FUTURE MOBILITY
Sector report
29 October 2019 – 5:30 PM
Automotive Infrastructures
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- Mobility
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CASE: what will change for OEMs
CASE (Connectivity, Autonomous, Sharing and Electric) will change the way consumers see mobility and will dramatically transform the industry. Quarterly results will be useful to assess short-term price reactions but, we believe, how every company is positioned in a fast- changing environment cannot be ignored for long-term returns.
The industry transformation doesn ’t necessarily mean “shrinking” : we believe that the overall size of the profit should rise. But a large amount of business centred on ownership models will be transacted in the future through mobility providers (i.e. services) and current incumbents may not be the winners. We initiate coverages on CNH (NEUTRAL, TP EUR10.3) that aims to be a disruptor in its sector thanks profiting from future mobility trends but it is witnessing an unpredictable AG cycle, Ferrari (BUY, TP EUR163.0) which will use the hybrid technology at its advantages and Piaggio (BUY, TP EUR3.20) where electric will support a new replacement cycle.
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Regulators are forcing the transition to electric but pick-up will be slowed down by the lack of infrastructure: EU CO2 targets are
forcing carmakers to introduce EVs despite they are still losing money on it and consumers are wobbling. However, slow deployment of charging infrastructure, lack in electricity storage and grids last mile capacity, constraints on battery production and recycling should limit PHEV and BEV to 16% of total registrations by 2025. We believe that electric is a
perfect technology for 2 wheelers where “range anxiety” doesn’t apply
and could trigger a long-awaited replacement cycle. Hybrid supercar are a different thing altogether and we believe this technology will be a plus both for carmakers profitability and consumers tastes.
Massimo Vecchio Senior Analyst
Tel. +39 02 62753016
Dario Fasani Analyst
Tel. +39 02 62753014
>>
Heavy Trucks/tractors: gas a mid-term bridge, hydrogen the end
point. While we don’t see electric as an option on those products, gas is
a reality. Hydrogen fuel cells is the future, probably 10 years from now.
www.ubibanca.com/equity-research
Diesel is not dead, in our view: driven by public opinion, governments
and local municipalities attacked heavily diesel engines. However diesel emits less than petrol and new technologies are reducing emissions further. We see diesel still at 20% of total sales by 2025.
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Autonomous vehicles will dramatically change the landscape…in a
faraway future. AD will be crucial to the birth of robo-taxi, will impact the component makers industry and will modify the business models by
adding the usership option to the ownership one. But we don’t see this
happening before 2030. Trucks and tractors autonomous instead is more
short term and incumbent will not be “attacked” by new comers.
We thank CESI Group for the very valuable support in preparing this report
Stocks, ratings and target prices
CNH
NEUTRAL
10.3
Ferrari
BUY
Piaggio
- BUY
- Rating
Target price (EUR) Upside/(Downside) Market cap (EURm) P/E Adj. 2020
- 163
- 3.20
- 6.5%
- 16.4%
26,458
31.9
19.4%
- 960
- 13,000
- 11.3
- 14.3
- YTD performance
- 27.1%
- 46.9%
0.9%
45.3%
- 3.9%
- Dividend yield 2020
- 2.6%
Source: Company data, UBI Banca estimates
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Index
12
- EXECUTIVE SUMMARY
- 3
NEW TRENDS AND EMERGING TECHNOLOGIES FOCUS ON: DIESEL – WILL ONLY DECLINE OR IT WILL DISAPPEAR? FOCUS ON: ELECTRIC VEHICLES
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- 3
- 10
13 41 46 49 55 49 56
4
- 5
- FOCUS ON: ALTERNATIVE FUELS
- 6
- FOCUS ON: CONNECTED VEHICLES
- 7
- FOCUS ON: AUTONOMOUS DRIVING AND SHARING
APPENDIX A – DEFINITION OF AUTONOMOUS DRIVING LEVELS APPENDIX B – A BRIEF DESCRIPTION OF CESI APPENDIX C – GLOSSARY
8910 11 12 13
CNH – MONOGRAPHIC REPORT FERRARI – MONOGRAPHIC REPORT PIAGGIO – MONOGRAPHIC REPORT
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Future Mobility
15 October 2019
Executive Summary
We believe that the mobility industry is at the beginning of an epical
transformation that cannot be ignored when assessing investment strategies. Alternative fuels, autonomous driving coupled with connected vehicles and the evolution of smart cities could change the way we see mobility. Upcoming quarterly results will be useful to assess short-term market price reactions but how every company is positioned in a fastchanging environment cannot be ignored as a driver of long-term returns;
The overall industry profit should grow, but the split between incumbent and new comers will be key. The overall size of the profit of
