Electric Vehicles Visit to China: Game on
Visit to China: Game on
We recently visited the electric vehicle (EV) supply chain and key influencers in Industry Report China. Among our observations was a significant change in the Chinese government’s EV policy since our last visit in October 2015. Last year, policymakers September 12, 2016 were focused on expanding the EV market through a wide range of incentives . Now, the government appears more focused on curbing th e overly generous
Mirae Asset Daewoo Co., Ltd. subsidy programs (which have led to oversupply concerns, similar to the solar power industry), emphasizing the need to create an environment where EV makers [Electric Vehicles ] are able to foster competitiveness on their own.
Yeon -ju Park The changes in policy will solidify the market dominance of leading players (e.g., +822 -768 -3061 [email protected] BYD) and encourage switching over to nickel-cobalt-manganese (NCM) lithium ion batteries for cost reduction. Major players, including BYD, are likely to deliver Young Ryu steady growth via cost reduction, while new entrants should struggle. +822 -768 -4138 [email protected] In the most recent round of certifications in June, Korean battery suppliers failed to
Jae -hwan Huh obtain certification in the country (making EVs using those companies’ batteries +822 -768 -3054 ineligible for subsidies). Views on this were mixed. On the on e hand, demand for [email protected] Korean batteries has been high due to their lower cost, and a number of Chinese
automakers that have already completed the development of new models using Yeon -hwan Choo Korean batteries may need to alter these models by installing other types of +822 -768 -3002 batteries—a process that could take about one year. On the other hand, if the [email protected] Chinese government continues to exclude LG Chem and Samsung SDI from its list Chul -joong Kim of approved battery suppliers (to avoid having foreign suppliers dominate the +822 -768 -4162 market), this may give Chin ese battery makers a chance to gear up their [email protected] competitiveness and enter the market over the medium term.
In -gu Lee Industry outlook and investment strategy Shanghai Office [email protected] Despite the government’s decision to reduce subsidies, we forecast the EV market to continue expanding thanks to technological advances and cost reductions driven by economies-of-scale effects. In the process, major players, such as BYD and Tesla, will likely maintain their competitiveness over peers.
Due to tight supply, we believe NCM suppliers will benefit fro m EV makers’ efforts to reduce battery costs. Although the cathode materials market was initially expected to experience oversupply due to the entry of Chinese makers, many Chinese makers have failed to produce high-quality NCM (i.e., NCM with high nickel content), benefitting Korean makers and some top-tier Chinese makers. Of note, cobalt prices are likely to climb on robust demand stemming from NCM.
We think there is still a technological gap between Korean and Chinese battery suppliers. As already evidenced by cathode materials, leaders tend to maintain their competitiveness over other players as technology develops. We believe Korean equipment makers, including P&T, will continue to benefit from Chinese battery manufacturers’ capacity expansion.
September 12, 2016 Electric Vehicles
C O N T E N T S
China trip takeaways 4 1. Game on 4 2. Meeting summaries 8
Industry outlook and investment strategies 16 1. EV and battery market outlook 16 2. Government focus on innovation and the EV market 20 3. Materials market outlook 28 4. Equipment market outlook 33 5. Charging market outlook 36 6. Global supply chain 42
LG Chem (051910 KS) 45 Samsung SDI (006400 KS) 48 Iljin Materials (020150 KS) 51 People & Technology (137400 KQ) 54
Mirae Asset Daewoo Research 2 September 12, 2016 Electric Vehicles
Table 1. Status of major players in the EV supply chain (Wbn, x, %) Company Ticker Mkt. cap P/E (17F) P/B (17F) Investment points and risks Tesla TSLA US 32,038 125.3 10.5 Likely to lead EV popularization with the launch of the Model 3 at end -2017; Boasts superior competitiveness in EV design and battery technology Risks: Concerns over the acquisition of SolarCity; Potential delay to Model 3 launch BYD 1211 HK 25,039 23.0 2.4 Highest global EV sales volume; Growth to continue via government support and vertical integration Risks: Slowdown in Chinese EV market growth; Fall in EV sales volume stemming from subsidy cuts Huayou Cobalt 603799 CH 3,133 110.5 7.2 EV battery-use cobalt producer; Cobalt demand to rise on a switch to NCM batteries Risks: Slowdown in Chinese EV market growth Beijing Easpring 300073 CH 1,808 68.1 7.3 EV battery -use c athode/anode materials producer ; To benefit from 1) a switch to NCM batteries and 2) rising lithium prices Risks: Slowdown in Chinese EV market growth ; Fall in EV sales volume stemming from subsidy cuts LG Chem 051910 KS 16,468 10.2 1.2 To benefit from EV market growth as a leading EV maker; Concerns related to t he firm appear to have been priced in, given the recent share price decline Risks: Short-term earnings could slow on won appreciation Samsung SDI 006400 KS 7,048 27.1 0.6 Global EV market to grow full-swing starting in 2017 Risks: Short -term earnings momentum to fall on Galaxy Note 7 battery recall and Chinese subsidy issues Iljin Materials 020150 KS 641 17.2 2.1 High competitive edge in the I2B (for rechargeable batteries) business ; Customer diversification is underway Risks: Galaxy Note 7 battery recall P&T 137400 KS 82 7.8 1.2 Rising revenue from local Chinese rechargeable battery producers; Cost reduction stemming from the internalization of equipment parts at the Xian factory Risks: Intense competition with Chinese makers; Delay to orders arising from changes in customers ’ capex plans Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 3 September 12, 2016 Electric Vehicles
China trip takeaways
1. Game on
Last week, we visited major companies in the Chinese EV supply chain in addition to government officials. Here, we highlight key takeaways.
First, we noted a significant change in the Chinese government’s EV policy since our last visit in October 2015. Last year, the Chinese government was focused on expanding the EV market through a wide range of subsidies. Now, government officials are pointing out the limits of the subsidies-oriented growth strategy. The change in the government’s stance appears to stem from the following: 1) EV subsidies are estimated to have increased to RMB50bn in 2015 (vs. the initial projection of RMB18bn); and 2) the EV market is seeing oversupply due to overly generous subsidy programs, as with the solar power industry.
Indeed, in early 2016 the government announced a plan to gradually reduce subsidies, and will likely release an additional subsidy reduction plan related to mini-buses in September. The government is also expected to announce the results of its investigation into subsidy fraud this month.
These policy changes underscore the government’s commitment to making Chinese EV makers competitive even in the absence of subsidy programs. Policymakers with whom we met during our trip emphasized that it is important to create a competitive environment where EV makers are able to foster competitiveness on their own, by improving battery performance and expanding charging infrastructure rather than relying on subsidies.
We project Chinese EV sales volume to increase sharply in 4Q. Although Chinese EV sales volume climbed YoY in 1H16, growth slowed from 2H15 due to the government’s delayed subsidy payments (pending the results of the fraud investigation), dampening EV makers’ sales campaigns. However, once the results of the investigation are announced and uncertainties dissipate, EV sales volume is likely to expand markedly, as consumers are likely to rush to purchase EVs before the 20% cut in subsidies (for pure EVs) scheduled for 2017.
Figure 1. EV sales trend in China Figure 2. Chinese EV subsidy plan (based on battery-only EVs)
(units) (2016=100) 120,000 EV (commercial) 100 EV (bus) 100,000 EV (passenger) 80 PHEV (bus) 80,000 PHEV (passenger) 60 60,000 40 40,000
20 20,000
0 0 1/15 4/15 7/15 10/15 1/16 4/16 2016 2017-2018 2019-2020
Source: Industry data, Mirae Asset Daewoo Research Source: Press release, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 4 September 12, 2016 Electric Vehicles
In the medium to long term, the policy changes will likely create an environment where EV makers are able to foster competitiveness on their own, thus 1) solidifying the market dominance of leading players (e.g., BYD) and 2) accelerating the adoption of high- performance cathode materials, including NCM.
Starting in 2017, the Chinese government is set to cut EV subsidies by 20% for pure EVs and 10% for plug-in hybrid electric vehicles (PHEVs). Given that subsidies currently account for 40% of EV sales prices, the subsidy cut will likely lead to an 8% rise in EV prices. As such, EV makers will need to lower their production costs by more than 8% to overcome the impact of the subsidy cut and increase sales volume. We believe cutting costs is more challenging for second-tier makers than for top-tier makers, including BYD.
BYD plans to lower production costs by 10% each year through 2020. For the BYD Song, a plug-in hybrid compact SUV to be released in 1H17, total production cost is estimated at RMB200,000-210,000 (vs. the sales price of RMB250,000) —including RMB20,000-30,000 for a 15kWh battery and RMB40,000 for the motors and control unit.
Battery costs are estimated at US$150-200/kWh. BYD plans to switch from LFP to NCM lithium ion batteries starting in 1H17 and lower battery costs to the US$100/kWh level by increasing the nickel content in NCM by 2020. In addition, the company aims to cut motor costs in half by 2020. Although it is still difficult to achieve economies of scale in the EV market, BYD expects motor prices to fall sharply once the EV market expands. Of note, Shenzhen Inovance Technology, a Chinese motor controller maker, displays an OP margin of around 30% due to a high barrier to entry (arising from robust technology requirements).
Table 2. Cost breakdown of BYD Song (PHEV compact SUV) (RMB) Cost/Price
Battery 25,000 Motor 20,000 Control unit 20,000 Other 140,000 Total cost 205,000 Selling price 250,000 Margin 45,000 Subsidy 50,000 Consumer price 200,000 Source: BYD
Figure 4. Shenzhen Inovance Technology ’s revenue and OP Figure 3. Energy density comparison by cathode margin
(Wh/Kg) (RMBmn) (%) 300 6,000 Revenue (L) OP margin (R) 27
250 5,000 26 200 4,000
150 3,000 25
100 2,000 24 50 1,000
0 0 23 NMC 111 NMC 622 NMC 811 LFP NCA 2013 2014 2015 2016F 2017F 2018F
Source: SNE Research and Bernstein analysis Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 5 September 12, 2016 Electric Vehicles
We believe other automakers are unable to achieve cost reductions as fast as BYD.
During our business trip, we visited JAC Motors. The Chinese automaker, which mainly produces low-end SUVs, sold around 8,000 units combined of the iEV4 and iEV5—low-end pure EV models with cylinder-type batteries—in 1H16. The company initially planned to launch the iEV6S adopting Samsung SDI’s batteries in September, but the launch has been delayed due to the recent battery certification issue.
Most automakers, including JAC, cannot cut costs as sharply as BYD due to their cost structures. Above all, they cannot control costs in the event of a rise in lithium prices and tight motor supply, as they procure core parts, including batteries and motors, outside.
Furthermore, the recent battery certification issue (i.e., Korean battery makers’ failure to obtain certification, making EVs using those companies’ batteries ineligible for subsidies) has been making it more difficult for most automakers (aside from BYD) to expand their presence in the Chinese EV market, as illustrated by JAC’s forced postponement of the launch of the iEV6S. JAC decided to adopt Samsung SDI’s batteries for the new model, rather than the locally produced batteries used in the iEV4 and iEV5, as Korean products display higher performance at lower prices than Chinese products. With local batteries, JAC is unlikely to compete with top-tier makers. As such, the Chinese government’s new EV policy will likely bolster the competitiveness of top-tier makers, including BYD.
With regard to cathode materials, we expect the shift to NCM to pick up speed, leading to a rise in cobalt prices. Once full-scale competition arises in the EV market, battery performance and cost-cutting ability will likely constitute core competitive advantages. And considering that LFP lithium ion batteries have only limited room for cost reduction, the switch to NCM batteries should accelerate.
In the Chinese cathode materials market, high-quality NCM (i.e., NCM with high nickel content) is in short supply. Although the cathode materials market was initially expected to experience oversupply due to the entry of Chinese makers, many Chinese makers have failed to produce high-quality NCM, benefitting Korean makers and some top-tier Chinese makers. Of note, cobalt prices are likely to climb on robust demand stemming from NCM.
Figure 5. Sales trends of major EV models in 1H16
(units) 20,000
15,000
10,000
5,000
0 BYD e6 BYD BYD Qin BYD Kandi EV Kandi BYD Tang BYD JAC i EV 4/5 EV i JAC BAIC E-Series BAIC Roewe SAIC 550 PHEV/e550 550
Source: Industry data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 6 September 12, 2016 Electric Vehicles
During our business trip, we wished to confirm whether the Chinese government has changed its policy on Korean battery makers. However, views on this were mixed. The fifth round of certifications, expected to happen in September-October, deserves attention.
However, we believe the need for Korean batteries is high from an economic standpoint.
If the technological gap between Korean and Chinese batteries were narrow, Korean battery makers would not receive a valuation premium regardless of the Chinese government’s policy. However, even for the technologically standardized cylinder-type batteries, Korean products are, as we confirmed in our meeting with JAC officials, far superior—cheaper and with longer ranges. We think the gap is even wider with polymer batteries. An industry watcher even informed us that Korean battery makers offered to supply their products at half the price of Chinese products in 2015.
Most Chinese battery producers use LFP for pouch-type and prismatic batteries. For example, EVE Energy, which mainly produces cylinder-type batteries, uses only LFP for prismatic battery production. Among Chinese battery producers, CATL is currently the only maker that is ready to start production of NCM lithium ion batteries, based on its experience producing small-sized polymer batteries. It would take at least several months for even top- tier battery producers such as CATL to stabilize the production of NCM lithium ion batteries, and another several months for the batteries to be adopted by major EV makers.
We think the recent development in the cathode materials market deserves attention. Market watchers initially expected competition to intensify in the market due to the entry of Chinese players. However, although the need for NCM with high nickel content has increased in line with technological advances, Chinese cathode materials makers have failed to meet this demand, benefitting Korean makers. We believe top-tier makers remain dominant thanks to the steady advancement of NCM technology. The gap between top- and second-tier battery producers will also likely remain intact as NCM lithium ion battery technology progresses.
Most Chinese automakers, which advanced into the EV market later than BYD, need Korean batteries due to their solid performance and lower prices. For example, SAIC Motor, which has adopted LG Chem’s batteries, planned to launch a new model in September, but it has been delayed due to the battery certification issue. If SAIC uses batteries produced by a local Chinese maker, the automaker will have to settle for lower performance and higher prices and spend a year adjusting the new EV model. During that year, competitors would roll out new models with better performance. To ensure economic viability without subsidy programs, high-quality batteries are all the more important for Chinese EV makers.
However, if the government were to change course and grant certification to Korean battery makers, it could face resistance from the industry and the public. The adoption of Korean batteries in new Chinese EV models would make it difficult for Chinese battery makers to carve out a place in the market, as it would be hard for an EV maker to shift to a new battery during a model’s life cycle.
Accordingly, the government should decide whether to 1) earn time for local players to further enhance competitiveness, even if that means accepting somewhat slower EV market growth in the short term, or 2) induce competition by partially opening the market to Korean players. Although it is not clear which course the government will take, Korean battery markers are unlikely to be excluded entirely from the market over the medium term. In our view, Korean battery makers’ entry into China will materialize in the near future.
Mirae Asset Daewoo Research 7 September 12, 2016 Electric Vehicles
2. Meeting summaries
¢ Research Department of Industrial Economics under the National Development and Reform Commission (NDRC)'s Academy of Macroeconomic Research
Q. What efforts is the Chinese government making to support innovative industries?
A. The government has released various measures to support and improve the competitiveness of the innovative industries. Indeed, China's 13 th five-year plan places significant emphasis on innovation. However, the impact of the efforts has not been significant due to the country’s slowing economic growth. Currently, China is providing unsparing support to R&D and strategic industries, with the main provider of support steadily shifting from the government to the market.
Q. What is the outlook for the new energy vehicle industry?
A. China plans to have 5mn EVs on the roads by 2020. However, the number of EVs is growing at a slower-than-expected pace, which is largely attributable to battery range limitations and a shortage of public charging stations. In an effort to increase EV adoption, the government continues to build charging stations in large cities and requires new public parking lots to have charging stations. In cooperation with internet firms, it also plans to provide services to help EV drivers easily find charging stations on their smartphones. Meanwhile, the government is maintaining that it will not extend EV subsidies beyond 2020. In Beijing, the central and municipal governments both provide subsidies to EV purchases (25% of the vehicle price each), along with exemptions on consumption tax and license plate fees. Public transport and services vehicles in the city are being steadily replaced with EVs.
Q. Is the government considering revising the current subsidy measures?
A. The government is now revising the subsidy scheme, which is currently based on the number of produced units reported by EV makers, due to widespread fraud.
Q. Does the Research Department of Industrial Economics forecast that a reduction in subsidies will depress EV sales?
A. A subsidy cut could bring down EV sales temporarily. However, the Chinese EV market will still likely remain on a growth trajectory, aided by 1) cheap electricity relative to oil, 2) the cap on internal combustion engine vehicle registrations, 3) the increase in charging stations, and 4) the expansion of purchases by the government and public offices. In particular, the government is now focusing on building more charging stations.
Q. What are other competitive EV makers in China in addition to BYD?
A. BYD, which started as a battery maker, began to develop EVs about five years ago. Recently, SAIC Motor and BAIC Motor have sharply improved their competitiveness. Several local automakers are also believed to be developing EVs.
Q. What do you think about regulations on Korean battery makers?
A. Government subsidies alone cannot drive the growth of the NEV market. If charging stations increase or batteries become compatible between different models, then EV market development should accelerate. In our view, convenience of use—not which countries batteries are made in—should be key to the growth of the EV market over the medium to long term. Accordingly, NDRC’s Research Department of Industrial Economics is making efforts to improve battery ranges and charging convenience. Although charging connectors could be standardized, standardizing batteries is likely to pose technical obstacles. In our view, the benefits currently given to new energy vehicles are excessive.
Mirae Asset Daewoo Research 8 September 12, 2016 Electric Vehicles
Q. How are overseas EV makers doing in China?
A. Most overseas EV markers except Tesla have entered the Chinese market by establishing JVs with domestic players. No subsidies are provided to Tesla vehicles for now.
Q. Will Tesla’s launch of the Model 3 intensify competition in the Chinese EV market?
A. The Model 3 is very attractively priced at US$35,000. If imported to China, however, the model should become more expensive due to taxes and the absence of subsidies. Only high income earners could afford the model, in our view.
Q. Is there any possibility that we could see oversupply in the EV market as we saw already in the solar PV market?
A. As sales are not strong enough for companies to recoup their investments, some EV markers could be forced out of the market sooner or later. We will reflect such a forecast when we draw up policies. Personally, I believe an industry developed based on subsidies should inevitably see an oversupply. Worse for EV makers than subsidy cuts would be a decision to reduce license plate quota-related benefits for new energy vehicles.
¢ Institute of Industrial Economics under Chinese Academy of Social Sciences
Q. What do you think about innovation-driven economic development?
A. The Chinese economy is now losing steam after expanding sharply for about 30 years. The economy staged an uptick in 2012, but the recovery was not sustained. The country’s long period of high economic growth was driven primarily by reallocation of resources from cities to rural areas. However, growth via reallocation of natural and human resources has limitations. Accordingly, the government is now putting greater focus on innovation in an effort to improve the efficiency of the economy from a medium- to long-term perspective.
