% 20% 13% 100 100 10% 10% 10% 7% 0% 7% 50 5% 50 -10% -20% 0 0% 0 2019 2020F 2021F 2022E 2023F 2024F 2025F 2013 2014 2015 2016 2017 2018
Source: Company data, Mirae Asset Daewoo Research Source: Tesla, Mirae Asset Daewoo Research
Favorable business environment
NIO has kept its fixed costs at low levels, building vehicles using excess capacity at Chinese automakers such as JAC Motors. Due to overall market weakness, utilization at Chinese automakers has declined to around 60%, which is favorable for NIO.
We expect NIO’s capex and investments in intangible assets to decline slightly through 2021. Currently, NIO has secured sufficient production capacity by locally outsourcing some of its production. We estimate NIO’s production capacity stands at 130,000 units (60,000 units in- house and 70,000 units outsourced) in 2020, and we project sales volume to increase from 40,000 units in 2020 to 70,000 units in 2021 and 120,000 units in 2022. From 2022, NIO is likely to expand production capacity to prepare for demand growth amid growing EV penetration.
Figure 13. NIO: Capex and intangible asset acquisition estimates
2016 2017 2018 2019 2020F 2021F 2022F 2023F 2024F 2025F 2026E 2027F 2028F 2029F 2030F 0
-500
-1,000
-1,500
-2,000
-2,500
-3,000
-3,500
-4,000 (CNYmn) -4,500
Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 70 August 21, 2020 China Autos
II. Earnings and forecasts
From 2020 to 2030, we expect NIO’s BEV sales to expand at a CAGR of 32%, which is in line with our projection for China’s BEV market as a whole. Gross margin should continue to improve, on the back of: 1) scale effects (arising from rapid sales growth); 2) falling battery costs; and 3) outsourcing-driven production cost savings. We believe R&D spending and SG&A expenses will decline to 6-8% of revenue over the long term. We forecast the firm to swing to operating profit and positive free cash flow by around 2023, given its conservative capex stance. From 2024 onwards, investments and cash holdings should expand gradually.
Table 2. NIO: Annual earnings trend and forecast 2018 2019 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F 2030F Vehicle sales (units) 12,807 20,139 40,000 70,000 120,000 180,000 230,000 275,000 330,000 396,000 475,200 560,736 661,668 YoY 57% 99% 75% 71% 50% 28% 20% 20% 20% 20% 18% 18% Revenue (CNYmn) 4,951 7,825 15,171 26,018 43,711 64,910 83,632 100,795 115,914 133,301 153,297 173,225 195,744 YoY 58.1% 93.9% 71.5% 68.0% 48.5% 28.8% 20.5% 15.0% 15.0% 15.0% 13.0% 13.0% Vehicle sales 4,852 7,367 14,047 24,091 40,473 60,102 76,029 89,996 103,495 119,019 136,872 154,665 174,772 Other 99 458 1,124 1,927 3,238 4,808 7,603 10,799 12,419 14,282 16,425 18,560 20,973 COGS (5,207) (9,024) (14,412) (23,156) (35,843) (50,630) (64,397) (77,108) (88,674) (101,976) (118,038) (133,383) (150,723) Gross profit (256) (1,198) 759 2,862 7,868 14,280 19,235 23,687 27,240 31,326 35,258 39,842 45,021 Margin -5.2% -15.3% 5.0% 11.0% 18.0% 22.0% 23.0% 23.5% 23.5% 23.5% 23.0% 23.0% 