the automotive industry should rise at a 3.6% 2015-30 CAGR. But a large amount of business centered around ownership models will be transacted in the future through mobility providers (i.e. services) and it is not a given that current incumbents will be the winners. There could be several
mitigating factors that would “soften” the revolution that incumbents are
going to face: a) Outsiders do not appreciate the sheer complexity of developing a mass market vehicle (I.e. Tesla example); b) Changes will happen unevenly around the world; c) Consumers might even invest more in their vehicles as a new era of customization dawns;
Electric vehicles growth, required by regulations, could be slowed down by lack of infrastructure. We see BEV (Battery Electric Vehicles)
and PHEV (Plug-in Hybrids) representing 16% of yearly new registrations in 2025 (4% and 12% respectively). While this revolution is inevitable, our estimates are probably below market consensus. We believe that the slow deployment of the charging infrastructure is one of the two major factors consumers cites for not to buy a BEV/PHEV. The other factor, price, is a consequence of volumes and therefore interrelated with infrastructure. While, ideally, the infrastructure has to anticipate a product to allow a rapid uptake, in this specific case, the infrastructure development is not keeping the pace of EVs volume growth already in 2018 (see next graph). And this before taking into account that volume growth is accelerating in 2019 and should pick up from 2021-22.
Figure 1 – EV car parc vs. EV public charging infrastructure Source: Global EV Outlook 2018, Statista, Insideevs, Technologyreview, Global China Association of Auto Mfrs, ALixPartners analysis
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15 October 2019
In our view this is because car makers themselves didn’t put emphasis on EV
deployment but then had to change their minds and recover the lost ground once
diesel sales fall and regulators didn’t delay the introduction of stricter emission
limits. This is evident when looking at the number of new EVs to be introduced (next graph): very few until 2019 and then a ramp-up shortly before 2021 emission targets kick-in.
Figure 2 – Total number of available EV models on the market in Europe
350 300 250 200 150 100
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Subaru Suzuki Mazda Tesla Honda Ford Jaguar Land Rover Hundai-Kia Volvo/Greely Renault-Nissan-Mitsubishi FCA BMW Daimler Toyota PSA Volkswagen
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: T&E
Issues like grid surcharge risks, re-modulation in electricity prices, batteries production capacity and re-cycling need to be addressed.
On top of the slow down caused by charging stations other factors have to be taken into account to evaluate the potential ramp-up speed of EVs (in order of importance):
ooo
Grid surcharge risks: in our view there are no risks at national level of being short in electricity capacity. However, the challenges are centered at local network level where there is a risk of overloading residential transformers. Smart charging systems are expected to reduce these risks and, to the extent the grid will become more digital, even be a source of power rather than a drain; Electricity prices: today in Italy, for instance, the charging cost may reach the EUR511/MWh mark (non-residential private charging point). This reduces the savings, when compared to ICE, to 0.4 EUR/KWh per km in some cases. A remodeling of electricity prices would be needed to incentivize EVs uptake. On the other hand, governments could lose part of the taxes on fuel that they get (EUR73 billion p.s. in Italy alone);
Battery production capacity: T&E (European Federation for
Transport & Environment) has calculated that the total lithium-ion battery demand from EV (and hybrid) production volumes within the
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15 October 2019
EU is expected to reach 112 GWh in 2023 and 176 GWh in 2025 according to the forecasted battery sizes provided by carmakers. The European Battery Alliance, launched by the EU Commission as
part of its ‘new industrial policy strategy’ materialized into plans for
at least a dozen cell manufacturing factories in Europe which should result in a manufacturing capacity to be at least 131 GWh in 2023 and 274 GWh in 2028 (i.e. enough to cover the demand mentioned in the point above);
o
Battery recycling: recycling will begin to be an issue from 2035 onwards (i.e. assuming a pick-up in EVs from 2025 and a life expectancy of 10 years) and to become a sizeable issue from 2040 onwards. In the long run the question has to be posed given that, as of today, there are no clear solutions in terms of recycling technologies. The issue however has a short term implication too, which is more commercial than environmental: granting a residual values to battery will reduce the TCO of vehicles and ease the leasing/renting of cars/batteries.