Innovation-driven economic growth requires a continuing, long-term investment. While China in the past focused on boosting production volume it is now making heavy investments in human resources and technologies (about 2% of GDP). The government is also encouraging corporate investments by providing a wide range of benefits, including tax breaks. In addition to innovation, China also needs to make further investments in infrastructure as well as the areas of finance and intellectual property.
Q. What are the government’s plans for EV subsidies?
A. Although subsidies have some positive effects, they are generally detrimental to innovation, in our view. We believe that the current subsidy programs should be revised. The government should end subsidies once a recipient is deemed to be sufficiently competitive. In selecting subsidy recipients, the government is shifting its focus to technologies from companies. From a long-term perspective, demand and production costs, rather than government subsidies, should determine Chinese EV makers’ competitiveness.
Q. Can you describe any successful case of innovation-driven development in China?
A. Although China is lagging behind other countries in some areas like patent protection, it has huge potential to take the lead in new and emerging industries via preemptive investments. Every country has unique areas of strength. Having long served as OEMs for global firms, Chinese firms are now producing their own products by investing in R&D and benchmarking the advanced technologies of global players.
Mirae Asset Daewoo Research 9 September 12, 2016 Electric Vehicles
Q. What efforts is the government making to alleviate oversupply issues in some industries?
A. This year, the government is focusing on two industries, steel and coal, that it believes are unlikely to see sharp improvement in efficiency any longer. Although their productivity has already peaked, the industries will likely remain stable for a while backed by robust demand. However, the government is aggressively intervening to tackle oversupply issues, as higher excess capacity should accelerate price declines. The NDRC is controlling lending or reducing tax benefits to companies with outdated technologies or facilities. Some companies are consolidating through M&As. Only the companies that have succeeded in business diversification should survive the oversupply.
Q. What is the government’s stance on the rumored acquisition of a global semiconductor company?
A. Due to the asymmetrical development of traditional and high-tech industries, the government is paying greater attention to improving competitiveness in the areas of basic sciences and technologies. Indeed, the 13 th five-year plan is focused on nurturing such areas. The government is willing to support the acquisition of global players operating in traditional industries with strong brand power. As for an acquisition of a semiconductor firm, the government is not likely to give outright support. However, it could provide an indirect form of support, such as corporate loans.
¢ EV sector analyst at CITIC Securities Futures
Q. What impact will a subsidy cut have on EV sales?
A. Due to the subsidy fraud scandal last year, the government decided to cut subsidies and strengthen monitoring and control on the subsidy payment program. Stronger regulations and intensified supervision should be beneficial to competitive firms or large players. The Ministry of Industry and Information Technology previously estimated this year’s EV sales volume at 700,000 units. However, the target is unlikely to be met due to a delay in the introduction of new support measures. In light of sales volume in 1H, EV sales are projected at around 500,000 units (400,000 units of passenger vehicles; 100,000-200,000 units of commercial vehicles).
Q. Tell us about new support measures.
A. The results of the investigation into subsidy fraud, which are scheduled to be released in September, should have a significant impact on new measures. Subsidies to six- to eight- meter buses will likely be cut by 70% (vs. previous forecast of a 40% cut). If new measures are announced in September, EV sales should increase sharply. Currently, most firms are holding off on sales due to policy uncertainties.
Q. What is the outlook for EV sales?
A. We forecast about 800,000-1mn EVs will be sold in China in 2017, mostly passenger and commercial vehicles. Even if subsidies are reduced by 20% next year, production costs should also decrease at a similar pace. Thus, sale volume could increase further next year.
Q. In which areas can EV makers reduce production costs?
A. Battery prices are projected to decline 10-15%. Motor and controller prices could also fall once producers achieve economies of scale.
Q. Is the rise in lithium prices weighing on EV makers? What are the current battery prices?
A. Lithium prices had risen significantly, but they turned downward in June. Lithium accounts for just 4% of total battery production costs. Batteries are currently priced at RMB2,000/kWh and are expected to fall to RMB1,000 by 2020.
Mirae Asset Daewoo Research 10 September 12, 2016 Electric Vehicles
Q. Why are Korean battery makers banned from the Chinese market?
A. Both LG Chem and Samsung SDI established plants in China to produce batteries based on NCM. The government is believed to have decided that Korean firms could threaten Chinese players as they supply batteries at half the price of Chinese products.
Q. What parts are currently in a supply shortage?
A. Batteries, separators, and cathode materials for NCM batteries are in short supply.
Q. When will the results of the fifth round of certification be announced?
A. We expect to receive the results in 4Q16. In our view, the government’s decision to ban Korean batteries is based more on political considerations than on certification issues. As most of the EV subsidies are awarded to battery makers, the government likely wants to provide subsidies to domestic players.
Q. What are the competitive battery makers in China?
A. No company is able to compete with Korean firms in the medium- to large-sized battery segments. However, Chinese companies now can produce batteries that could at least meet the requirements of EV makers. In our view, CATL and BYD are competitive.
Q. How long will it take for an EV maker shift to other batteries?
A. If LG Chem wins certification, Chinese EV makers will likely immediately adopt the company’s batteries. Otherwise, it will likely take three to 12 months for an EV maker to shift to other batteries.
Q. Which players in the EV supply chain stand to benefit from the government’s policies?
A. The government’s policy direction should mostly benefit leading players. Commercial vehicles should enjoy greater benefits in the short term, while passenger cars should have advantages in the medium to long term. NCM battery and separator makers are attractive among parts and materials, respectively. We are not positive about cathode materials due to unfavorable price outlook and producers’ valuation burden.
¢ JAC Motors (Anhui Jianghuai Automobile: 600418 CH)
Q: What was behind the strong sales growth of new energy vehicles (e.g., EV, PHEV, HEV) in 1H?
A: We attribute the strong growth to a low base of comparison. While sales were small in 1H15, sales began to increase in May-June on the back of greater government subsidies. The company’s new energy vehicle sales reached roughly 10,000 units in 2015, and are expected to double this year. No detailed estimate for 2017 has come out yet.
Q: What enables your superior price competitiveness?
A: We initially targeted low-income consumers, significantly reducing costs by designing exteriors similar to existing models in the market.
Q: What is your sales forecast for the i EV6EV6EV6SEV6 S (slated to hit the market in September)?
A: Details regarding the launch of the iEV6S have yet to be determined. The government has so far not certified Samsung SDI as an approved battery supplier, and in light of the uncertainty, we have not yet committed to switching to a Chinese supplier. Except for the iEV6S, all of our models have relied on Chinese batteries. If Samsung SDI ultimately fails to obtain certification, we will have no choice but to turn to Tianjin Lishen Battery or Hefei Guoxuan High-Tech Power Energy. However, Samsung SDI products are superior to Chinese batteries in terms of range.
Mirae Asset Daewoo Research 11 September 12, 2016 Electric Vehicles
Q: How long will it take to switch battery suppliers if that proves necessary?
A: We are considering other local vendors, and our technology team is already engaged in testing. As our existing models use locally produced batteries, it would not take long to switch to non-Samsung batteries. However, we have yet to choose a vendor, and we are still holding out hope that Samsung SDI will receive approval. Samsung batteries are attractive in terms of price and range.
Q: What conditions must be met for your company to choose Samsung SDI batteries?
A: We intend to comply with the government’s policies.
Q: If government subsidies decrease by 20% in 2017, can sales growth be sustainable?
A: We believe the subsidy cuts will increase the cost burden, dampening sales.
Q: Are EVs profitable relative to currently available combustion engine vehicles?
A: Margins of EVs are better than those of combustion engine vehicles thanks to subsidies, although we cannot provide exact numbers. Among EV parts, battery costs are the highest.
Q: Can you discuss plans for future line operations in line with the proliferation of EVs?
A: We had been using existing lines to produce EVs, but have recently built separate EV- dedicated lines. If EVs begin to drive the car market, it will be difficult to use the same lines to produce both conventional and EV models. We aim to increase the mix of new energy vehicles to 30% by 2025. However, we admit that without government subsidies, EVs lack competitiveness relative to combustion engine vehicles due to low range and insufficient charging infrastructure. From a long-term perspective, competitiveness could improve through economies of scale and cost savings.
Q: What is the target range per full charge?
A: We are targeting improvement to 400km of range per charge (from 250km for the iEV5 and 300km for the iEV6S). We are also producing small electric trucks. Among subsidiaries, Anhui Ankai Automobile (000868 CH) is manufacturing only electric buses.
Q: What are plans for exports?
A: We have an overseas subsidiary. Also, we may rely on our export networks for combustion engine vehicles to sell EVs.
¢ EVE Energy
Q: Can you discuss your current capacity status and plans and your customer base?
A: Currently, our annual battery production capacity stands at 1GWh for NCM batteries (cylinder-type) and 0.8GWh for LFP batteries (prismatic). In 2H, we plan to ramp up capacity by 0.7GWh for LFP and 2.5GWh for NCM. Thus, by the end of the year, we expect to have capacity of 5GWh (3.5GWh NCM + 1.5GWh LFP). We supply LFP batteries to bus makers, while supplying NCM batteries to passenger car makers (e.g., Dongfeng Motor, Zotye Auto).
Q: Do you plan to shift toward prismatic NCM?
A: We are considering this and have already made related R&D efforts. In 2012, we supplied NCM batteries to bus makers. Currently, the government prohibits the use of NCM batteries in buses. As for passenger cars, the use of prismatic batteries poses technical challenges.
Q: What is the price per kWh?
A: We cannot say exactly. But in general, an LFP battery is 20% more expensive than an NCM battery. The NCM battery business is much more profitable. Currently, we are working to develop NCA batteries, as well.
Mirae Asset Daewoo Research 12 September 12, 2016 Electric Vehicles
Q: Can you discuss battery production costs?
A: Cathode materials take up the highest portion of overall costs (30-40%), followed by electrolytes and membranes/anode materials. Currently, elecfoil costs are soaring. Early this year, material costs soared, as supply was disrupted amid a surge in lithium prices. However, with material prices stabilizing, cathode material costs have been declining. Currently, our NCM batteries are based on a 6:2:2 combination (Ni:Co:Mn). We are heavily reliant on Beijing Easpring Material Technology for cathode materials.
Q: What are the margins of the rechargeable batteries unit?
A: We cannot specify margins at this point, as rechargeable batteries are still in the initial phase of production (we are steadily increasing capacity utilization), and key materials are changing.
Q: Where does capacity utilization stand?
A: Capacity utilization for primary cells is at more than 90%. Utilization of rechargeable batteries is around 7%, as they are in the initial stage of production. We are reliant for Korean companies for equipment.
Q: What is the earnings outlook?
A: We expect earnings to improve markedly in 2H compared to 1H, driven by: 1) strong sales of primary cells and electronic cigarette products, and 2) robust power battery sales. We aim to increase annual revenue from the current RMB2.3bn to RMB10bn in five years.
Q: What is your view on subsidy cuts and a potential supply glut?
A: If subsidies dissipate, growth will inevitably slow. However, over the medium to long term, subsidy cuts should be positive to the EV market. As we foresee a supply glut in the battery market, we will focus on premium products.
Q: What about market competition?
A: Because R&D efforts play a key role in boosting the EV battery business, battery makers are working to forge partnerships. Chinese makers are aspiring to match the advanced level of Korean technologies and making efforts to acquire Korean researchers. Among our 2,000-3,000 employees, 400-500 work in R&D.
Q: What is your view on the government’s decision to exclude Korean companies from the list of approved battery suppliers?
A: The fifth round of certifications should happen in September, and we believe Korean firms are qualified to obtain approval.
■ BYD (002594 SHE)
Q: What is your outlook on the EV market?
A: We are still optimistic about the Chinese EV market. In light of government subsidies, sales volume should expand in 4Q. The government has been investigating subsidy fraud alleged to have taken place in 2015, and once the investigation is completed in September, new policies are likely to come out. We expect some makers to face penalties or a reduction in subsidies. In particular, subsidies for 6-8 meter electric buses are likely to decrease.
Q: The government plans to cut subsidies by 20% in 2017. What will be the impact on EV sales?
A: Currently, subsidies account for 40% of overall sales prices. Next year’s cut (20%) is equivalent to roughly 8% of sales prices. That 8% could be offset by cost-saving efforts, meaning consumers would not feel a price difference. We are now capable of reducing costs through vertical integration, and we are able to achieve economies of scale more easily than competitors. If competitors quickly lose market share following the subsidy cut, they might
Mirae Asset Daewoo Research 13 September 12, 2016 Electric Vehicles
competitively cut sales prices.
Q: What is your outlook on the commercial EV car market?
A: The outlook for commercial EVs appears bright due to relatively cheap maintenance costs. Indeed, oil costs are higher than electricity costs. In addition, given the ubiquity of parking areas for official use, installing recharging systems is not a large obstacle. Furthermore, thanks to strong subsidies, commercial cars are priced similarly to combustion engine models.
Q: What is the outlook for flagship models?
A: The Tang and Qin have each sold around 17,000-18,000 units so far this year. We aim to generate respective sales of 100,000 units in 2017 (including sales of upgraded models). In 1H17, we plan to launch two major plug-in hybrid models: the Song, a compact SUV, and the Yuan, a sub-compact SUV. Assuming respective subsidies of RMB250,000 and RMB220,000, consumer prices are projected at RMB200,000 and RMB150,000. The Song (15kWh battery) and the Yuan (13kWh) can travel a distance of up to 80km in pure EV mode. Both models are likely to adopt NCM batteries. BYD plans to produce a model equipped with five motors enabling 0-100 km/h acceleration in just 3.9 seconds.
Q: What are the competitive advantages of BYD vehicles?
A: Our vehicles achieve 0-100 km/h acceleration in just 4.9 seconds. In addition, vertical integration of parts makes it possible to reduce production costs.
Q: Recent media reports featured the Denza 400, with an upgraded range of up to 400km on a single charge. Is this model based on an LFP battery?
A: Yes, the model is based on an LFP battery. There are two versions: One uses a 48kWh battery and can travel up to 300km on a single charge, while the other uses a 63KWh battery and can travel up to 400km on a single charge. Using an NCM battery could increase the range to 500km.
Q: Has the recent surge in material prices caused a cost burden?
A: Most material prices have surged since last year. Lithium prices have almost tripled. As for certain materials, their cost contribution rose from 2% to 6%. Luckily, prices have declined once again following capacity expansion. Still, with regard to cobalt, prices could once again rise if NCM battery consumption expands, given that capacity expansion seems unlikely.
Q: How significant are cathode materials in terms of production costs, and when does BYD plan to adopt NCM batteries?
A: LFP battery costs take up 30% of overall costs. We expect mass production of NCM batteries to begin next year. Currently, our in-house LFP production meets 50% of demand. Although we are trying to produce NCM batteries, we are likely to rely on outside supply for the time being due to technical challenges. Price per kWh of NCM batteries is likely to be similar to that of LFP batteries. For now, battery density is 130mAh/g for LFP and 160- 180mAh/g for NCM.
Q: Do you have strategies to cut costs?
A: We expect battery costs to decline by 10% annually due to capacity expansion and technological advances. Motor prices are likely to fall by 50% in five years due to economies of scale.
Q: When do you expect to government to announce the fifth round of certifications?
A: Some said it was supposed to happen in August. Nothing seems certain yet.
Q: If Korean battery makers remain excluded from the subsidy list, how long would it take for auto makers to alter new models to accommodate other batteries?
A: It would take one year due to the testing process.
Mirae Asset Daewoo Research 14 September 12, 2016 Electric Vehicles
Q: When do you expect battery prices to fall to RMB1,000/kWh?
A: Our battery is already priced around RMB1,000/kWh. Other Chinese makers could achieve this level in one to two years.
Q: Who are the competitive players?
A: For now, CATL and Hefei Guoxuan High-Tech Power Energy are capable of generating profits similar to ours. However, their LFP costs are estimated to be higher than RMB1,000.
Q: Why do some Chinese makers produce cylinder-type NCM batteries?
A: Cylinder-type batteries have very good performance. Meanwhile, prismatic batteries are advantageous due to their effective use of space.
Q: Do you have plans to ramp up battery capacity?
A: Capacity stands at 10GWh, and we plan to ramp that up to 13GWh by end-2016, to 20GWh in 2017, and to 40-50GWh in 2020. We are heavily reliant on Japanese firms for facility equipment. It would take around one year to build a new line. 2016F capex is RMB10bn, and we set aside a similar budget for 2017.
Q: Do you plan to supply batteries to other auto makers?
A: Yes, we may supply batteries if we have extra lines and if the auto makers in question operate on a fairly large scale.
Q: What is your export strategy?
A: We are currently concentrating on exports of buses and taxis, especially to the US and South Asia. We plan to export the Tang and Song models starting next year.
Q: Some are comparing BYD to Tesla. What do you think about that comparison?
A: We believe Tesla is superior in terms of power, speed, and design. However, Tesla models are not as affordable as ours.
Q: Volkswagen and other automakers are attempting to build their own battery facilities. What are your views on that?
A: Battery costs take up 40% of EV production costs. We expect an increasing number of auto makers to attempt to produce batteries in-house. We also heard that SAIC Motor is planning in-house battery production.
Mirae Asset Daewoo Research 15 September 12, 2016 Electric Vehicles
Industry outlook and investment strategies
1. EV and battery market outlook
The global EV industry has entered a rapid growth phase, aided by the successful launch of Tesla’s Model S in 2012 and the growth of the Chinese EV market that started in 2014. In 2017, we do not expect China’s EV demand to grow as robustly as it did in 2015-16, as EV subsidies will be phased out beginning next year. Nevertheless, overall market growth should continue on the back of: 1) advancing battery technology, 2) cost savings (resulting from economies of scale), 3) new model releases, and 4) expanding charging infrastructure. In the near term, commercial EVs such as electric trucks will likely drive volume growth.
Over the medium term, the Chinese government is anticipated to continue to support EV market expansion. Amid the country’s struggles with slowing economic growth and environmental pollution, the EV market not only helps to ease environmental concerns, but also offers an opportunity for market dominance early on (as the industry has yet to be controlled by any developed market players). The size of subsidies should decrease over time, but investments in infrastructure (charging stations) and R&D will continue.
The recent rise in lithium prices has, to some extent, dimmed the prospect of steady battery price declines. However, our recent visit to BYD confirmed multiple cost saving possibilities along the EV value chain. For instance, switching to NCM materials and steadily increasing the nickel content will lead to a significant reduction in battery unit price. Moreover, lithium prices have started to fall recently after surging in 1H. Given its production cycle of around 1.5 years, we expect prices to stabilize starting from 2018. And the production costs of core battery parts (such as separators) are anticipated to fall steadily on the back of capacity ramp-ups in China, and R&D expenses will also decline as EVs become more popularized.
As for motors/controllers, the high margins in the supply chain give room for price cuts over the medium term. Shenzhen Inovance Technology’s OP margin is close to a whopping 30%, thanks to its exclusive supply to Yutong Bus. High OP margins are common in the initial stage of industry growth, and will gradually come down over the medium term as more players enter into competition.
In the US and Europe, we think that Tesla’s Model 3 (to be released at end-2017) will mark an inflection point. Tesla’s most affordable car yet, the Model 3 achieves 300km of range per charge while starting at only US$35,000. (Pre-orders stand at 400,000.) A successful launch of the Model 3 will indicate that EVs are moving from a niche market to the mainstream, and will entice more auto manufacturers to join the market.