23.0% Operating expenses (9,341) (9,881) (6,827) (7,805) (8,742) (12,333) (15,054) (17,135) (18,546) (21,328) (23,761) (24,252) (27,404) R&D (3,998) (4,429) (3,034) (3,903) (4,371) (5,842) (6,691) (7,056) (8,114) (9,331) (9,964) (10,394) (11,745) % of revenue -81% -57% -20% -15% -10% -9% -8% -7% -7% -7% -7% -6% -6% SG&A (5,342) (5,452) (3,793) (3,903) (4,371) (6,491) (8,363) (10,080) (10,432) (11,997) (13,797) (13,858) (15,660) % of revenue -108% -70% -25% -15% -10% -10% -10% -10% -9% -9% -9% -8% -8% OP (EBIT) (9,596) (11,079) (6,068) (4,943) (874) 1,947 4,182 6,552 8,694 9,998 11,497 15,590 17,617 Margin -193.8% -141.6% -40.0% -19.0% -2.0% 3.0% 5.0% 6.5% 7.5% 7.5% 7.5% 9.0% 9.0% Interest income 133 160 143 165 49 45 110 207 337 530 788 1,123 1,534 Interest expenses (124) (371) (678) (691) (581) (554) (534) (503) (503) (503) (503) (503) (503) Losses from equity investees (10) (64) 0 0 0 0 0 0 0 0 0 0 0 Investment income 0 0 0 0 0 0 0 0 0 0 0 0 0 Net other income (21) 66 0 0 0 0 0 0 0 0 0 0 0 PBT (9,618) (11,288) (6,603) (5,469) (1,407) 1,439 3,758 6,255 8,527 10,024 11,782 16,210 18,647 Margin -75.1% -56.0% -16.5% -7.8% -1.2% 0.8% 1.6% 2.3% 2.6% 2.5% 2.5% 2.9% 2.8% Income tax (22) (8) 0 0 0 (43) (376) (938) (1,279) (1,504) (1,767) (2,431) (2,797) Effective tax rate 0.2% 0.1% 0.0% 0.0% 0.0% 3.0% 10.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% NP (9,640) (11,296) (6,603) (5,469) (1,407) 1,396 3,383 5,317 7,248 8,520 10,015 13,778 15,850 Margin -194.7% -144.3% -43.5% -21.0% -3.2% 2.1% 4.0% 5.3% 6.3% 6.4% 6.5% 8.0% 8.1% NP (minority interests) 42 9 9 1,318 339 (336) (815) (1,281) (1,747) (2,053) (2,414) (3,321) (3,820) Minority interests % 0.4% 0.1% 0.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% Accretion (13,667) 0 0 0 0 0 0 0 0 0 0 0 0 Accretion (minority interests) (63) (127) 0 0 0 0 0 0 0 0 0 0 0 NP (owners) (23,329) (11,413) (6,594) (4,151) (1,068) 1,059 2,567 4,035 5,501 6,467 7,601 10,458 12,030 Shares (diluted, avg., mn) 537 1,058 1,107 1,107 1,107 1,107 1,107 1,107 1,107 1,107 1,107 1,107 1,107 EPS (CNY) (43.42) (10.79) (5.95) (3.75) (0.96) 0.96 2.32 3.64 4.97 5.84 6.86 9.44 10.86 Growth 142% 57% 36% 18% 18% 38% 15% FCF (CNYmn) (10,872) (11,077) (5,455) (4,390) (475) 2,251 4,124 5,013 7,070 9,727 11,724 15,532 17,590 EBITDA (9,122) (10,080) (4,907) (3,731) 381 3,314 5,514 8,100 10,561 12,142 13,753 17,943 19,989 CAPEX (2,644) (1,707) (1,500) (1,500) (2,000) (2,500) (3,000) (4,000) (4,000) (3,000) (3,000) (2,500) (2,500) Net debt (5,052) 9,596 5,507 8,604 9,273 7,851 4,922 1,443 (3,739) (11,435) (20,987) (33,726) (48,372) Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 71 August 21, 2020 China Autos
III. Valuation
1. DCF valuation: TP of US$17 (21% upside)
We initiate coverage of NIO with a target price of US$17 (21% upside). Our target price was derived using the DCF methodology. Key assumptions behind our valuation include: 1) a terminal growth rate (beyond 2030) of 2%; and 2) a WACC of 9% (18% COE, 30% weight).