E-scooters and e-bikes are a key part of the micro-mobility rise.
While electric doesn’t seem the answer for Heavy trucks and tractors, it is
a promising development for 2 wheelers. Penetration of electric-2Wheels is lagging behind cars, in our view because there was no regulation push. But, from our analysis, it seems that we are at the beginning of a growth
story: “range anxiety” doesn’t apply to 2W which, on average, run
15Km/day and micro-mobility trends are supportive too. While demography plays against 2W, at least in Europe, marketing electric 2W
as “tech-toys” could attract a new breed of customers thus rejuvenating
the client base. The old circulating park (around 18 years old in Italy) coupled with incentives and traffic bans are behind the current replacement cycle. ACEM (the European Association of motorcycles producers) reports that in 1H2019 in Europe 5,812 electric motorbikes were registered, an 82% increase YoY.
Electric luxury sport cars and motorbikes are a different item all
together: they attracts tech-fans and command a higher pricing than petrol version in many cases, making the business model potentially more viable. While many may see electrification as a price to pay in terms of cars performances to reduce emissions, this is not the case for sport cars. The performances of the Ferrari SF90 Stradale, for instance, are quite peculiar: a) two of the three electric engines mounted on the front wheels transforming the car into a 4WD at times, with obvious benefits on the acceleration (2.5 second from zero to 100Km/h) and road handling; b) every electric engine can also rotate at different speed. This phenomenon, known as torque vectoring, gives an un-parallel control during turns. In the sport motorbikes industry instead the main topic of discussion between pro-electric and against, is weights distribution. The expected reduction in batteries weight may help to sort out this issue and, in our view, incumbent players will enter the sector too but at a later stage;
The development of alternative fuels like Bio-methane and hydrogen are underestimated in public debates, in our view. On top of the fact
that diesel technological development may be such that its emissions could be massively reduced, we point out how there are other very promising alternative fuels (gas in the short term and hydrogen in the long run ), which are extremely relevant if we move from looking at cars to trucks, tractors and 2 wheelers.
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Figure 3 – Well-to-Whell (WTW) GHG emissions (CO2 g/km) Source: CNH Industrial (Thinkstep Study 2017 and JEC WTW study v4 2014)
We understand that gas is a viable solution in the short term for heavy trucks as their emissions are much lower than diesel, their costs are comparable, making the payback time reasonable. Additionally, we understand that the circulating park can be retro-fitted, thus reducing fleet operator’s costs. As far as tractors are concerned, farmers would have the advantage that gas could be produced from
manure, an energy source that can be defined “in-house” and at zero cost.
Considering that the gas propulsion technology is not very well developed in the US, this could be a massive technological advantage for European OEM players like CNH;
We don’t believe diesel is dead. Still today, despite the fall in sales,
diesel represents one third of new car sales in Europe (source: ACEA – January/May registrations). In fact, there are some reasons why we believe diesel will not die: a) Infrastructures are not yet ready for a massive growth in EVs; b) Diesel reduces the fleet overall emissions for car makers; c) Assets (plants, technologies/patents, etc) have yet a sizeable value in companies balance sheet and need time to be depreciated; d) Technologies evolutions (already under development at the time of the dieselgate) may further reduce diesel emission levels. Our conclusion is that diesel will not represent less than 20% of new car sales in the next 10/15 years. Still, it need (and will be) improved as a technology going forward.
Autonomous driving will bring a paradigm shift: from number of vehicles sold to number of kilometers travelled. Tech giants, thanks to
developments in AI and vehicles connectivity are trying to transform the automotive sector in favor of service/content provider rather than OEMs. The overall of cars sold should decline but their lifecycle should be shortened from around 7 years to less than half addressing the issue that cars are empty 96% of the time. This will also change the customer’s habits from a ownership model in favor of an user-ship one. While AD
doesn’t apply to 2 wheelers, strangely enough, trucks and tractors may
test this technology before cars. Trucks platooning reduces emissions and TCO and is supported by governments in Europe. Autonomous tractors will probably be the first ones to come to the market, as the low density of their operating environment reduces the associated risks.