Figure 6. EV sales forecast by region Figure 7. Energy density comparison by cathode
('000units) (Wh/Kg) 300 2,500 US Europe China 250 2,000 Other 200 1,500 150 1,000 100
500 50
0 0 2014 2015 2016F 2017F 2018F NMC 111 NMC 622 NMC 811 LFP NCA
Source: Industry data, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 16 September 12, 2016 Electric Vehicles
As the EV market gradually expands, first movers such as BYD and Tesla are anticipated to stay ahead of rivals.
In China, the shift in the government’s stance toward subsidizing EV growth (to wean automakers off subsidies and enhance competitiveness) should benefit BYD, as the firm already holds competitiveness. In Europe and the US, Tesla is well positioned to fully utilize the growth of EV demand, because it is solely focused on EVs (unlike most automakers, for which EVs will cannibalize gasoline car sales and leave existing production lines useless).
Another key difference that will set winners and losers apart will be the basic concept of an EV. Existing auto giants such as GM failed to gain a foothold in EVs with their first generation vehicles, which used existing combustion engines upgraded with batteries. Tesla, meanwhile, created a completely new concept with its Model S through innovative, visionary design and functions. The 2G EVs of existing auto nameplates and Tesla’s Model 3 continue to reflect this difference in conceptual approach.
BYD and Tesla each gained market share in 1H16 with eye-grabbing new models (the Tang and the Model 3, respectively), while existing automakers continued to struggle in the EV segment.
Figure 8. Market share of Tesla and BYD Figure 9. BYD Tang
(%) 40 Tesla BYD
30
20
10
0 2015 1H16
Source: Industry data, Mirae Asset Daewoo Research Source: Google
Figure 10. GM Bolt Figure 11. Tesla Model 3
Source: Google Source: Google
Mirae Asset Daewoo Research 17 September 12, 2016 Electric Vehicles
The global battery market is projected to expand sharply along with EV demand, from 41GW in 2016 to 355GW in 2020. China’s commercial EV demand is likely to power battery market growth in the near term, and after the launch of the Model 3 (around 2017-18), medium- and large-sized EVs are projected to drive battery use.
Looking ahead, we expect battery prices to continue to slide, with Korean battery firms (first movers) maintaining technological competitiveness over their Chinese counterparts. The technological barrier to entry is not high in this segment, but more R&D is needed to increase nickel content. As such, Korean battery makers, equipped with strong know-how and expertise, should perform better than late entrants for the foreseeable future.
Aggressive capacity expansions for cathode materials in China were widely expected to cause oversupply. However, the supply of NCM materials has tightened recently, as Chinese cathode material makers failed to meet quality standards in their efforts to increase nickel content.
Market competition is set to intensify over the medium term as a growing number of Chinese firms enter the EV battery market after technology standardization. Nevertheless, as in any other market, manufacturers will eventually find an appropriate level of margins as the battery market alternates between oversupply and shortages.
Table 3. Major Korean and Chinese EV battery makers (GWh) Battery maker Major customers Capacity (2016F) Battery type Cathode LG Chem GM, VW, Major Chinese makers 8.0 Pouch NMC Samsung SDI BMW, VW, Major Chinese makers 8.0 Prismatic NMC BYD BYD 13.0 Prismatic LFP/LMFP/NMC CATL Yutong, BMW, FAW 4.0 Prismatic LFP/NMC Lishen Tianjin Bus, Dongfeng Yangtze River Group, Kandi 4.0 Prismatic LFP Guoxuan High Tech Nanjing King Long, JAC, Ankai, Sunwin 3.5 Prismatic LFP/LMFP/NMC OptimumNano Wuzhoulong, King Long, Haima 1.3 Cylindrical LFP Wanxiang Kandi, Zoyte, Wanxiang 1.0 Pouch LFP CALB Yutong, DFM, Changan Ford, Chery NA Prismatic LFP Tianneng Kandi, Zoyte, Geely, BAIC 2.3 Cylindrical NMC Chaowei Zoyte 0.2 Prismatic LFP Boston Power Skywell, BAIC, Dongfeng 1.9 Cylindrical NMC/NCA Source: Industry data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 18 September 12, 2016 Electric Vehicles
Table 4. Global EV market forecast 2014 2015 2016F 2017F 2018F 2019F 2020F 2025F Region USA ‘000 16,124 16,446 16,775 17,111 17,453 17,802 18,158 20,048 Europe ‘000 14,194 14,478 14,767 15,063 15,364 15,671 15,985 17,648 China ‘000 23,442 25,083 26,839 28,717 30,728 32,879 35,180 49,342 Other ‘000 32,236 33,203 34,199 35,225 36,282 37,370 38,491 44,622 Total ‘000 85,996 89,210 92,581 96,116 99,827 103,722 107,815 131,661 M/S USA % 0.7% 0.8% 1.2% 1.5% 3.0% 4.0% 5.0% 8.0% Europe % 0.6% 0.7% 1.0% 1.2% 3.0% 4.0% 5.0% 6.0% China % 0.3% 0.8% 1.3% 1.8% 2.5% 3.0% 5.0% 10.0% Other % 0.0% 0.2% 0.3% 0.5% 1.0% 2.0% 3.0% 4.0% Total % 0.3% 0.6% 0.9% 1.2% 2.1% 3.0% 4.3% 7.1% Passenger EV sales USA ‘000 120 132 201 257 524 712 908 1,604 vehicles Europe ‘000 90 101 148 181 461 627 799 1,059 China ‘000 70 201 349 517 768 986 1,759 4,934 Other ‘000 3 66 103 176 363 747 1,155 1,785 Total ‘000 283 500 800 1,130 2,116 3,073 4,621 9,382 Battery capacity kWh/unit 20.0 20.0 20.0 30.0 40.0 50.0 60.0 70.0 Battery market USA MWh 2,394 2,631 4,026 7,700 20,944 35,604 54,475 112,270 volume (capacity) Europe MWh 1,800 2,027 2,953 5,423 18,437 31,343 47,954 74,124 China MWh 1,400 4,013 6,978 15,507 30,728 49,318 105,540 345,394 Other MWh 66 1,328 2,052 5,284 14,513 37,370 69,285 124,942 Total MWh 5,660 10,000 16,010 33,914 84,621 153,635 277,254 656,729 China Bus Total bus sales ‘000 190 200 209 220 231 242 255 267 Penetration % 10% 30% 35% 40% 45% 45% 45% 45% EV bus sales ‘000 19 60 73 88 104 109 115 120 Other commercial Total market ‘000 3,000 3,150 3,308 3,473 3,647 3,829 4,020 4,221 Penetration % 3% 4% 5% 6% 7% 8% 10%
Chinese EV commercial ‘000 95 132 174 219 268 322 422 commercial Low speed EV ‘000 200 400 600 800 1,000 1,200 1,500 2,000
vehicles Bus kWh 100 120 140 160 180 200 200 200 Battery capacity Other commercial kWh 15 20 22 24 26 28 30 50 per vehicle Low speed EV kWh 15 18 20 22 24 26 30 40 Battery demand Bus MWh 1,900 7,182 10,264 14,077 18,707 21,824 22,916 24,061 Other commercial MWh - 1,890 2,911 4,167 5,689 7,505 9,649 21,107 Low speed EV MWh 3,000 7,200 12,000 17,600 24,000 31,200 45,000 80,000 Total MWh 4,900 16,272 25,175 35,844 48,395 60,529 77,564 125,168 USA MWh 2,394 2,631 4,026 7,700 20,944 35,604 54,475 112,270 Europe MWh 1,800 2,027 2,953 5,423 18,437 31,343 47,954 74,124 China Total battery (passenger + MWh 6,300 20,285 32,153 51,352 79,123 109,847 183,105 470,561 demand commercial ) Other MWh 66 1,328 2,052 5,284 14,513 37,370 69,285 124,942 Global total MWh 10,560 26,272 41,184 69,758 133,016 214,164 354,818 781,897 Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 19 September 12, 2016 Electric Vehicles
2. Government focus on innovation and the EV market
1) Chinese government prioritizes innovation
Our recent meetings with researchers at China’s economic research institutions confirmed for us that the government’s top priority has changed once again, to innovation. Previously, the government emphasized the transition to a “new normal” of slower growth based on services and consumption—rather than manufacturing and investment—as the economy’s high-growth era came to an end.
Now, the government is taking one step further. As the country braces for an “L-shaped” economic trend, officials seem to view innovation (e.g., source technology) as the key to future survival and the sole driver of growth.
All of the researchers with whom we met acknowledged that China’s capital-intensive growth model had hit a limit and that government stimulus was no longer as effective as before (a shift from the views of government officials we met with in the past who were optimistic about both government control and policy effects).
Proof of the government’s focus on innovation is easily found: the new business creation/innovation agenda released in March 2015; the China Manufacturing 2025 strategy announced in August 2015; and the innovation-driven development strategies presented in June 2016, which have the aim of making China a global science technology leader.
This shift in priority may mean that the government will now lean less on monetary policy than on occasional boosting measures to revitalize the economy, and government support, for the most part, will be channeled into improving corporate efficiency and innovation.
Figure 12. Chinese government has shifted its focus to innovation
Sluggish global Increasing Limitation of trade labor cost existing policies
Innovation as growth driver
Supply-side Fostering Infra reform new industry investment Subsidies Government Support development of Relieve corporate finance new tech debt
Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 20 September 12, 2016 Electric Vehicles
2) Countering China’s copycat image
We also see changes in China’s investments. Previously, investments were mostly made to expand production capacity. Now, technology/human resource development attracts the greatest share of investments. And the private sector is emerging as a major investor (in addition to the government) as free market principles increasingly take hold.
Such changes in the nature of investments are most obvious in Shenzhen (or, the changes may be limited to Shenzhen). First of all, we saw strong support for start-ups. According to Shenzhen Daily , the government has granted RMB500,000 (W85mn) in subsidies to start-ups possessing original, innovative technologies.
Shenzhen’s start-up support is unique in two ways: 1) even companies established by foreign nationals can receive the grant, and 2) support for firms with original (rather than imitative) technology has been strengthened. These incentives have encouraged some joint ventures (between Chinese and foreign capital) to relocate from Silicon Valley to Shenzhen. And the support for original technology is part of the local government’s efforts to fight China’s copycat image.
According to China Quality Daily , 113 start-ups in Fujian have received grants from the Shenzhen government, with 19 of them in the form of bank loans, 16 in intellectual property financing, two in technology support, four in e-commerce platforms, five in office rental expenses, and 67 in prize money for intellectual property or technology.
Interestingly, the municipal government is also looking for ways to attract talented engineers who have won science and technology awards or studied abroad. This shows that the city is trying to do more than just hand out subsidies to foster technology.
At the national policy level, the Chinese government has also been beefing up efforts to support technology advancement. At a meeting of the Central Leading Group for Deepening Overall Reform on August 30 th , Chinese President Xi Jinping called for structural reform aimed at technology development. As part of such efforts, the government is considering raising the pay of science majors, according to the China Daily.
Such steps indicate that government support for innovation is becoming more sophisticated and confirm the government’s strong commitment to technology development.
Figure 13 . Start -up Cypheme moved to Shenzhen from Silicon Figure 14. Support programs in Shenzhen Valley
Support programs for starts-ups in Shenzhen
EC platform / Rents for Technology offices support
Intellectual Intellectual property / property / Techonology Rewards for financing technology
Subsidy for loan amortization
Source: Shenzhen Daily, Mirae Asset Daewoo Research Source: Shenzhen Daily, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 21 September 12, 2016 Electric Vehicles
Figure 15. R&D expenditure to increase in China Figure 16. Share of high technology investment is around 20%
(RMBtr) (% of GDP) (%, average R&D expenditure growth for last 3 years) 1.6 China R&D expenditure (L) 2.5 30 Share of R&D expenditure in GDP (R) 25 1.4 2.0 20 1.2 15
1.0 1.5 10 0.8 5 0 C o m p u t e r Aircraft & spacecraft M a n u f a c t u r i n g High technology 0.6 1.0 E&T equipment Medical equipment pharmaceutical C h in a G D P -5 Medical & 0.4 0.5 0.2
0.0 0.0 00 02 04 06 08 10 12 14 16 Source: CEIC, Mirae Asset Daewoo Research Source: CEIC, Mirae Asset Daewoo Research
3) Supply-side reform and the growth of emerging industries
We believe China is taking a two-pronged approach to promoting innovation: 1) supply-side reform and 2) the promotion of emerging industries.
Broadly speaking, supply-side reform can be viewed as efforts to “upgrade” the manufacturing industry. This involves restructuring oversupplied industries, deleveraging the corporate sector, reducing housing inventory, and saving costs.
China’s restructuring is widely perceived as the forcing out of uncompetitive companies and removal of production capacity. But the NDRC and Chinese Academy of Social Sciences (CASS) officials with whom we met argued that what the government was seeking was a more fundamental change. Rather than simply shutting down capacity, they said the government is focused on improving the underlying strength of companies so that they can quickly respond to changing demand.
To be sure, Chinese officials acknowledged that restructuring was going to be a slow process, given the impact on unemployment and resistance from local governments. However, they noted that, while the number of bankruptcies over the past couple of years has been insignificant, many companies have undergone substantial changes (such as facility closures).
Interestingly, NDRC officials suggested that, while the next year or so will be a challenging time for the economy due to restructuring, things could start to improve in 2018-19, around the start of President Xi’s second term. Overall, it seems likely that China’s restructuring will take place slowly but last for at least the next two to three years.
Figure 17. Mining, metal, chemicals, and machinery investments are decreasing
(%,YoY) 2016 40 3-year average Manufacturing Tertiary industry
20 Mining
0
-20
-40 A uto C o a l I r o n o r e N o n m e t a l l i cF o o d s B e v e r a g e s T o b a c c o L e a t h e r F u r n i t u r e P a p e r P r i n t C u l t u r e C h e m i c a l s PharmaceuticalChemical fiber N o n m e t a l l i c Nonferrous metalS y n m e t a l Special machinery Electronic equipment Electricity, gas T r a n s p o r t a t i o nIT W a te r Recreation, sportsIn f r a A p p a r e l G a s m i n i n g T e x t i l e Petroleum chemicals Rubber, plastic S t e e l General machinery P C c o m m u n i c a t i o n Electric power H e a lth
Source: CEIC, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 22 September 12, 2016 Electric Vehicles
4) Strategic importance of China’s EV industry
Another important component of China’s innovation policy is the promotion of emerging industries. Since the financial crisis, Beijing has unveiled plans to foster emerging industries almost every year.
One interesting point is how important the new energy vehicle (NEV) industry is to the Chinese government. China, which is eager to shed its cheap, knock-off image, believes local firms have little competitiveness in the conventional car industry not only because of their lack of technology, but also because of the huge gap in brand recognition with foreign carmakers.
On the other hand, the government seems to view green cars as a potential area of strength for Chinese companies. NEVs are not only critical to solving China’s environmental problems, but can also have positive spillover effects on related industries, such as auto parts and materials. More importantly, green cars are likely to quickly catch on with Chinese consumers once the necessary infrastructure (e.g., recharging stations) is in place.
China has already surpassed the US as the world’s largest auto market, but Chinese companies only account for about 40% of the local market. Green cars are a different story. Local companies, including BYD, hold a sizeable share in the Chinese EV market. For Beijing, the EV market is a challenge worth taking on in terms of size and technology. In this sense, the EV/green car industry will provide a good gauge of how well China’s innovation policies are working.
Fortunately, government efforts have started to bear fruit from 2015. So far, there are only 500,000-600,000 NEVs on the roads in China, far below the government’s target of 5mn vehicles by 2020. However, sales of NEVs increased dramatically in 2015, exceeding that of the US based on units.
The government appears determined to make China into a global leader in the green car market. China’s Premier Li Keqiang has also commented on the strategic importance of the EV industry.
At present, it seems unlikely China will meet the government’s 2020 target of 5mn EVs. The NDRC views 2-3mn as a more realistic number, which still represents an impressive 37% CAGR over the next four years. While China’s EV market is unlikely to repeat the above-300% growth rate seen in 2014-15, we expect growth to continue at a CAGR of 20-30% in the coming years.
Figure 18 . China auto sales exceeded those of the US after Figure 19. Profit margin of Chinese corporates decreased financial crisis
(monthly sales) (Profit margin, %) 40 3,000 US auto sales US World China China auto sales 2,500 30
2,000
1,500 20
1,000 10 500
0 0 02 04 06 08 10 12 14 16 Pharmaceutical Semicon Communication equipment Auto
Source: CEIC, Mirae Asset Daewoo Research Source: McKinsey Global Institute, June 2016, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 23 September 12, 2016 Electric Vehicles
Figure 20 . Reasons cited by Chinese consumers for not buying Figure 21. New energy vehicle sales in China and the US EVs
(%, reasons cited) (annual sales) 350,000 China new energy vehicle sales Low recharging speed US new energy vehicle sales 300,000
250,000 Mechanical failure 200,000
150,000 High price 100,000
Lack of recharging stations 50,000
0 0 5 10 15 20 25 30 35 11 12 13 14 15 16
Source: McKinsey 2016 China Auto Consumer Survey, Mirae Asset Daewoo Source: CEIC, Insideevs.com, Mirae Asset Daewoo Research Research
5) Policy focus shifting from expansion to competition
It is also important to note that changes are starting to take place in China’s NEV policies.
Over the years, China has handed out large subsidies to support the NEV industry. For EVs, subsidies are provided by both the central government and local governments. According to China’s State Council, the central government spent RMB28.4bn on green car subsidies from 2013 to 2015, while local governments shelled out RMB20bn during that period.
In addition to consumers, China also provides subsidies to companies. This has given rise to problems such as fraud and overcapacity, with companies falsifying their sales to qualify for the subsidies or slacking in technology development after becoming reliant on the funds. The government began to recognize the side effects in late 2015 and launched a probe into subsidy fraud this May. In September-October, the government will release a list of companies that have abused the subsidy funds.
It is widely known that China intends to phase out EV subsidies from 2017 to 2020. Further motivated by the recent subsidy scandal, the government has begun to shift the focus of its green car policy. Looking ahead, the emphasis will likely be on encouraging competition.
In June, China’s Ministry of Finance and Ministry of Industry and Information Technology announced plans to raise the threshold for NEV subsidies. Since introducing its subsidy program in 2010, China has applied fairly loose criteria to ensure wider access. It looks likely China will introduce stricter criteria for subsidies and issue fewer production permits. For example, the NDRC has said it plans to cut back the number of NEV manufacturers in China to around 10 from more than 220 currently. In other words, a wave of restructuring is beginning to spread across the NEV industry.
Indeed, the definition of NEVs was revised in a policy statement released on August 12 th . In China, companies need to obtain approval in order to produce NEVs. Previously, companies capable of developing one of the three main systems—auto control, power, and driving— were allowed to gain a license. Now, companies must meet all three system requirements, and licenses must be reexamined within two years of issuance.
Clearly, the shift in NEV policy is aimed at promoting self-sufficient growth, encouraging competition, and reducing subsidies in order to identify competitive companies and eliminate those taking advantage of subsidies.
Mirae Asset Daewoo Research 24 September 12, 2016 Electric Vehicles
This does not necessarily mean the government is outright reducing subsidies. According to the CASS, industry subsidies, which used to be doled out to companies, are now going to technology and production facilities. This is likely to benefit large, leading EV makers that either have strong technology or the financial resources to invest in technology.
Figure 23 . New energy vehicle industry to undergo Figure 22. EV subsidies reached RMB48bn in 2014-5 restructuring
(RMBbn, 2014-15) (no.) 1200 250
1000 200
800 150 600 100 400
200 50
0 Science & technology Environmental EV subsidies 0 protection No. of companies related to new energy vehicles NDRC target
Source: CEIC, Mirae Asset Daewoo Research Source: NDRC, Mirae Asset Daewoo Research
6) Growth should nevertheless continue
As China’s policy changes, the pace of NEV sales is likely to slow gradually, as the government played an important role in the sharp rise in EV sales last year.
In addition to subsidies, NEV sales were fueled by strong demand for government vehicles and commercial vehicles (e.g., large buses and sanitation trucks), as well as license plate benefits. In other words, the government was a major driver behind the surge in demand.
But even if subsidy policies are overhauled, we believe the green car market will continue to grow for the following three reasons.
First, near-term uncertainties surrounding subsidy policies have eased. Subsidy rules are due to be revised in September-October. Once they are confirmed, the market should gain more clarity on product prices. Furthermore, with subsidies set to be reduced further in 2017, demand is likely to accelerate in 4Q16.
Figure 24. Growth in new energy vehicle sales has been especially pronounced in 4Q
('000 units, quarterly sales) 250 2013 2014 2015 2016
200
150
100
50
0 1Q 2Q 3Q 4Q
Source: CEIC, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 25 September 12, 2016 Electric Vehicles
Second, industry technology is becoming more advanced. Thanks to technology innovation, the price and performance of EVs are fast approaching mass market appeal in both the US and China. For instance, Tesla’s Model 3 will cost US$35,000 and have a range of 200 miles per charge. This represents a major breakthrough in price, given that the average price of a car in the US is US$33,000.
Prices are falling and performance is improving mainly because technology competition is getting fierce. Aside from Tesla, Chevrolet plans to release its Bolt EV, which will have a price tag of US$37,500 and range of 200 miles, as early as the end of this year.
In China, government subsidies have pushed NEV sales higher. In metropolitan cities, license plate rationing also encourages consumers to opt for NEVs, as they provide a higher chance of getting a license plate (for conventional car drivers, there is only a 1/700 chance).
Nevertheless, BYD is unlikely to be affected much by the government’s subsidy cuts or reduced support. BYD states that around 40% of the NEV price is subsidized by the government, and subsidy dependence would fall by 8% per year if subsidies are cut by 20% a year until 2020. This means that NEV manufacturers have to cut costs by 8% every year.
BYD has already been reducing costs by more than 8% each year through technology development (in batteries, etc.). EVE Battery, a Chinese battery maker we visited recently, also seemed confident that it would be able to advance technology and cut costs through massive capacity ramp-ups planned in 2H16.
As EV subsidies decrease, major EV makers are anticipated to invest more in technology development. And the nature of subsidies will also change: the government will increasingly reward technology advances and innovation rather than grant subsidies to manufacturers. We think that the shift in government support will favor top-tiers and firms focused on R&D.
In China, NEVs are still unaffordable without subsidies, but prices are falling steadily. A person on BYD’s IR team we met with recently estimated the timing of EVs becoming price- competitive without subsidies at around 2020.
Figure 26 . BYD ’s battery price expected to continue Figure 25. Battery prices falling by an average 10% annually decreasing until 2020
(US$/kWh) (RMB/kWh) 300 Battery price of Tesla 2500 Battery price of BYD
250 -21% decrease over 2 years 2000 -12.5% annual decrease 200 1500 150 1000 100
500 50
0 0 2014 Present Present 2020(E)
Source: Clean Technica, Mirae Asset Daewoo Research Source: BYD, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 26 September 12, 2016 Electric Vehicles
Third, China’s environmental regulations are expected to tighten starting next year, driving NEV demand.
Subsidy cuts, which are already known to be coming, are unlikely to deal a heavy blow to the industry, as subsidies will be phased out over several years. In fact, the NDRC researcher with whom we met said that if the government were to reduce license plate quota-related benefits for NEVs, it would be worse for EV makers than subsidy cuts.
Looking ahead, the government is anticipated to continue to implement environmental regulations, including road space rationing in metropolitan cities (driving restrictions based on the last digits of the license number on certain days), and congestion charges.
In 2017, China will launch a national cap-and-trade scheme to cut carbon emissions. In 2011, an emissions trading system was introduced as a pilot project in two provinces (Guangdong and Hubei) and five cities (Beijing, Tianjin, Shanghai, Chongqing, and Shenzhen). Under the new national program, companies are given a right to emit a certain amount of a given pollutant, and if they can cut emissions beyond what is expected, they can sell the excess allocation. The system will cover major carbon polluters such as petrochemical, construction materials, cement, steel, non-ferrous metal, paper-making, power generation, airline, and transport companies. We think that this carbon trading system will help boost NEV demand.
At the 2016 G20 meeting held in Hangzhou, China, US President Obama and Chinese Premier Xi Jinping, despite clear differences in political matters, agreed to formally join the Paris Agreement to combat climate change, significantly increasing the likelihood that the accord will take effect this year.
Figure 27 . Annual number of internal combustion engine car Figure 28. Chronic Chinese air pollution registrations granted in Beijing has been decreasing
(10,000 permits) (mcg/m3) Beijing/Tianjin/Hefei monthly average concentration of fine dust 20 Internal combustion engine cars 160 74 Chinese cities average concentration of fine dust New energy vehicles 140
15 120
100
10 80
60 Poor 5 40 Average 20
0 0 2014 2015 2016 13 14 15 16
Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
Admittedly, last year’s robust EV market growth in China was driven in large part by subsidies. Subsidies will be phased out gradually, but we think EV sales will continue to expand as EV technology advances.
Technological advances will require more investments, and thus even top-tier firms may experience cash shortages for the time being. Market conditions should eventually favor leading players, but within the value chain, we think parts materials makers will benefit the most, followed by parts makers and then finished car makers.
As the Chinese government has decided to reduce subsidies and induce competition in innovative industries such as EVs, uncompetitive NEV firms are likely to be driven out of the market within the next three to four years. (Indiscriminate subsidies for solar PV companies in the past failed to boost the industry’s competitiveness.) Already, the market landscape is being transformed, with competitive, large-sized players gaining further ground.
Mirae Asset Daewoo Research 27 September 12, 2016 Electric Vehicles
3. Materials market outlook
1) Materials makers perform better than expected
In our report published on October 26 th , 2015 ( China trip takeaways: The battle has already begun ), we stated that growing EV demand would have only a limited impact on materials makers, on the grounds that: 1) prices needed to come down for demand to start to pick up full swing, and downward pricing pressure would be the heaviest on materials makers, as materials make up 70% of rechargeable battery production costs.
2) The fact that Chinese materials makers were rapidly catching up with Korean and Japanese companies did not bode well, either. While Korean and Japanese firms continued to hold competitive edges in products subjected to stringent quality requirements, Chinese rivals were widely anticipated to overtake them soon on the back of swift investment decisions and domestic market growth. 3) Furthermore, Korean battery manufacturers were increasingly relying on Chinese materials to secure cost competitiveness.
Over the past year, however, we saw notable earnings improvements at materials makers. For some materials, tight supply certainly helped. Cathode materials (which account for the largest share in production costs) benefited from slower-than-expected technology development in China, which was, in part, attributable to the failure of small companies to obtain core raw materials as lithium prices jumped three-fold.
Figure 29. Price change of major LIB raw materials (-1Y)
(%) 200 Price change (-1Y) 163.6 160
120
80 64.6
40 10.2 2.5 0 -0.9 -2.7 -10.7 -40 Lithium Carbonate- Manganese Nickel Aluminum Cobalt Copper graphite
Source: KORES, KITA, Mirae Asset Daewoo Research
Figure 30. Battery cost structure Figure 31. Material cost breakdown
1%
9%
10% Material costs 31% 32% Cathodes Depreciation Anodes
11% R&D Separators SG&A Electrolytes 69% Other Other 11% 13% 13%
Source: Mirae Asset Daewoo Research Source: CEMC, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 28 September 12, 2016 Electric Vehicles
2) Raw materials: Note lithium and cobalt
Lithium demand has surged on the high demand for rechargeable batteries. In 2015, the Chinese EV market delivered higher-than-expected growth. As such, lithium prices have tripled since 2H15. At BYD, the proportion of lithium in total battery production costs has climbed from 2% to 6%.
The rise in lithium prices has drawn attention to raw materials, particularly lithium and cobalt. According to CRU, the high demand for lithium and cobalt is most related to battery market growth. Lithium prices have been stabilizing recently, while cobalt prices have been gradually rising. We expect demand for cobalt to continue to climb thanks to a shift from LFP to NCM at Chinese battery producers.
Lithium: In 2015, global lithium demand stood at 171,050 tonnes, of which 57,000 tonnes were used for the production of lithium ion batteries. Typically, a smartphone battery requires 5-7g of lithium, while 0.9kg lithium is required for a 1kWh EV battery. Lithium demand will likely continue to increase on the expansion of battery factories and the EV market. The global lithium market is dominated by Talison, SQM, FMC, and Albemarle, which have a combined market share of 80%.
The lithium market is unlikely to again see the current acute supply shortage, as most raw material producers have recognized the battery market’s high growth potential. Indeed, lithium prices have been stabilizing gradually recently thanks to supply growth arising from capacity ramps-up that Chinese makers began in 2015. We expect the lithium market to stabilize further in 2018, backed by new projects and the entry of new players.
Cobalt: Of global cobalt production, 50% is used for batteries. Thus, cobalt prices are significantly affected by battery market growth. As of 2015, Congo and China accounted for 64% of global cobalt mine production and 52% of global refined cobalt supply, respectively. Of note, China Molybdenum announced in May that its wholly-owned subsidiary CMOC has entered into a definitive agreement with Freeport to acquire a 56% stake in the Tenke mine, which has the world’s highest copper and cobalt reserves, in Congo. According to CRU, China will likely control 62% of the global cobalt market due to the acquisition of Tenke by China Molybdenum. Going forward, Chinese cobalt-related firms will likely benefit from their dominant position.
Nickel/manganese: We believe the impact of battery market growth on nickel and manganese prices will be limited. Of manganese output, 80% is used for steel production, while only 1.5-2% is used for batteries. Most nickel output is used for stainless steel production, while a mere 5% is used for batteries.
Figure 32. Proportion of additional demand growth driven by batteries
http://www.crugroup.com/about-cru/cruinsight/Cobalt_and_Lithium_the_winners_in_battery_demand
Source: CRU
Mirae Asset Daewoo Research 29 September 12, 2016 Electric Vehicles
Figure 33. NCM proportion in the Chinese market Figure 34. Lithium supply market share in 2015
(GWh) 12 LMO LCO NCM LFP
0.7 6% 7% Talison 3.32 8 9% SQM 0.85 40% ALB
FMC 2.95 3.05 China 4 17% Other 2.1 3.58 21% 1.35 0 2014 2015
Source: Research in China Source: Roskill, USGS
Figure 35. Lithium demand comparison (2009 vs. 2015) Figure 36. Cobalt market share by demand
2016 Other 2009
Aluminum production 20% A/C & casting Batteries Superalloys Pharmaceuticals & polymers 9% 45% Hard materials
Lubricants Catalysts 10% Other Ceramics & glass 16% Batteries
0 10 20 30 40
Source: USGS, Mirae Asset Daewoo Research Source: USGS
Figure 37. Mined cobalt market share by region Figure 38. Refined cobalt market share by region
12%
3% Congo 3% 21% Russia China 4% Cuba Finland Philippines 5% Canada 4% Australia 52% Australia 5% 5% Madagascar Japan 5% 64% 6% Canada Other Other 11%
Source: Darton Commodities, USGS Source: Darton Commodities, USGS
Mirae Asset Daewoo Research 30 September 12, 2016 Electric Vehicles
With raw material prices strong, concerns are mounting over battery prices. However, we think the impact of raw material costs on battery prices will be limited and battery prices will steadily fall.
Lithium, cobalt, and manganese are used mainly for cathode materials. Although lithium is also used for electrolytes, its major application is the production of cathode materials. Lithium requirement is estimated at 395-435g/kWh. For cobalt, Tesla uses 15-16kg for an 80kWh battery. Based on spot prices, a 10% rise/fall in raw material prices would lead to a mere 1.5% rise/fall in battery prices. The use of spot prices is inappropriate in this estimation, as battery producers and materials makers have long-term raw material supply contracts and benefit from large-volume purchases. Even so, the impact of raw material prices on battery prices will be limited unless raw material prices surge.
Table 5. LIB raw material price per kWh kg/kWh US$/kg US$/kWh Lithium 0.4 17.4 9.0 Cobalt 0.3 27.5 10.7 Nickel 0.5 9.8 6.4 Manganese 0.3 1.8 0.7 Source: Argonne National Laboratory, press release, Mirae Asset Daewoo Research
We believe instead that battery prices are likely to fall going forward, as: 1) a switch to production of a limited number of items in large quantities should lead to cost reduction; 2) the amount of raw materials used to produce one kWh is likely to decrease on technological advances (for example, NCM lithium ion batteries have higher energy density than LFP lithium ion batteries); and 3) steady capacity ramps-up should lower prices. Japanese materials makers, including Sumitomo, Toray Industries, and Showa Denko, as well as Chinese makers, are expanding their capacities rapidly.
Table 6. Average cell cost forecast of NCM (533) battery (US$/kWh) 2016F 2017F 2018F 2019F 2020F
Material cost 138.0 126.8 117.2 109.5 102.9 Cathode 44.2 43.4 42.4 41.8 41.3 Lithium 9.0 8.6 8.2 8.2 8.2 Cobalt 10.7 11.3 11.5 11.7 12.0 Nickel 6.4 6.4 6.4 6.4 6.4 Manganese 0.7 0.7 0.7 0.7 0.7 Other 17.3 16.4 15.6 14.8 14.1 Anode 17.9 17.4 16.9 16.4 15.9 Electrolyte 15.2 14.4 13.7 13.0 12.4 Separator 17.9 17.4 16.9 16.4 15.9 Other 42.8 34.2 27.4 21.9 17.5 Depreciation 22.0 20.2 18.6 17.1 15.8 R&D 20.0 18.0 16.2 14.6 13.1 SG&A 18.0 17.5 16.9 16.4 15.9 Other 2.0 1.8 1.6 1.5 1.3 Total 200.0 184.3 170.6 159.1 149.1 Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 31 September 12, 2016 Electric Vehicles
3) Competitive firms will survive
Competitive materials makers have delivered notable earnings improvements since 1H16. Of note, high-quality cathode materials are currently in the limelight, as Chinese battery producers are rapidly switching from LFP to NCM. Although Chinese materials makers have already started producing NCM, their product quality appears lower than those of Korean and Japanese products. In addition, small materials makers have had difficulty sourcing raw materials due to the surge in lithium prices, leaving the market with only competitive makers. Even if new players enter the market, top-tier Korean makers, such as L&F (066970 KQ) and Ecopro (086520 KQ), will likely fare well in light of first-mover advantages and a long test period.
Safety is a much more important issue for automotive batteries than for consumer electronic batteries. While every battery part impacts safety either directly or indirectly, parts such as insulations, separators, and elecfoils are especially critical, which is why Japanese- or Korean-made ones are generally preferred over their cheaper Chinese counterparts. In particular, elecfoils (I2B) used in EV batteries are more complicated to produce than other commoditized parts, as each client has different requirements in terms of size, shape, and thickness. In Korea, LS Mtron and Iljin Materials (020150 KS) are the two leading elecfoil manufacturers. For mid/large-sized I2B, it takes time for a company to become a registered supplier because of safety issues. We thus think Iljin Materials will continue to benefit from the expansion of the mid/large-sized battery market.
Figure 39. Easpring’s revenue and OP margin Figure 40. L&F’s revenue and OP margin
(RMBmn) (%) (Wbn) (%) 350 Revenue (L) 20 80 Revenue (L) 12 OP margin (R) OP margin (R) 9 280 10 60 6 210 0 40 3 140 -10 0 20 70 -20 -3
0 -30 0 -6 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16
Source: Bloomberg, Mirae Asset Daewoo Research Source: WiseFn, Mirae Asset Daewoo Research
Figure 41. Ecopro’s revenue and OP margin Figure 42. Iljin Materials’ revenue and OP margin
(Wbn) (%) (Wbn) (%) 50 Revenue (L) 20 150 Revenue (L) 10 OP margin (R) OP margin (R) 15 40 120 5 10
30 90 0 5
0 20 60 -5
-5 10 30 -10 -10
0 -15 0 -15 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q13 1Q14 1Q15 1Q16
Source: WiseFn, Mirae Asset Daewoo Research Source: WiseFn, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 32 September 12, 2016 Electric Vehicles
4. Equipment market outlook
1) China’s massive spending to drive equipment bull cycle
According to SNE Research data, depreciation accounts for 10.3% of the manufacturing cost of battery cells. Excluding expenses related to buildings and other structures, actual depreciation is around 76%. Based on this data, our analysis shows that facility depreciation represents 7.9% of battery cell costs.
As previously disclosed by GM, the cost of Chevrolet Bolt’s battery cell supplied by LG Chem is US$145/kWh, which translates to a facility depreciation of US$11.5/kWh. Given that LG Chem’s depreciation is spread over six years (for the battery business), we estimate it costs around US$69mn (US$11.5 * 6 * 1mn) to build a 1GWh battery production line. While our figure is based on the pouch-type NCM EV cells produced by LG Chem, we think the capex estimates of a 1GWh battery line are not much different for other types of batteries (prismatic or cylindrical) or manufacturers.
Based on the above input, we see the global rechargeable battery equipment market expanding from US$1bn in 2015 to US$2.1bn in 2016 and US$4.4bn in 2017. These forecasts reflect our projection that global EV battery demand will increase rapidly from 41GWh in 2016 to 70GWh in 2017 and 133GWh in 2018. We believe China will be the main driver, with demand growing from 32.1GWh in 2016 to 51.4GWh in 2017 and 79.1GWh in 2018.
After equipment orders are placed, the entire process of delivery, installation, and testing typically takes around six to nine months for mixing equipment and three to four months for assembly and activation equipment. Further taking into account the time needed to prepare for mass production, we believe it takes at least one year for new capacity to be completed. Fueled by the explosive growth of China’s EV market, major Chinese battery firms (e.g., BYD and EVE Energy) and domestic firms (LG Chem and Samsung SDI) have invested heavily in new production lines for mid/large-sized batteries since 2H14, benefiting many battery equipment makers.
Similar to the semiconductor/display equipment markets, the rechargeable battery equipment market is led by Japanese suppliers, but Korean and Chinese firms are quickly catching up. As the industry shifts away from small-sized batteries for IT devices (smartphones, laptops, etc.) towards mid/large-sized batteries for EVs and ESS, we expect related equipment suppliers to experience rapid growth.