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Sector like tractors protected from AD revolution, to a lesser extent
also trucks are. In terms of business model (and therefore investment strategies) trucks and tractors are a nice segment to be when looking at AD impacts: a) there are only few players worldwide (Deere and CNH with AGCO third, lagging well behind); b) customers are professional ones, strictly loyal to the brand they have been using for ages, difficult to imagine they would change for a product sold by a startup; c) highly capital intensive sector with limited visibility on returns due to point a) and b); The same is true for the trucks manufacturing sector although competition is wider and fleet/app operators may emerge on Light Commercial Vehicles operating in cities and over the last mile. Still truckmakers are much less exposed than carmakers to the future mobility revolution.
We selected a number of Italian stocks that will be impacted (positively or negatively) by at least one of the trends above: In
studying the above macro-trends we came across a number of industry players listed and non-listed which will be discussed in the report. On some of the listed ones we are initiating the coverage:
CNHI (NEUTRAL, TP EUR10.3): the company is in the position to benefit from the mobility of the future but the visibility on the AG cycle is very low. CNH has a stronghold in LNG/CNG engines while heavily involved in developing alternative fuels, autonomous driving and connectivity. The latter will increase the weight of services and
aftermarket revenues and this doesn’t seem to be included in
consensus figures (UBI est. 10% above). Furthermore, CNH endmarkets are more protected than cars from the entrance of tech giants and the company sell to professional operators which are mostly driven by Total Cost of Ownership and should accept price increases to satisfy their future mobility needs;
Ferrari (BUY, TP EUR163.0): we like the uniqueness of the brand that still has meaningful space for growth (0.05% penetration on the 18 million HNWI). This will be enhanced by the development of hybrids cars which, in our view, will be accretive to profitability margins. We believe this is not the consensus view which, in fact, is below our long term estimates. We also believe that, while meaningful revenues from the electrification will materialize only from 2021-22, the P&L is already taking the brunt of the associated costs. Therefore, once again, consensus is not appreciating the full effect on profitability of the price/mix increase of the past two years; Piaggio (BUY, TP EUR3.20): we like the wide portfolio of technologies that differentiate it from its peers and are significant advantage looking at the evolution that the mobility is having. Penetration of electric-2Wheels is lagging behind cars, in our view because there was no regulation push. In our view, we could be at
the beginning of a growth story: “range anxiety” is not an issue
when dealing with 2W drivers which, on average, run 15Km/day and micro-mobility trends are supportive too. The old circulating park (around 18 years old in Italy) coupled with incentives and traffic bans are behind the current replacement cycle. Piaggio top line growth in EU should compound with an under-utilized production base in Italy, a significant operating leverage and a fiscal advantage in growing its European sales/profits.
We are already covering two companies which are impacted by the advent of
electric cars: Agatos (BUY, TP EUR0.17) and Elettra Investimenti (BUY, TP
EUR15.20). Other listed companies mentioned include Askoll EVA, BMW, Energica Motor Company, FCA, Lion-E Mobility, Landi Renzo and Tesla.
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New Trends and Emerging Technologies
Mobility is going to change rapidly in the coming years as electric vehicles (EV) proliferate, ride sharing continues to grow, and eventually autonomous vehicles (AV) enter urban fleets. This is especially true in cities where new forms of mobility are concentrated and where investment in supporting infrastructure is needed to accommodate this growth. These changes coincide with the evolution towards cleaner, more decentralized and digitalized energy systems and services, and increasing electrification.
The mobility industry transformation doesn’t necessarily mean “shrinking”,
actually in this case is the opposite: according to several market researches, the overall size of the profit of the automotive industry should rise. But a large amount of business centered around ownership models will be transacted in the future through mobility providers (i.e. services) and it is not a given that current incumbents will be the winners:
Figure 4 – Automotive global profit pool 2015-2030 evolution
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2015: EUR332 billion