Table 7. LIB cost breakdown Cost estimates per 1kWh (2016F)
‘L’ company pouch EV cell (US$/kWh) Proportion (%) Cathode + other (incl. Al foil) 39.4 25.8 Anode + other (incl. Cu foil 12.1 8.3 Separator 18.8 12.9 Electrolyte 11.7 8.1 Lead tab and Al pouch 3.8 2.6 Total material cost 85.8 59.1 Depreciation 14.9 10.3 Labor cost 9.0 6.2 Other 12.4 8.5 R&D 7.7 5.3 SG&A 10.2 7.0 Fixed cost 54.2
Profit 5.2 3.6 Cost 145.2 100.0 Source: SNE Research, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 33 September 12, 2016 Electric Vehicles
Figure 43. LIB equipment market forecast
(US$mn) 10,000 Charge/discharge testing equipment Cell assembly equipment Slitter 8,000 Roll press Coater Mixing equipment 6,000
4,000
2,000
0 2015 2016F 2017F 2018F 2019F
Source: Mirae Asset Daewoo Research
Figure 44. Battery cost estimates (pouch EV cell) Figure 45. Battery depreciation cost breakdown
Mixing Profit equipment SG&A 4% 3% 7% Other Cathodes & R&D 24% other 5% (aluminum foil) 26% Other Charge/ 9% discharge Coater testing 42% Labor costs equipment 6% Anodes & other 2% (copper Foil) Depreciation 9% 10% Cell assembly Lead tabs & equipment Separators aluminum 26% Roll press Electrolytes 13% Slitter 1% pouches 2% 3% 8%
Source: SNE Research, Mirae Asset Daewoo Research Source: SNE Research, Mirae Asset Daewoo Research
Table 8. LIB equipment companies by process Companies
Yunsung F&C, Jeil Machine, Shinil Mixer Mill’s, Dongil Machinery Mixing Asada, Plimix, Chynamix, Beijing Sevenstar
P&T, CIS, A-Pro, Coater Toray Engineering, Hirano Tecseed, Yinghe Technology, Areconn, Beijing Sevenstar
Electrode equipment P&T, CIS, Narae Nanotech, Hankook Master Roll press Toray Engineering, Ono Roll Press, Xingtai Naknor, Beijing Sevenstar
P&T, CIS, Narae Nanotech, Hankook Master Slitter Toray Engineering, Nishimura, Beijing Sevenstar, Wuhan Swift Horse
Vacuum dryer Korea Vacuum Tech, Korea Vacuum Limited
Assembly equipment DA Tech, CKD, Wuxi Lead Auto Equipment
Formation equipment PNE Solution, Samji Electronics, Toyo System
Source: SNE Research, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 34 September 12, 2016 Electric Vehicles
2) Overall earnings to improve
Thanks to the large investments of rechargeable battery suppliers, Japanese, Korean, and Chinese equipment makers’ revenues have been on an upward trend. Major Japanese producers Toray Engineering and Hirano Tecseed have turned around, while Korean suppliers have also seen their revenue increase.
In particular, Chinese equipment firms have been growing at a rapid pace. Shenzhen Yinghe Technology, which supplies mixing process equipment (coaters, etc.), expanded its revenue by 62% YoY from RMB220mn in 2014 to RMB360mn in 2015. In 2016, the company’s revenue is expected to skyrocket 107% YoY to RMB750mn. Wuxi Lead Auto Equipment, an assembly equipment manufacturer, saw its revenue jump 74% YoY from RMB300mn in 2014 to RMB530mn in 2015. This year, the company’s revenue is forecast to soar 89% YoY to RMB1bn.
With Chinese battery makers expected to continue massive capacity ramp-ups, China is likely to become a key market for many equipment suppliers. We believe battery makers with scale (like BYD) are mainly using Japanese equipment, while cost-sensitive, second-tier battery makers are relying on Chinese equipment, which is more cost competitive.
Korean equipment suppliers have become technologically as competitive as their Japanese rivals on the back of their experience supplying to LG Chem and Samsung SDI. They have been seeing rising orders thanks to their growing profile in China. While competition with Japanese and Chinese rivals is intensifying, we are bullish on Korean rechargeable battery equipment suppliers and their earnings, given China’s surging demand.
Figure 46. Share performances of global LIB equipment companies
(1/1/15=100) 1,500 Hirano Tecseed Shenzhen Yinghe Technology Wuxi Lead Intelligent Equipment 1,200 PNT DA Tech 900 PNE Solution
600
300
0 1/15 4/15 7/15 10/15 1/16 4/16 7/16
Source: Bloomberg, Mirae Asset Daewoo Research Figure 47 . Revenue of Korea n LIB Figure 48 . Revenue of Japanese LIB Figure 49 . Revenue of Chinese LIB equipment companies equipment companies equipment companies
(Wbn) (JPYbn) (RMBmn) 200 PNE Solution 120 Hirano Tecseed 3,000 Wuxi Lead Intelligent Equipment DA Tech Toray Engineering Shenzhen Yinghe Technology 2,500 160 PNT 100
80 2,000 120
60 1,500 80 40 1,000
40 20 500
0 0 0 08 09 10 11 12 13 14 15 08 09 10 11 12 13 14 15 11 12 13 14 15 16F 17F
Source: Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 35 September 12, 2016 Electric Vehicles
5. Charging market outlook
1) Charging stations: A major prerequisite for EV mass adoption
In its 13 th five-year plan, China set a goal of putting 5mn NEVs on the road by 2020. To meet this target, the government is expected to ramp up subsidies for new energy vehicles. According to one government report, the central government plans to increase its subsidies at a five-year CAGR (2015-2020) of 57.8% and spend around RMB79bn in 2020 alone. (Local governments generally offer matching subsidies.)
However, direct cash subsidies have recently come under fire, as they have been widely accused of benefiting only certain companies or industries and being abused by unqualified companies. In response, China has said it will gradually cut back its direct subsidies.
Furthermore, China has come to the realization that establishing the necessary infrastructure is more important in encouraging Chinese consumers to buy EVs. In the government’s guidelines on the construction of EV charging infrastructure (2015-2020), charging stations were cited as one of the most important considerations for Chinese consumers in purchasing EVs, while an iResearch survey showed that the lack of charging infrastructure was one of the biggest reasons consumers were hesitant to switch to EVs.
Figure 50. Chinese subsidy plan for new energy vehicles
(RMBbn) 90 Vans Passenger vehicles Buses Commercial vehicles 80 790
70 CAGR: 57.8% 21.8 60
50 454 427 40 301 16.8 17.2 30 49.7 216 13.2 20 127 11 22.1 24.9 10 7.4 14.7 9.2 4.6 0 2015 2016 2017 2018 2019 2020
Source: Ministry of Finance of the People’s Republic of China, Ministry of Science and Technology of the People’s Republic of China , MIIT, NDRC, Mirae Asset Daewoo
Figure 51. Chinese consumers’ main considerations in purchasing EVs
Government policy Resale value 5% 7%
Driving performance 7%
Safety Battery life 9% 36%
Charging infrastructure 15% Range 21%
Source: NEA, Mirae Asset Daewoo
Mirae Asset Daewoo Research 36 September 12, 2016 Electric Vehicles
2) Charging infrastructure investment plans: 12,100 stations and 4.8mn charging poles by 2020
Chinese sales of NEVs exceeded 330,000 units in 2015. Relative to the strong sales, the country’s charging infrastructure still appears insufficient. As of end-2015, there were just 3,600 EV charging stations and 49,000 charging poles. In 2015, the ratio of EVs to chargers was 9.12:1; over the long term, the Chinese government needs to quickly expand charging infrastructure (dropping the ratio to 1:1) so as to ensure comfortable use of EVs.
Since last year, the Chinese government has released several plans and guidelines for charging infrastructure investments. The most noteworthy was “Guideline on EV Charging Infrastructure Development (2015-2020),” published on October 9 th of last year.
This guideline elaborated plans to enhance EV charging infrastructure to facilitate the new energy vehicle market (projected to reach 5mn units by 2020). By 2020, China aims to establish 12,100 charging stations and 4.8mn charging poles (including 7,400 stations and 2.5mn power poles in fast-growing areas; 4,300 stations and 2.2mn power poles in pilot expansion areas; and 400 stations and 100,000 power poles in promotion areas). In short, China plans to increase stations and charging poles by 3.4x and 10x over the next five years. In 2015, the numbers of stations and charging poles were 3,600 and 49,000 on a cumulative basis.
While charging poles are to be for passenger cars, China plans to build 3,850 charging stations for public buses, 2,500 for electric taxis, and 2,450 for cleaning/delivery vehicles.
Figure 52. EV charging stations and EV chargers in China
(units) (units) 4,000 Charging stations (L) 80,000 3,600 Chargers (R) 3,500 70,000
3,000 60,000
2,500 50,000
2,000 40,000
1,500 30,000
1,000 800 20,000 641 432 500 310 10,000
0 0 2011 2012 2013 2014 2015
Source: SAC, Mirae Asset Daewoo
Table 9. EV charging infrastructure plans (2020F) EV sales Charging infrastructure
(‘000 units) Stations (units) Chargers (‘000 units) Total 5,000 12,100 4,800 Fast-growing areas 2,660 7,400 2,500 By region Pilot expansion areas 2,230 4,300 2,200 Promotion areas 110 400 100 Total 5,000 12,100 4,800 Public transportation 200 3,850 By vehicle type EV taxi 300 2,500 500 Garbage collection/logistics 200 2,450 Official/private 4,300 *3,300 4,300 Source: NEA, Mirae Asset Daewoo
Mirae Asset Daewoo Research 37 September 12, 2016 Electric Vehicles
3) New investment market worth RMB150bn and related government policies
According to the “2016 guideline on energy business” released by the National Energy Administration (NEA), the Chinese government will expand EV charging infrastructure this year, spending RMB30bn to build 2,000 charging stations, 100,000 public chargers, and 860,000 individual chargers.
In addition, under the NEA’s guideline, China will need to establish 12,000 stations and 4.5mn chargers by 2020. Assuming that installing a charger and a station costs RMB20,000 and RMB3mn, respectively, the charging infrastructure market should expand by RMB124bn over the next six years.
Assuming the government spends RMB30bn each year through 2020 (the amount the NEA set aside for the 2016 budget), the resulting market would be RMB150bn. Or, assuming 12,100 stations and 4.8mn chargers are built, as outlined in “Guideline on EV Charging Infrastructure Development (2015-2020)”, the market would be RMB132bn.
Along with promoting EV sales, the government will subsidize charging infrastructure expansion. The central government is providing subsidies to regional governments that build cost-heavy stations. For instance, Beijing, which is classified as an air pollution control city, is to receive RMB90mn in charging station subsidies from the central government if newly registered EVs exceed 30,000 units in 2016. After that, every increase of 2,500 units would lead to RMB7.5mn in subsidies. The ceiling on subsidies is RMB120mn.
Still, there is no clear guideline on regional governments’ subsidy policies. In addition, subsidies differ by region. Beijing, Shanghai, and Xi'an provide their own subsidies (aside from the central government’s), whereas most cities are reliant on the central government’s subsidies.
Table 10. Subsidy plan for EV charging stations (2016-20)
EV sales growth Subsidy Region Year Additional subsidy assumption for (RMBmn) subsidy (units ) For each further sales increase of 2,500 units, subsidy of 2016 30,000 90 RMB7.5mn is paid (max RMB 12 0mn) For each further sales increase of 3,000 units, subsidy of Air 2017 35,000 95 RMB8.0mn is paid (max RMB140mn) pollution For each further sales increase of 4,000 units, subsidy of control 2018 43,000 104 RMB9.5mn is paid (max RMB160mn) cities For each further sales increase of 5,000 units, subsidy of 2019 55,000 115 RMB10.0mn is paid (max RMB180mn) For each further sales increase of 6,000 units, subsidy of 2020 70,000 126 RMB11.0mn is paid (max RMB200mn) For each further sales increase of 1,500 units, subsidy of 2016 18,000 54 RMB4.5mn is paid (max RMB120mn) For each further sales increase of 2,000 units, subsidy of 2017 22,000 60 RMB5.5mn is paid (max RMB140mn) Central For each further sales increase of 2,500 units, subsidy of region 2018 28,000 67 RMB6.0mn is paid (max RMB160mn) and Fujian For each further sales increase of 3,500 units, subsidy of 2019 38,000 80 RMB7.0mn is paid (max RMB180mn) For each further sales increase of 4,500 units, subsidy of 2020 50,000 90 RMB8.0mn is paid (max RMB200mn) For each further sales increase of 800 units, subsidy of 2016 10,000 30 RMB2.4mn is paid (max RMB120mn) For each further sales increase of 1,000 units, subsidy of 2017 12,000 33 RMB2.8mn is paid (max RMB140mn) Other For each further sales increase of 1,200 units, subsidy of 2018 15,000 36 cities RMB3.0mn is paid (max RMB160mn) For each further sales increase of 1,500 units, subsidy of 2019 20,000 42 RMB3.2mn is paid (max RMB180mn) For each further sales increase of 2,500 units, subsidy of 2020 30,000 54 RMB4.5mn is paid (max RMB200mn) Source: Ministry of Finance of the People’s Republic of China, Mirae Asset Daewoo
Mirae Asset Daewoo Research 38 September 12, 2016 Electric Vehicles
4) Charging infrastructure market and related companies
¢ Charging system production: Rapid growth possible during initial phase, but possibility of red ocean market due to low entry barriers Charging system production is anticipated to benefit first from infrastructure investments, and could thus show exponential growth. However, production of low-technology items (e.g., AC standard chargers) has low entry barriers, meaning competition might become overheated. Charging system revenues account for less than 10% of overall revenues at related companies.
Currently, construction and operation of EV charging stations in China is driven by regional governments and companies (e.g., State Grid Corporation of China, Qingdao TGOOD Electric, China Southern Power Grid Company, and Potevio). Due to the low entry barriers, electric system operators are jumping into the business. If a dominant player emerges, it is likely to generate margin growth from the charging business.
Table 11. Major EV charging infrastructure-related companies Companies Major business Qingdao TGOOD (300001) Box type substation, switch box, EPC solar power plant Shenzhen Kstar Science And Technology (002518) UPS (uninterruptible power supply), solar inverter NARI Technology (600406) Electric supply automation equipment XJ Electric (000400) Smart electric supply system, DC power transmission system Zhejiang Wanma (002276) Power cable Hiconics Drive Techn (300048) High-low voltage converter, power-saving equipment Zhongshan Broad-Ocean Motor (002249) Starter, generator, motor controller East Group (300376) UPS (uninterruptible power supply) Shijiazhuang Tonhe Electrncs (300491) Power management system Shenzhen Auto Electric Pwr Plnt (002227) AC-DC UPS Shanghai Cooltech Power (300153) Diesel generation module Suzhou Industrial Park Hshn Elctr (300141) Power meter, charger Source: Industrial Securities, Mirae Asset Daewoo
The charging station business is concentrated on large cities (e.g., Beijing, Shanghai, Xi'an) where EVs proliferate. State Grid Corporation of China, a state-owned mega-sized grid operator, has the most EV charging stations in China on the back of its dominant position in power supply. Qingdao TGOOD Electric, a listed firm (300001), is operating 35,000 chargers.
Table 12. Major Chinese institutions’ EV charging infrastructure (as of end-1Q16) Institution Charging stations (units) Chargers (‘000 units) State Grid Corporation of China 1,537 29.6 Qingdao TGOOD (300001) 80 35.0 China Southern Power Grid Company 19 3,2 Potevio 691 9,7 Other 100 20.0 Total 2,350 63.0 Source: Industrial Securities, Mirae Asset Daewoo
Mirae Asset Daewoo Research 39 September 12, 2016 Electric Vehicles
While the charging station business is dominated by State Grid Corporation of China, competition in the charger business is rather intense. In the first EV charger bidding this year (held by State Grid Corporation of China), 17 companies won orders. Although Nari Technology and XJ Electric won the largest orders in terms of value and volume, they still could not establish dominance. Due to low entry barriers, we do not expect dominant players to emerge in the near term.
Table 13. EV charger orders of State Grid Corporation of China (2016 cumulative) Companies Orders (RMBmn) Orders (units) NARI Technology 80 438 XJ Electric 72 638 Hangzhou Zhongheng Electric 49 389 Suzhou Industrial Park Hshn Elctr 42 330 Shenzhen Clou Electronics 37 346 Changyuan Group 36 224 Shenzhen Auto Electric Pwr Plnt 32 232 Average 49 371 Source: Industrial Securities, Mirae Asset Daewoo
¢ Operation of charging stations: To develop in various directions While individual charging stations account for 97% of total charging facilities in the US and Europe, public stations take up 15% of the total in China. Given that apartments are the most common type of housing in Chinese cities, the country needs to increase the number of charging stations that provide similar services as gas stations. A public EV charging station usually refers to a facility equipped with multiple DC fast chargers that provide about an 80% charge in fewer than 30 minutes.
In China, EV charging fees recently fell to RMB1.3/kWh from RMB1.6/kWh (a full charge generally requires 20-30kWh). In our view, the charging fee levels are sufficiently competitive. However, considering the additional costs associated with charging, including fees for using public parking lots (RMB10-15 for above-ground; RMB8 for underground), existing small-size stations are not highly competitive, in our view.
However, large-size charging stations have increased sharply since 2H15. These facilities have high-speed chargers and space to provide value-added services to customers during charging. This trend indicates that EV charging stations could develop into facilities that are similar to gas stations. Accordingly, China’s charging stations will likely to make efforts to diversify their businesses, providing additional services such as car cleaning.
Charging stations could also provide maintenance and repair services, as core components of EVs including batteries and control systems can be checked simply by connecting vehicles to charging equipment.
Some stations are attempting to create a business model that combines pro test driving, used-car sales, and rental services.
Mirae Asset Daewoo Research 40 September 12, 2016 Electric Vehicles
¢ Public services: Long-term growth potential based on policy support Under the EV charging infrastructure development plan, the government aims to have 5mn EVs on the roads by 2020. The targets for public transport buses and taxis are 200,000 and 300,000 units, respectively, which correspond to 4% and 6% of the total target, respectively. Meanwhile, buses and taxis take up 31.8% (3,840) and 20.7% (2,500) of the total charging station installation target. The operating efficiency of charging stations for buses and taxis is expected to be high thanks to the concentration of stations and regular operating schedules.
Accordingly, charging stations for public transport vehicles are believed to be one of the areas with huge growth potential. China’s policy direction should also provide tailwinds. To meet the central government’s target to increase the proportion of public transport charging stations to over 30% by 2020, local governments have been announcing a series of support measures, including the creation of industrial standards, favorable electricity rates, and a minimum profitability guarantee for charging service fees.
The Shanghai office of Mirae Asset Daewoo recently met with officials from an EV station subsidiary of Beijing Bashi Media, which is in charge of advertising on buses of its controlling shareholder Beijing Public Transport Holdings. Beijing Bashi Media has been generating stable earnings based on captive demand from Beijing Public Transport Holdings. However, the company held only limited room for growth. In an effort to level up earnings and seek further growth, the company made a foray into the EV charging market in cooperation with its parent company.
Ahead of Beijing Public Transport Holdings’ planned replacement of 20,000 of its buses with EVs, Beijing Bashi Media in February established a charging station operating firm, Longruisanyou, via its wholly-owned subsidiary Longyuangongmao (a 40% stake), with Xiexinruitong and Huashangsanyou each holding a 30% stake in the charging station operator.
Amid the steady replacement of public transport vehicles with EVs, the profitability outlook for the installation and operation of charging stations appears to be stronger than the outlook for the operation of on-site charging stations or installation of charging facilities.
Mirae Asset Daewoo Research 41 September 12, 2016 Electric Vehicles
6. Global supply chain
Figure 53. Chinese LIB supply chain
Lithium Battery Charging CITIC Guoan (000839 CH) Cathodes management stations Baotou Steel Rare-Earth (600111CH) systems Rising Nonferrous Metals (600259 CH) Shanshan (600884 CH) Potevio (600680 CH) Tianqi Lithium (002466 CH) Easpring (300073 CH) Desay (000049 CH) China TowerCo (unlisted) Tibet Mineral (000762 CH) Joyson (600699 CH) ZTE (763 HK) BYD (1211 HK) Qingdao TGOOD (300001 CH) Cobalt NARI Technology (600406 CH) Huayou Cobalt (603799 CH) Guodian Nanjing Automation (600268 CH)
Graphite Anodes Battery cells Automakers
Shanshan (600884 CH) BYD (1211 HK) BYD (1211 HK) Shenzhen BTR (000009 CH Lishen (unlisted) Chery (unlisted) Guoxuan (002074 CH) Geely (175 HK) ATL (unlisted) GAC (2238 HK) Boston=Power (unlisted) Dongfeng (489 HK) Electrolyte Electrolytes Do-Fluoride Chemicals (002407 CH) SAIC (600104 CH) solutions Tianneng (819 HK) BAIC (unlisted) Coslight (1043 HK) Kandi (KNDI US) Jiujiujiu Technology (002411 CH) Guotai (002091 CH) Wanxiang Qianchao (000559 CH) JAC (600418 CH) Do-Fluoride Chemicals (002407 CH) Capchem (300037 CH) EVE Energy (300014 CH) Tinci Materials (002709 CH) Shanshan (600884 CH)
Electric motors/ Separators powertrains Foshan Plastics (000973 CH) BYD (1211 HK) Cangzhou Mingzhu (002108 CH) Broad-Ocean (002249 CH) Senior (unlisted) Inovance (300124 CH) Wanxiang Qianchao (000559 CH) Zhenghai Magnetic (300224 CH)
Source: Mirae Asset Daewoo Research
Table 14. Global EV companies valuation table (Wbn, %, x) Revenue OP NP ROE P/E P/B EV/EBITDA Mkt. cap 16F 17F 16F 17F 16F 17F 16F 17F 16F 17F 16F 17F 16F 17F Tesla 32,038 8,904 12,534 -120 293 -1,005 -542 -10.6 4.0 - 125.3 10.9 10.5 50.3 22.0 BYD 25,039 16,808 19,691 1,283 1,508 782 982 11.2 11.1 27.1 23.0 2.7 2.4 14.7 12.9 Geely 8,548 7,277 9,725 765 1,035 625 822 17.4 19.1 13.5 10.2 2.2 1.9 7.3 5.6 SAIC 39,485 117,876 125,507 5,115 6,033 5,200 5,550 17.1 16.7 7.6 7.1 1.3 1.2 9.1 7.7 JAC 4,430 8,774 9,873 -188 -202 192 243 11.2 12.7 19.6 16.0 2.0 1.9 12.8 12.3 Yutong 8,137 5,664 6,015 731 776 654 704 29.3 28.5 12.3 11.5 3.5 3.1 9.6 9.0 Average 12.6 15.3 16.0 32.2 3.8 3.5 17.3 11.6 Source: Bloomberg, Mirae Asset Daewoo Research
Table 15. Global LIB companies valuation table (Wbn, %, x) Revenue OP NP ROE P/E P/B EV/EBITDA Mkt. cap 16F 17F 16F 17F 16F 17F 16F 16F 17F 16F 17F 16F 17F
LG Chem 16,468 20,784 22,446 2,072 2,220 1,480 1,625 10.9 10.9 11.8 10.7 1.3 1.2 5.2 4.9 Samsung SDI 7,048 5,453 6,247 -782 120 266 327 1.0 2.8 33.3 22.4 0.6 0.6 - 5.2 Panasonic 27,692 80,245 82,606 3,615 4,201 1,574 2,072 8.3 10.3 15.7 12.1 1.4 1.3 4.6 4.1 Sony 46,137 81,881 85,022 3,285 5,206 984 2,628 4.0 9.3 46.5 17.7 1.6 1.5 6.1 4.8 BYD 25,039 16,808 19,691 1,283 1,508 782 982 11.2 11.1 27.1 23.0 2.7 2.4 14.7 12.9 EVE Energy 2,708 412 793 52 96 48 84 14.0 20.0 52.0 33.6 8.3 6.8 42.9 28.3 Guoxuan 5,378 987 1,520 231 307 195 260 29.2 29.2 27.2 20.3 8.0 6.0 20.7 15.6 Average 11.2 13.4 30.5 20.0 3.4 2.8 15.7 10.8 Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 42 September 12, 2016 Electric Vehicles
Table 16. Global cathode-related companies valuation table (Wbn, %, X) Revenue OP NP ROE P/E P/B EV/EBITDA Mkt. cap 16F 17F 16F 17F 16F 17F 16F 16F 17F 16F 17F 16F 17F
Ecopro 247 167 219 12 20 6 14 5.5 10.0 43.5 20.6 2.1 1.9 10.8 8.5 Umicore 7,305 12,447 13,360 416 474 262 339 13.2 14.9 24.5 21.0 3.2 3.0 11.6 10.8 Shanshan 3,036 994 1,261 89 119 96 122 10.2 11.0 29.7 24.8 2.6 2.4 20.1 17.1 Easpring 1,808 256 346 16 29 16 27 7.7 10.8 105.5 68.1 8.2 7.3 81.3 51.3 Huayou Cobalt 3,133 821 1,012 4 37 5 35 1.8 6.9 544.2 110.5 7.8 7.2 - - Average 7.7 10.7 149.5 49.0 4.8 4.4 30.9 21.9 Source: Bloomberg, Mirae Asset Daewoo Research
Table 17. Global anode-related companies valuation table (Wbn, %, X) Revenue OP NP ROE P/E P/B EV/EBITDA Mkt. cap 16F 17F 16F 17F 16F 17F 16F 16F 17F 16F 17F 16F 17F
Shanshan 3,036 994 1,261 89 119 96 122 10.2 11.0 29.7 24.8 2.6 2.4 20.1 17.1 Hitachi Chem 5,212 5,701 5,929 541 583 380 419 9.6 10.1 13.6 12.3 1.3 1.2 5.1 4.8 Nipon Carbon 225 281 341 2 20 0 9 1.2 - - 23.0 - - 14.2 11.1 Showa Denko 2,144 7,293 7,601 312 346 107 169 3.6 5.2 20.9 11.8 0.6 0.6 8.2 7.3 UACJ 1,445 6,614 7,064 272 370 108 174 5.9 9.4 12.5 8.4 0.8 0.7 8.3 7.1 Average 6.1 8.9 19.2 16.1 1.3 1.2 11.2 9.5 Source: Bloomberg, Mirae Asset Daewoo Research
Table 18. Global electrolyte-related companies valuation table (Wbn, %, X) Revenue OP NP ROE P/E P/B EV/EBITDA Mkt. cap 16F 17F 16F 17F 16F 17F 16F 16F 17F 16F 17F 16F 17F
Soulbrain 999 718 787 124 142 98 115 18.2 18.1 10.2 8.7 1.7 1.4 6.3 5.7 Tinci Materials 3,096 343 428 64 79 56 69 23.0 22.6 54.8 44.7 12.9 10.3 47.6 37.2 DFD 3,862 715 1,017 121 152 98 123 20.8 21.0 40.6 31.5 8.1 6.8 26.8 20.9 Capchem 1,671 258 326 52 63 42 53 11.5 12.4 40.4 32.6 4.4 3.9 27.5 21.5 Ube Industry 2,198 6,873 7,073 363 424 206 243 7.0 8.3 10.4 9.0 0.7 0.7 5.7 5.3 Mitsubishi Chem 10,214 38,222 38,855 2,545 2,775 1,025 1,152 9.7 10.5 9.9 8.8 0.9 0.9 6.2 5.8 Average 15.0 15.5 27.7 22.6 4.8 4.0 20.0 16.1 Source: Bloomberg, Mirae Asset Daewoo Research
Table 19. Global separator-related companies valuation table (Wbn, %, X) Revenue OP NP ROE P/E P/B EV/EBITDA Mkt. cap 16F 17F 16F 17F 16F 17F 16F 16F 17F 16F 17F 16F 17F
LG Chem 16,468 20,784 22,446 2,072 2,220 1,480 1,625 10.9 10.9 11.8 10.7 1.3 1.2 5.2 4.9 SK Innovation 14,055 42,076 47,230 3,024 2,744 1,911 1,855 11.5 10.3 7.4 7.6 0.8 0.8 4.3 4.6 Mingzhu 2,561 446 505 102 123 77 89 22.6 22.2 35.2 30.7 7.0 5.8 23.1 19.1 Asahi Kasei 12,729 20,139 20,698 1,546 1,666 964 1,046 8.5 8.9 13.0 12.0 1.1 1.0 6.0 5.7 Toray 17,121 22,894 23,787 1,801 1,939 1,096 1,187 10.7 10.9 15.2 14.0 1.6 1.5 8.5 7.9 Average 12.8 12.6 16.5 15.0 2.3 2.0 9.4 8.5 Source: Bloomberg, Mirae Asset Daewoo Research
Table 20. Global lithium makers valuation table (Wbn, %, X) Revenue OP NP ROE P/E P/B EV/EBITDA Mkt. cap 16F 17F 16F 17F 16F 17F 16F 16F 17F 16F 17F 16F 17F
Tianqi Lithium 6,475 722 843 413 488 277 326 35.5 29.6 23.2 20.4 8.0 4.1 15.5 13.6 Ganfeng Lithium 4,026 507 667 111 155 85 118 23.2 25.2 43.2 34.3 8.7 6.8 35.2 26.3 Albemarle 9,567 2,909 3,186 617 659 - 495 11.3 13.4 21.8 19.2 2.5 2.7 16.5 14.5 SQM 7,865 2,019 2,183 528 583 339 357 12.8 13.3 22.7 20.1 2.9 2.7 10.4 9.7 FMC 6,651 3,704 3,883 634 721 410 467 16.7 16.9 16.4 14.5 2.6 2.3 11.5 10.3 Average 19.9 19.6 26.1 22.2 4.9 3.8 17.9 15.0 Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 43 September 12, 2016 Electric Vehicles
Figure 54. Share performances of global EV companies Figure 55. Share performances of global LIB companies
(-1Y=100) (-1Y=100) 250 BYD Geely JAC 350 Samsung SDI Panasonic BYD Yutong SAIC Tesla EVE Sony LG Chem 300 200 250
150 200
100 150
100 50 50
0 0 9/14 3/15 9/15 3/16 9/16 9/14 3/15 9/15 3/16 9/16
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Figure 56. Share performances of global cathode companies Figure 57. Share performances of global lithium makers
(-1Y=100) (-1Y=100) 500 Ecopro L&F Umicore 500 Tianqi Lithium Ganfeng Lithium Easpring Huayou Cobalt Shanshan Albemarle FMC SQM 400 400
300 300
200 200
100 100
0 0 9/14 3/15 9/15 3/16 9/16 9/14 3/15 9/15 3/16 9/16
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 44 September 12, 2016 Electric Vehicles
LG Chem (051910 KS) Concerns have already been priced in
Chemicals Concerns mostly priced in; Maintain Buy Share price correction : LG Chem shares rose in 2H15, reflecting the growth (Maintain) Buy potential of the EV battery unit. However, thus far in 2016, they have fallen due to: 1) concerns that the company might not benefit from China’s EV market growth Target Price (12M, W) 370,000 (after being excluded from the country’s approved battery vendor list) as well as 2) the narrowing of premiums on the small battery and electronic materials units due Share Price (9/9/16, W) 248,500 to earnings sluggishness.
Battery growth potential remains solid : We project that the EV battery market Expected Return 49% will continue to grow in the medium term, and that LG Chem will maintain its position as the industry leader for some time. Demand in China for high-quality, OP (16F, Wbn) 2,100 low-priced batteries produced in Korea should increase amid high demand from Consensus OP (16F, Wbn) 2,049 local automakers and a shift in the country’s policy away from subsidy-driven EPS Growth (16F, %) 29.9 growth and toward competitiveness enhancement. In the short term, the key issue Market EPS Growth (16F, %) 20.1 will be whether or not LG Chem will be included in China’s fifth list of approved P/E (16F, x) 12.3 battery vendors (to be announced in September or October). In the medium term, Market P/E (16F, x) 10.7 however, the company is highly likely to secure a share of the valuable Chinese KOSPI 2,037.87 market.
Market Cap (Wbn) 16,468 Maintain Buy : We estimate LG Chem’s 3Q16 operating profit at W508.5bn, slightly Shares Outstanding (mn) 74 short of the market consensus. Although the company’s performance is expected Free Float (%) 65.9 to remain solid, we think the sharp appreciation of the Korean won and the lagging Foreign Ownership (%) 38.1 impact of oil price fluctuations are proving to be drags. In the short term, the Beta (12M) 1.58 company’s shares could move within a boxed range, owing to sluggish earnings 52-Week Low 230,500 and battery certification uncertainties. However, we see strong upside to the 52-Week High 341,500 current share price, which has already reflected the bulk of investor concerns. We (%) 1M 6M 12M lower our target price by 8% to W370,000 on downward revisions to earnings Absolute -3.5 -16.0 7.3 estimates, but reiterate our Buy rating. Relative -3.2 -19.5 1.9 3Q preview: OP to slightly miss the consensus
160 LG Chem KOSPI OP to miss consensus on strong won : We expect LG Chem to report operating 140 profit of W508.5bn, slightly below the consensus, for 3Q16. Despite core
120 profitability indicators (e.g., chemical product spreads, etc.) remaining solid, we think the company is suffering from the sharp appreciation of the Korean won and 100 the lagging impact of oil price fluctuations. Given LG Chem’s high exposure to US 80 dollar-denominated sales, a drop of 10 in the US$/W rate leads to a W50bn 9.15 1.16 5.16 9.16 reduction in annual operating profit. By division, the electronic materials, small
battery, and EV battery divisions should remain in loss-making territory due to: 1) oversupply (e.g. electronic materials, small batteries) and 2) additional costs arising from delays to EV battery certification in China.
FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F 12/18F Revenue (Wbn) 23,144 22,578 20,207 20,342 21,676 23,524 OP (Wbn) 1,743 1,311 1,824 2,100 2,356 2,604 OP margin (%) 7.5 5.8 9.0 10.3 10.9 11.1 NP (Wbn) 1,266 868 1,153 1,498 1,794 1,998 EPS (W) 17,131 11,745 15,602 20,271 24,274 27,035 ROE (%) 11.4 7.3 9.2 11.0 12.0 12.1 P/E (x) 17.5 15.4 21.1 12.3 10.2 9.2 P/B (x) 1.9 1.1 1.9 1.3 1.2 1.1 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 45 September 12, 2016 Electric Vehicles
Table 21. LG Chem’s earnings table (Wbn, %) 2015 2016 2015 2016F 2017F 1Q 2Q 3Q 4Q 1Q 2Q 3QF 4QF Revenue Total 4,915 5,073 5,178 5,041 4,874 5,217 5,095 5,154 20,207 20,340 21,676 Chemicals 3,608 3,801 3,792 3,432 3,512 3,653 3,577 3,598 14,633 14,340 14,334
I&E 676 668 710 711 627 650 653 587 2,764 2,517 2,637
Batteries/other 707 690 769 985 814 809 865 969 3,150 3,457 4,705 OP Total 362 563 546 352 458 616 509 522 1,824 2,104 2,356 Chemicals 321 589 484 282 466 649 554 561 1,677 2,230 2,309
I&E 37 17 52 41 -8 -15 -7 -9 146 -38 27
Batteries/other 4 -42 10 29 0 -31 -38 -31 1 -101 19 Pretax profit 324 493 440 293 423 500 494 508 1,550 1,925 2,312 Net profit 243 349 350 210 340 377 385 396 1,153 1,498 1,794 Source: Mirae Asset Daewoo Research estimates
Table 22. Valuation (2016F) (Wbn, x, mn shares, W) 16F EBITDA Target EV/EBITDA FV Notes Operating profit Chemicals 2,750.4 7.0 19,252.7 Industry average I&E 170.9 5.0 854.6 Industry average
Small batteries 187.4 5.0 937.0 Industry average
Medium/large batteries 5,369.8 2020F EV/EBITDA of 7x Total 26,414.0
Net borrowings 627.0 1Q16
Preferred shares market cap 1,396.1
Fair value 24,390.9
Number of shares 66.3
Target price 367,887.5
Source: Mirae Asset Daewoo Research
Figure 58. MEG spread Figure 59. Chemical revenue breakdown
(US$/tonne) (US$/tonne) 1,200 500 Acrylic/SAP Price (L) 10% Spread (R) 400 NCC/PO 34% 900 300 ABS/EP 200 31%
600 100
0 Rubber/special PVC/caustic resins soda/plasticizer 300 -100 10% 15% 12 13 14 15 16 17
Source: Cischem, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 46 September 12, 2016 Electric Vehicles
LG Chem (051910 KS/Buy/TP: W370,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/15 12/16F 12/17F 12/18F (Wbn) 12/15 12/16F 12/17F 12/18F Revenue 20,207 20,342 21,676 23,524 Current Assets 8,656 9,250 10,603 12,372 Cost of Sales 16,541 16,285 17,363 18,964 Cash and Cash Equivalents 1,705 3,351 4,436 5,493 Gross Profit 3,666 4,057 4,313 4,560 AR & Other Receivables 3,364 3,441 3,596 4,012 SG&A Expenses 1,842 1,957 1,957 1,957 Inventories 2,339 2,459 2,570 2,867 Operating Profit (Adj) 1,824 2,100 2,356 2,604 Other Current Assets 1,248 -1 1 0 Operating Profit 1,824 2,100 2,356 2,604 Non-Current Assets 9,923 10,969 11,200 11,422 Non-Operating Profit -274 -175 -44 -29 Investments in Associates 294 300 314 350 Net Financial Income -21 -43 -44 -29 Property, Plant and Equipment 8,867 9,531 9,795 10,019 Net Gain from Inv in Associates 11 -5 0 0 Intangible Assets 502 726 678 635 Pretax Profit 1,550 1,925 2,312 2,575 Total Assets 18,579 20,219 21,803 23,794 Income Tax 401 430 518 577 Current Liabilities 4,799 5,465 5,579 5,883 Profit from Continuing Operations 1,149 1,495 1,794 1,998 AP & Other Payables 1,348 1,177 1,231 1,373 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 2,151 2,958 2,958 0 Net Profit 1,149 1,495 1,794 1,998 Other Current Liabilities 1,300 1,330 1,390 4,510 Controlling Interests 1,153 1,498 1,794 1,998 Non-Current Liabilities 676 509 516 537 Non-Controlling Interests -4 -3 0 0 Long-Term Financial Liabilities 508 336 336 0 Total Comprehensive Profit 1,144 1,500 1,794 1,998 Other Non-Current Liabilities 168 173 180 537 Controlling Interests 1,147 1,511 1,808 2,013 Total Liabilities 5,475 5,974 6,095 6,420 Non-Controlling Interests -2 -11 -14 -15 Controlling Interests 12,992 14,164 15,627 17,293 EBITDA 3,080 3,432 3,739 4,023 Capital Stock 370 370 370 370 FCF (Free Cash Flow) 1,539 1,427 1,432 1,428 Capital Surplus 1,158 1,158 1,158 1,158 EBITDA Margin (%) 15.2 16.9 17.2 17.1 Retained Earnings 11,533 12,697 14,160 15,826 Operating Profit Margin (%) 9.0 10.3 10.9 11.1 Non-Controlling Interests 112 81 81 81 Net Profit Margin (%) 5.7 7.4 8.3 8.5 Stockholders' Equity 13,104 14,245 15,708 17,374
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/15 12/16F 12/17F 12/18F 12/15 12/16F 12/17F 12/18F Cash Flows from Op Activities 3,172 2,908 3,032 3,028 P/E (x) 21.1 12.3 10.2 9.2 Net Profit 1,149 1,495 1,794 1,998 P/CF (x) 8.7 5.7 4.9 4.6 Non-Cash Income and Expense 1,658 1,748 1,945 2,025 P/B (x) 1.9 1.3 1.2 1.1 Depreciation 1,215 1,281 1,336 1,376 EV/EBITDA (x) 7.7 5.2 4.5 3.9 Amortization 41 51 48 43 EPS (W) 15,602 20,271 24,274 27,035 Others 402 416 561 606 CFPS (W) 37,974 43,889 50,597 54,441 Chg in Working Capital 208 70 -146 -389 BPS (W) 176,007 191,879 211,669 234,221 Chg in AR & Other Receivables 26 107 -150 -400 DPS (W) 4,500 4,500 4,500 4,500 Chg in Inventories 385 137 -111 -297 Payout ratio (%) 25.8 19.8 16.5 14.8 Chg in AP & Other Payables -167 -90 53 141 Dividend Yield (%) 1.4 1.8 1.8 1.8 Income Tax Paid -247 -572 -518 -577 Revenue Growth (%) -10.5 0.7 6.6 8.5 Cash Flows from Inv Activities -1,698 -851 -1,602 -1,605 EBITDA Growth (%) 25.2 11.4 8.9 7.6 Chg in PP&E -1,470 -1,469 -1,600 -1,600 Operating Profit Growth (%) 39.1 15.1 12.2 10.5 Chg in Intangible Assets -59 -37 0 0 EPS Growth (%) 32.8 29.9 19.7 11.4 Chg in Financial Assets -223 1,000 -2 -5 Accounts Receivable Turnover (x) 6.2 6.2 6.4 6.4 Others 54 -345 0 0 Inventory Turnover (x) 8.0 8.5 8.6 8.7 Cash Flows from Fin Activities -757 -372 -331 -331 Accounts Payable Turnover (x) 13.2 13.9 14.5 14.7 Chg in Financial Liabilities -275 636 0 1 ROA (%) 6.3 7.7 8.5 8.8 Chg in Equity 0 0 0 0 ROE (%) 9.2 11.0 12.0 12.1 Dividends Paid -309 -347 -331 -331 ROIC (%) 10.4 12.2 13.0 13.9 Others -173 -661 0 -1 Liability to Equity Ratio (%) 41.8 41.9 38.8 36.9 Increase (Decrease) in Cash 717 1,646 1,085 1,057 Current Ratio (%) 180.4 169.3 190.0 210.3 Beginning Balance 988 1,705 3,351 4,436 Net Debt to Equity Ratio (%) -0.4 -0.4 -7.3 -12.6 Ending Balance 1,705 3,351 4,436 5,493 Interest Coverage Ratio (x) 31.4 24.6 24.0 26.5 Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 47 September 12, 2016 Electric Vehicles
Samsung SDI (006400 KS) Long-term perspective needed
Technology Maintain Trading Buy; Lower TP to W120,000 We reiterate our Trading Buy rating on Samsung SDI but lower our target price to (Maintain) Trading Buy W120,000 from W129,000. In deriving our target price, we added the company’s operating value of W4.8tr to its asset value of W3.9tr (sum-of-the-parts Target Price (12M, W) 120,000 methodology).
3Q16 preview: The electronic materials unit should incur up-front costs from the Share Price (9/9/16, W) 102,500 operation of a new polarizer line, while the small battery unit should see greater uncertainties arising from the recent smartphone recall by its key client (despite the Expected Return 17% turnaround in 2Q16). We estimate recall-related costs at W40bn or more, considering that the customer typically produces 5-6mn units per month and holds OP (16F, Wbn) -874 inventory for four to six weeks. The large battery unit should benefit from new Consensus OP (16F, Wbn) -768 shipments to BMW, but earnings growth is likely to be limited by the certification EPS Growth (16F, %) 275.2 issue in China. In the short term, we think the company’s share price will be largely Market EPS Growth (16F, %) 20.1 affected by whether its EV batteries will be approved by the Chinese government. P/E (16F, x) 35.7 Market P/E (16F, x) 10.7 Still positive on medium/large-sized battery growth KOSPI 2,037.87 Technology gap : During the course of our trip to China, we were able to confirm that Korean batteries remain highly competitive in terms of costs and technology Market Cap (Wbn) 7,048 Shares Outstanding (mn) 70 (vs. Chinese products). Most automakers (excluding BYD) want to use Korean Free Float (%) 79.5 batteries, which offer good quality and long ranges. However, many of them have Foreign Ownership (%) 36.4 been forced to postpone the launches of new models set to be equipped with Beta (12M) 0.84 Korean batteries, due to the certification issue. Even if automakers replace Korean 52-Week Low 86,400 batteries with Chinese ones, the process would take at least one year. Despite the 52-Week High 129,000 ongoing political tension between Korean and China, we believe the Chinese government will eventually grant certification to Korean companies given the needs (%) 1M 6M 12M of automakers. Absolute -12.8 2.6 15.3 Relative -12.5 -1.7 9.4 Global EV market growth to accelerate from 2017 : From 2017, we expect positives for the EV market in many regions (in addition to China). Indeed, interest 160 Samsung SDI KOSPI in EVs should remain strong, backed by the Paris climate agreement, launches of 140 second-generation batteries with longer ranges, and the release of Tesla’s Model 3.
120 Samsung SDI plans to invest W400bn to build a new battery factory in Hungary. We think that the EV market has entered the growth phase, and that Korean battery 100 producers will become the largest beneficiaries, given their stable mass production 80 capabilities, strong reputations, and high-quality products. We recommend taking a 9.15 1.16 5.16 9.16 long-term view on Samsung SDI amid concerns over its small battery unit and
earnings.
FY (Dec.) 12/12 12/13 12/14 12/15 12/16F 12/17F Revenue (Wbn) 5,771 3,428 5,474 7,569 5,412 6,584 OP (Wbn) 187 -11 71 -60 -874 -35 OP margin (%) 3.2 -0.3 1.3 -0.8 -16.1 -0.5 NP (Wbn) 1,472 131 -84 54 202 267 EPS (W) 31,192 2,768 -1,426 765 2,870 3,788 ROE (%) 21.8 1.8 -0.9 0.5 1.8 2.4 P/E (x) 4.8 58.5 - 149.0 35.7 27.1 P/B (x) 0.9 1.0 0.7 0.7 0.7 0.6 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 48 September 12, 2016 Electric Vehicles
Medium- to long-term approach needed Although lithium is highly reactive and flammable, it is widely used to produce batteries as it yields strong performance and a long shelf life. Research on lithium battery stability has been conducted for some time, yielding significant improvements in performance and safety.
In the past, many battery producers suffered from fire/explosion incidents amid fierce competition to cut costs and develop high-capacity batteries. Sony, Sanyo and Panasonic lost customer trust due to such incidents in 2005 and beyond. This has helped Korean companies expand market share to the current levels.
In 2009, Sanyo, then the market leader, was acquired by Panasonic following recalls at end-2006 and in early 2007. Sony also saw its market share shrink after a series of laptop recalls. On the domestic front, LG Chem struggled mightily in the year following Apple’s computer recall and once considered selling its battery unit; however, the company managed to overcome the crisis.
Samsung SDI’s short-term earnings will undoubtedly be affected by the recent recall by its key client. And, as it will take some time for Samsung SDI to recover customer trust, we believe the company needs to approach the issue from a medium- to long-term perspective rather than focus on recovering market share or losses in the short term.
Table 23. Battery recall events (units) Customers Recalled units Manufacturer
2009-11 HP 300,000 Unreleased Oct. 2008 HP, Dell 600,000 Sony Aug. 2007 Nokia 46,000,000 Panasonic March 2007 Lenovo Unreleased Sanyo Dec. 2006 Mitsubishi 1,300,000 Sanyo 2005-6 Dell and eight others 9,660,000 Sony Oct. 2005 HP 135,000 Sony May 2005 Apple 128,000 LG Chem Aug. 2004 Apple 28,000 LG Chem Source: Bloomberg, KDB Bank
Table 24. Earnings table (Wbn, %) 1Q16 2Q16 3Q16F 4Q16F 1Q17F 2Q17F 3Q17F 4Q17F 2016F 2017F
Revenue 1,292 1,318 1,389 1,415 1,493 1,616 1,746 1,729 5,414 6,584 Batteries 863 875 915 917 943 1,001 1,066 1,060 3,570 4,071 IT 662 663 669 636 717 728 764 716 2,629 2,926 EV, ESS 201 212 246 281 226 272 302 345 941 1,145 Materials 429 443 474 498 550 615 680 668 1,844 2,513 EM 428 442 472 497 549 613 679 667 1,838 2,508 Operating profit -703.8 -54.2 -81.9 -34.6 -19.2 -14.6 -3.6 2.3 -874 -35 Batteries -100 -92 -114 -66 -54 -52 -44 -42 -373 -191 IT 0 4 -44 -22 -11 -12 -10 -16 -62 -48 EV, ESS -100 -96 -70 -45 -43 -40 -34 -25 -310 -143 Materials -604 38 32 32 35 37 40 44 -502 156 EM 46 38 32 32 35 37 40 44 147 156 Other -649 0 0 0 0 0 0 0 -649 0 Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 49 September 12, 2016 Electric Vehicles
Samsung SDI (006400 KS/Trading Buy/TP: W120,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15 12/16F 12/17F (Wbn) 12/14 12/15 12/16F 12/17F Revenue 5,474 7,569 5,412 6,584 Current Assets 3,536 4,774 5,238 5,542 Cost of Sales 4,545 6,186 4,383 5,238 Cash and Cash Equivalents 628 1,288 2,147 1,766 Gross Profit 929 1,383 1,029 1,346 AR & Other Receivables 893 1,055 802 980 SG&A Expenses 858 1,443 1,904 1,381 Inventories 769 750 570 696 Operating Profit (Adj) 71 -60 -874 -35 Other Current Assets 1,246 1,681 1,719 2,100 Operating Profit 71 -60 -874 -35 Non-Current Assets 12,433 11,451 9,855 10,162 Non-Operating Profit 128 99 -95 348 Investments in Associates 4,979 5,173 5,173 5,173 Net Financial Income -16 -14 -10 -3 Property, Plant and Equipment 3,325 3,229 2,337 2,496 Net Gain from Inv in Associates 190 280 160 357 Intangible Assets 1,279 1,278 895 823 Pretax Profit 199 39 -969 313 Total Assets 15,969 16,225 15,093 15,705 Income Tax 47 13 -81 47 Current Liabilities 2,254 3,201 2,338 2,501 Profit from Continuing Operations 152 26 -888 265 AP & Other Payables 565 595 452 552 Profit from Discontinued Operations -232 0 1,083 0 Short-Term Financial Liabilities 975 1,047 701 501 Net Profit -80 26 195 265 Other Current Liabilities 714 1,559 1,185 1,448 Controlling Interests -84 54 202 267 Non-Current Liabilities 1,887 1,771 1,614 1,798 Non-Controlling Interests 4 -28 -7 -1 Long-Term Financial Liabilities 803 702 624 624 Total Comprehensive Profit 244 -530 -29 265 Other Non-Current Liabilities 1,084 1,069 990 1,174 Controlling Interests 237 -503 -28 260 Total Liabilities 4,142 4,972 3,953 4,299 Non-Controlling Interests 6 -27 -1 5 Controlling Interests 11,587 11,012 10,935 11,202 EBITDA 604 604 -255 578 Capital Stock 357 357 357 357 FCF (Free Cash Flow) -166 155 323 -119 Capital Surplus 5,033 5,031 5,031 5,031 EBITDA Margin (%) 11.0 8.0 -4.7 8.8 Retained Earnings 4,862 4,853 4,985 5,252 Operating Profit Margin (%) 1.3 -0.8 -16.1 -0.5 Non-Controlling Interests 240 241 205 203 Net Profit Margin (%) -1.5 0.7 3.7 4.1 Stockholders' Equity 11,827 11,253 11,140 11,405
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15 12/16F 12/17F 12/14 12/15 12/16F 12/17F Cash Flows from Op Activities 311 881 1,081 581 P/E (x) - 149.0 35.7 27.1 Net Profit -80 26 195 265 P/CF (x) 19.0 22.5 10.1 12.6 Non-Cash Income and Expense 440 331 520 305 P/B (x) 0.7 0.7 0.7 0.6 Depreciation 444 533 523 541 EV/EBITDA (x) 13.9 13.4 - 9.7 Amortization 89 130 96 72 EPS (W) -1,426 765 2,870 3,788 Others -93 -332 -99 -308 CFPS (W) 6,118 5,063 10,149 8,106 Chg in Working Capital 10 624 358 60 BPS (W) 164,775 156,614 155,527 159,315 Chg in AR & Other Receivables 267 56 136 -155 DPS (W) 1,000 0 0 0 Chg in Inventories 140 17 -3 -126 Payout ratio (%) -85.6 0.0 0.0 0.0 Chg in AP & Other Payables -213 -20 -300 64 Dividend Yield (%) 0.9 0.0 0.0 0.0 Income Tax Paid -50 -87 5 -47 Revenue Growth (%) 59.7 38.3 -28.5 21.7 Cash Flows from Inv Activities -328 115 211 -1,119 EBITDA Growth (%) 44.2 0.0 - - Chg in PP&E -434 -705 -743 -700 Operating Profit Growth (%) - - - - Chg in Intangible Assets -3 -16 -3 0 EPS Growth (%) - - 275.2 32.0 Chg in Financial Assets -1,896 1,735 15 -419 Accounts Receivable Turnover (x) 7.6 8.6 6.7 8.5 Others 2,005 -899 942 0 Inventory Turnover (x) 8.5 10.0 8.2 10.4 Cash Flows from Fin Activities -84 -355 -433 -200 Accounts Payable Turnover (x) 13.3 16.2 13.2 16.4 Chg in Financial Liabilities 594 -28 -425 -200 ROA (%) -0.6 0.2 1.2 1.7 Chg in Equity 3,886 -1 0 0 ROE (%) -0.9 0.5 1.8 2.4 Dividends Paid -83 -72 0 0 ROIC (%) 1.4 -0.7 -16.9 -0.7 Others -4,481 -254 -8 0 Liability to Equity Ratio (%) 35.0 44.2 35.5 37.7 Increase (Decrease) in Cash -103 660 859 -381 Current Ratio (%) 156.8 149.1 224.0 221.6 Beginning Balance 730 628 1,288 2,147 Net Debt to Equity Ratio (%) 0.6 -1.2 -15.4 -15.2 Ending Balance 628 1,288 2,147 1,766 Interest Coverage Ratio (x) 1.7 -1.1 -23.7 -1.2 Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 50 September 12, 2016 Electric Vehicles
Iljin Materials (020150 KS) Entering a period of stable growth
Technology Maintain Buy and TP of W23,000
We maintain our Buy rating on Iljin Materials with a target price of W23,000. (Maintain) Buy Despite a recent correction stemming from a major recall by a key customer, the company is one of the few materials suppliers that stands to benefit from the Target Price (12M, W) 23,000 growth of rechargeable batteries, given its: 1) strong competitiveness in I2B elecfoils (rechargeable battery-use) and 2) diverse customer base. For now, we Share Price (9/9/16, W) 16,350 believe Iljin Materials will maintain its strong market presence amid growth of the medium/large-sized battery industry. We think further conversion of existing ICS elecfoil (PCB-use) lines to I2B, new capacity additions, and customer acquisition will Expected Return 41% drive growth.
OP (16F, Wbn) 32 Competitive materials suppliers to benefit from battery market growth Consensus OP (16F, Wbn) 31 For batteries, raw materials account for 70% of overall production costs, creating a EPS Growth (16F, %) - somewhat negative environment for suppliers of components and materials. Market EPS Growth (16F, %) 20.1 Nonetheless, we think component/materials suppliers boasting quality products and P/E (16F, x) 17.7 strong competitiveness can benefit from the growth of the battery market. China’s Market P/E (16F, x) 10.7 battery producers occasionally experience a shortage of materials in the domestic KOSPI 2,037.87 market, due to their rapid expansion of production lines. During our visit to China, Market Cap (Wbn) 641 EVE Energy mentioned difficulties in securing some materials, including elecfoils. Shares Outstanding (mn) 39 Among automotive battery parts, insulators, separators, and elecfoils are especially Free Float (%) 36.6 important for ensuring stability; as such, battery producers prefer Korean and Foreign Ownership (%) 2.5 Japanese products over Chinese ones in these categories. In particular, elecfoils, Beta (12M) -0.12 which are used in EV batteries, are difficult to produce, due to a high degree of 52-Week Low 6,110 customization (different sizes, shapes, etc.). With regard to medium/large-sized I2B 52-Week High 19,650 elecfoils, it usually takes some time for a new supplier to receive the necessary (%) 1M 6M 12M approvals because of potential stability issues. As such, we think Iljin Materials will Absolute -3.5 41.6 165.0 continue to grow amid the expansion of the medium/large-sized battery market. Relative -3.3 35.7 151.5 3Q16 preview: Earnings to remain stable 380 Iljin Materials KOSPI 330 We estimate Iljin Materials’ 3Q16 revenue and operating profit at W105.2bn (-14.1% 280 YoY, +6.0% QoQ) and W8.88bn (turning to black YoY, +7.2% QoQ), respectively. QoQ 230 earnings improvement should be attributable to: 1) the operation of new I2B 180 elecfoil lines (converted in 2Q) and 2) gradual improvement in profitability owing to 130 an increased focus on high-margin ICS products. The company has yet to 80 9.15 1.16 5.16 9.16 determine whether to undertake additional line conversions or make new capex investments. However, we expect to see new production lines, depending on customer acquisition or earnings improvements by major existing customers.
FY (Dec.) 12/12 12/13 12/14 12/15 12/16F 12/17F Revenue (Wbn) 393 350 415 458 418 454 OP (Wbn) -7 -15 -29 -31 32 44 OP margin (%) -1.8 -4.3 -7.0 -6.8 7.7 9.7 NP (Wbn) -57 -7 3 -38 36 37 EPS (W) -1,459 -187 86 -978 923 950 ROE (%) -19.1 -2.7 1.2 -15.2 14.4 13.0 P/E (x) - - 82.9 - 17.7 17.2 P/B (x) 1.3 1.6 1.0 2.0 2.4 2.1 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 51 September 12, 2016 Electric Vehicles
Table 25. 3Q16 preview (Wbn, %) 3Q16F Growth 3Q15 2Q16 Mirae Asset Consensus YoY QoQ Daewoo Revenue 122.4 96.9 105.2 104.3 -14.1 8.6 Operating -5.6 7.9 8.9 8.7 TTB 12.3 profit OP margin -4.6 8.2 8.4 8.4 13.0 0.3 Pretax profit -6.1 -13.8 7.5 7.6 TTB TTB Net profit -5.7 -1.6 6.0 6.6 TTB TTB Source: Company data, WISEfn, Mirae Asset Daewoo Research estimates
Table 26. Earnings table (Wbn, W, %) 1Q16 2Q16 3Q16F 4Q16F 1Q17F 2Q17F 3Q17F 4Q17F 2015 2016F 2017F Revenue 105.1 99.3 105.2 108.4 106.3 107.9 114.6 125.4 458.2 417.9 454.1 ICS 22.5 16.5 16.5 16.1 12.7 11.1 11.4 11.2 135.9 71.7 46.3 I2B 34.6 40.4 44.3 44.3 47.4 56.3 59.6 67.1 103.1 163.6 230.4 IHT 1.0 0.7 0.7 0.7 0.6 0.6 0.6 0.6 8.3 3.1 2.5 Other 4.6 5.4 4.4 4.8 5.3 5.6 5.7 6.1 10.5 19.2 22.6 Subsidiary 42.3 36.3 39.3 42.4 40.3 34.3 37.3 40.4 200.6 160.3 152.3 Proportion 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ICS 21.4 16.6 15.7 14.9 11.9 10.3 10.0 8.9 29.7 17.1 10.2 I2B 32.9 40.7 42.1 40.9 44.6 52.2 52.0 53.5 22.5 39.2 50.7 IHT 1.0 0.7 0.7 0.6 0.6 0.6 0.6 0.5 1.8 0.7 0.6 Other 4.4 5.4 4.2 4.5 5.0 5.2 4.9 4.8 2.3 4.6 5.0 Subsidiary 40.3 36.5 37.4 39.1 37.9 31.8 32.6 32.2 43.8 38.4 33.5 Operating profit 5.9 8.3 8.9 9.4 9.4 10.4 11.3 13.2 -30.9 32.4 44.4 Iljin 4.0 6.6 7.3 7.2 7.4 8.7 9.5 11.2 6.3 25.1 36.8 Subsidiary 1.9 1.7 1.6 2.1 2.0 1.7 1.9 2.0 -37.2 7.3 7.6 Pretax profit 25.2 6.9 7.5 9.0 10.1 10.8 11.7 14.2 -48.4 48.8 46.9 Net profit 24.7 -1.6 6.0 7.4 8.1 8.5 9.3 11.3 -38.3 36.6 37.3 OP margin 5.6 8.3 8.4 8.6 8.9 9.7 9.9 10.5 -6.7 7.8 9.8 Pretax margin 24.0 7.0 7.2 8.3 9.5 10.0 10.2 11.3 -10.6 11.7 10.3 Net margin 23.5 -1.6 5.7 6.8 7.7 7.9 8.1 9.0 -8.4 8.8 8.2 Growth (QoQ/YoY) Revenue -17.4 -5.5 6.0 3.0 -1.9 1.5 6.2 9.5 10.4 -8.8 8.7 Operating profit TTB 40.7 7.2 5.4 0.9 10.4 8.8 16.6 RR TTB 37.1 Pretax profit TTB -72.5 8.6 19.8 12.4 6.6 8.5 21.2 TTR TTB -3.7 Net profit TTB TTR TTB 23.2 10.3 4.6 8.6 22.3 TTR TTB 1.9 Source: Mirae Asset Daewoo Research estimates
Figure 60. Revenue and OP margin Figure 61. Capacity breakdown
(Wbn) (%) (tonnes) 150 Revenue (L) 15 8,000 ICS I2B IHT OP margin (R) 10 120 6,000 5 90 0 4,000 60 -5 2,000 30 -10
0 -15 0 1Q14 1Q15 1Q16 1Q17F 1Q15 3Q15 1Q16 3Q16F 1Q17F 3Q17F Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 52 September 12, 2016 Electric Vehicles
Iljin Materials (020150 KS/Buy/TP: W23,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15 12/16F 12/17F (Wbn) 12/14 12/15 12/16F 12/17F Revenue 415 458 418 454 Current Assets 220 199 206 305 Cost of Sales 401 439 359 382 Cash and Cash Equivalents 22 28 60 136 Gross Profit 14 19 59 72 AR & Other Receivables 83 76 64 74 SG&A Expenses 43 50 27 28 Inventories 88 71 60 70 Operating Profit (Adj) -29 -31 32 44 Other Current Assets 27 24 22 25 Operating Profit -29 -31 32 44 Non-Current Assets 376 237 183 167 Non-Operating Profit 43 -17 17 3 Investments in Associates 0 0 0 0 Net Financial Income -4 -3 0 1 Property, Plant and Equipment 267 179 134 113 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 26 7 6 5 Pretax Profit 14 -48 49 47 Total Assets 596 437 389 472 Income Tax 15 15 12 9 Current Liabilities 265 166 94 135 Profit from Continuing Operations -2 -63 37 38 AP & Other Payables 59 59 50 58 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 184 79 20 50 Net Profit -2 -63 37 38 Other Current Liabilities 22 28 24 27 Controlling Interests 3 -38 36 37 Non-Current Liabilities 39 38 23 26 Non-Controlling Interests -5 -25 1 1 Long-Term Financial Liabilities 15 15 3 3 Total Comprehensive Profit -4 -60 35 38 Other Non-Current Liabilities 24 23 20 23 Controlling Interests 2 -35 35 37 Total Liabilities 303 204 116 161 Non-Controlling Interests -5 -24 0 0 Controlling Interests 272 233 268 305 EBITDA 6 7 54 66 Capital Stock 20 20 20 20 FCF (Free Cash Flow) -78 22 43 52 Capital Surplus 193 190 190 190 EBITDA Margin (%) 1.4 1.5 12.9 14.5 Retained Earnings 54 16 52 90 Operating Profit Margin (%) -7.0 -6.8 7.7 9.7 Non-Controlling Interests 21 0 5 6 Net Profit Margin (%) 0.7 -8.3 8.6 8.1 Stockholders' Equity 293 233 273 311
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15 12/16F 12/17F 12/14 12/15 12/16F 12/17F Cash Flows from Op Activities -55 35 47 52 P/E (x) 82.9 - 17.7 17.2 Net Profit -2 -63 37 38 P/CF (x) 4.5 22.6 14.1 9.5 Non-Cash Income and Expense 64 84 9 30 P/B (x) 1.0 2.0 2.4 2.1 Depreciation 32 35 21 21 EV/EBITDA (x) 81.6 81.5 11.3 8.5 Amortization 2 2 1 1 EPS (W) 86 -978 923 950 Others 30 47 -13 8 CFPS (W) 1,590 531 1,159 1,729 Chg in Working Capital -80 12 13 -8 BPS (W) 6,921 5,945 6,832 7,782 Chg in AR & Other Receivables -15 0 -4 -10 DPS (W) 0 0 0 0 Chg in Inventories -8 11 6 -9 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -3 4 7 5 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -35 0 -12 -9 Revenue Growth (%) 18.6 10.4 -8.7 8.6 Cash Flows from Inv Activities -20 76 1 -6 EBITDA Growth (%) -60.0 16.7 671.4 22.2 Chg in PP&E -21 -13 -2 0 Operating Profit Growth (%) - - - 37.5 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) - - - 2.9 Chg in Financial Assets 13 11 6 -6 Accounts Receivable Turnover (x) 5.8 5.9 6.1 6.7 Others -12 78 -3 0 Inventory Turnover (x) 4.9 5.8 6.4 7.0 Cash Flows from Fin Activities 90 -105 -13 30 Accounts Payable Turnover (x) 10.7 12.8 10.4 11.1 Chg in Financial Liabilities 82 -105 -71 30 ROA (%) -0.3 -12.3 8.9 8.8 Chg in Equity 0 -3 0 0 ROE (%) 1.2 -15.2 14.4 13.0 Dividends Paid 0 0 0 0 ROIC (%) 1.1 -11.7 10.0 17.3 Others 8 3 58 0 Liability to Equity Ratio (%) 103.7 87.6 42.6 51.8 Increase (Decrease) in Cash 16 6 35 76 Current Ratio (%) 83.0 120.1 220.0 225.6 Beginning Balance 7 22 25 60 Net Debt to Equity Ratio (%) 58.7 27.2 -14.6 -27.8 Ending Balance 22 28 60 136 Interest Coverage Ratio (x) -5.2 -10.5 175.5 155.9 Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 53 September 12, 2016 Electric Vehicles
People & Technology (137400 KQ) Penetrating the Chinese market
Rechargeable battery/electronic materials equipment play People & Technology (P&T) manufactures rechargeable battery electrode Not Rated processing equipment (including coaters, roll presses, and slitters) and equipment for electronic materials production based on roll-to-roll technology (which Target Price (12M, W) - facilitates manufacturing on rolls of flexible plastic or metal foil). The company’s major customers include Samsung SDI, LG Chem, and BYD in the rechargeable Share Price (9/9/16, W) 10,850 battery segment, and Samsung Electro-Mechanics (SEMCO), MNtech, and LS Mtron in the electronic materials segment. Expected Return - Aggressive penetration into China
OP (16F, Wbn) 9 In 1H16, P&T’s exports to China reached W44.3bn, exceeding the W32.8bn figure Consensus OP (16F, Wbn) 9 recorded in 2015. We believe rechargeable battery equipment accounted for most of the exports. Until LG Chem and Samsung SDI resume capex, exports to China will EPS Growth (16F, %) - likely represent an overwhelming portion of total sales. P&T has been more Market EPS Growth (16F, %) 20.1 aggressive in its efforts to win customers in China than other Korean equipment P/E (16F, x) 12.4 makers, turning to a local agent for help. Although sales made via the local agent Market P/E (16F, x) 10.7 yield lower profits than direct sales, the strategy seems to have helped P&T acquire KOSDAQ 664.99 clients in a short period of time despite the fact that its brand reputation is weaker Market Cap (Wbn) 82 than that of Japanese competitors. Shares Outstanding (mn) 8 Free Float (%) 71.3 Currently, the company boasts around 10 Chinese rechargeable battery makers as Foreign Ownership (%) 2.8 clients and is increasing direct marketing by its Xi’an subsidiary Beta (12M) 1.02 Earnings likely to continue improving on global EV market expansion 52-Week Low 7,390 52-Week High 14,650 For 2016, we forecast P&T to post revenue of W120.6bn (+32% YoY), operating profit of W8.7bn (turning to profit YoY), and net profit attributable to controlling (%) 1M 6M 12M interests of W6.6bn (turning to profit YoY). Despite sales growth, profitability was Absolute -24.7 10.0 43.5 weak in 2Q16 (OP margin of 4.9%) due to higher commissions paid to the Chinese Relative -20.6 12.5 42.6 partner. However, from 2H16, OP margin is likely to improve, as: 1) the proportion
200 P&T KOSDAQ of direct sales to Chinese local rechargeable battery makers will likely rise, and 2) 180 the Xi’an plant will likely begin to manufacture equipment components in-house 160 (thus cutting costs). 140 120 The stock is trading at a 2016F P/E of 12.4x (14.2x reflecting the conversion of 100 convertible bonds) and a 2016F P/B of 1.3x. We believe the company is the most 80 undervalued play among listed Korean rechargeable battery equipment makers 9.15 1.16 5.16 9.16 (PNE Solution, DA Technology, and NS). Expectations for new orders are rising, as
its Chinese customers (e.g., EVE Energy, Hefei Guoxuan High-tech Power Energy) are expanding facilities. In addition, LG Chem and Samsung SDI, which have delayed capex, are also likely to expand their presence in Europe going forward.
FY (Dec.) 12/12 12/13 12/14 12/15 12/16F 12/17F Revenue (Wbn) 55 83 106 91 121 145 OP (Wbn) 7 5 9 0 9 14 OP margin (%) 12.7 6.0 8.5 0.0 7.4 9.7 NP (Wbn) 5 3 6 0 7 11 EPS (W) 652 437 808 -31 872 1,386 ROE (%) 10.6 7.0 12.0 -0.4 11.6 16.1 P/E (x) 9.7 16.4 10.3 - 12.4 7.8 P/B (x) 1.0 1.1 1.1 1.6 1.3 1.2 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 54 September 12, 2016 Electric Vehicles
Figure 62. Order backlog breakdown
(Wbn) 100 Semiconductor LIB Materials
80 4 2 4 3 18 60 11 3 3 21 3 4 3 31 2 0 11 21 22 24 40 4 15 24 30 54 34 41 10 24 56 49 20 39 36 35 33 30 29 31 26 21 24 15 15 0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16
Source: Company data, Mirae Asset Daewoo Research
Figure 63. Revenue breakdown by region Figure 64. Revenue by region
(%) Other China Korea (Wbn) 120 100 5 3 3 2 Other China Korea 13 9 3 4 17 20 20 100 80 22 36 2 8 80 10 60 16 82 3 33 60 3 1 83 40 78 77 77 9 40 81 55 63 64 44 20 50 20 42 16 9 0 0 11 12 13 14 15 1H16 11 12 13 14 15 1H16
Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research
Figure 65. Annual revenue breakdown Figure 66. Quarterly revenue and gross margin
(Wbn) (Wbn) Semiconductor (L) LIB (L) (%) 140 Semiconductor 70 Materials (L) Gross margin (R) 30 LIB 120 Materials 60 25
100 50 20 80 40 15 60 30 10 40 20
20 10 5
0 0 0 09 10 11 12 13 14 15 16F 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16F Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 55 September 12, 2016 Electric Vehicles
People & Technology (137400 KQ/Not Rated)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15 12/16F 12/17F (Wbn) 12/14 12/15 12/16F 12/17F Revenue 106 91 121 145 Current Assets 69 73 85 98 Cost of Sales 87 81 93 113 Cash and Cash Equivalents 9 6 11 12 Gross Profit 19 10 28 32 AR & Other Receivables 10 19 22 27 SG&A Expenses 9 10 19 19 Inventories 32 27 36 43 Operating Profit (Adj) 9 0 9 14 Other Current Assets 18 21 16 16 Operating Profit 9 0 9 14 Non-Current Assets 19 29 31 34 Non-Operating Profit -1 -1 0 0 Investments in Associates 0 0 0 0 Net Financial Income 0 -1 -1 -1 Property, Plant and Equipment 16 25 28 30 Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 1 1 1 1 Pretax Profit 8 -1 9 14 Total Assets 88 102 116 132 Income Tax 2 0 2 3 Current Liabilities 23 31 44 51 Profit from Continuing Operations 6 0 7 11 AP & Other Payables 9 8 18 21 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1 7 11 11 Net Profit 6 0 7 11 Other Current Liabilities 13 16 15 19 Controlling Interests 6 0 7 11 Non-Current Liabilities 10 17 11 11 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 10 17 11 11 Total Comprehensive Profit 6 0 7 11 Other Non-Current Liabilities 0 0 0 0 Controlling Interests 6 0 7 11 Total Liabilities 33 48 56 62 Non-Controlling Interests 0 0 0 0 Controlling Interests 55 54 60 70 EBITDA 10 1 11 16 Capital Stock 4 4 4 4 FCF (Free Cash Flow) 0 -12 1 2 Capital Surplus 19 19 19 19 EBITDA Margin (%) 9.4 1.1 9.1 11.0 Retained Earnings 33 32 39 48 Operating Profit Margin (%) 8.5 0.0 7.4 9.7 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 5.7 0.0 5.8 7.6 Stockholders' Equity 55 54 60 70
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15 12/16F 12/17F 12/14 12/15 12/16F 12/17F Cash Flows from Op Activities 3 -3 5 7 P/E (x) 10.3 - 12.4 7.8 Net Profit 6 0 7 11 P/CF (x) 5.0 50.6 7.8 5.1 Non-Cash Income and Expense 7 2 4 6 P/B (x) 1.1 1.6 1.3 1.2 Depreciation 1 1 2 3 EV/EBITDA (x) 5.0 64.5 7.6 4.9 Amortization 0 0 0 0 EPS (W) 808 -31 872 1,386 Others 6 1 2 3 CFPS (W) 1,676 230 1,390 2,140 Chg in Working Capital -9 -2 -3 -6 BPS (W) 7,321 7,191 8,063 9,350 Chg in AR & Other Receivables -1 -8 -3 -5 DPS (W) 100 0 100 100 Chg in Inventories -5 2 -8 -7 Payout ratio (%) 12.2 0.0 11.3 7.1 Chg in AP & Other Payables 1 -1 6 2 Dividend Yield (%) 1.2 0.0 0.9 0.9 Income Tax Paid -1 -2 -2 -3 Revenue Growth (%) 27.7 -14.2 33.0 19.8 Cash Flows from Inv Activities -4 -12 2 -5 EBITDA Growth (%) 100.0 -90.0 1,000.0 45.5 Chg in PP&E -3 -9 -4 -5 Operating Profit Growth (%) 80.0 - - 55.6 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 84.9 - - 58.9 Chg in Financial Assets -1 -2 6 -1 Accounts Receivable Turnover (x) 9.5 6.3 5.9 6.0 Others 0 -1 0 1 Inventory Turnover (x) 3.5 3.1 3.9 3.7 Cash Flows from Fin Activities 9 12 -2 -1 Accounts Payable Turnover (x) 11.9 10.5 8.8 7.6 Chg in Financial Liabilities - - - - ROA (%) 7.6 -0.2 6.1 8.5 Chg in Equity 1 0 0 0 ROE (%) 12.0 -0.4 11.6 16.1 Dividends Paid 0 -1 0 -1 ROIC (%) 19.8 -0.2 12.7 17.5 Others - - - - Liability to Equity Ratio (%) 61.1 89.2 92.1 88.1 Increase (Decrease) in Cash 8 -3 5 1 Current Ratio (%) 296.4 238.0 190.6 193.1 Beginning Balance 0 9 6 11 Net Debt to Equity Ratio (%) -27.3 -2.0 -2.8 -3.2 Ending Balance 9 6 11 12 Interest Coverage Ratio (x) 17.2 -0.2 9.7 15.1 Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 56 September 12, 2016 Electric Vehicles
APPENDIX 1
Important Disclosures & Disclaimers 2-Year Rating and Target Price History
Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price LG Chem (051910) 09/11/2016 Buy 370,000 07/30/2015 Buy 123,000 06/01/2016 Buy 400,000 07/01/2015 Buy 168,000 03/22/2016 Buy 420,000 05/26/2015 Buy 175,000 10/18/2015 Buy 400,000 04/28/2015 Buy 156,000 05/26/2015 Buy 360,000 02/02/2015 Buy 163,000 04/19/2015 Buy 330,000 01/23/2015 Buy 150,000 04/01/2015 Buy 300,000 No Coverage 01/26/2015 Buy 270,000 10/31/2014 Buy 180,000 10/20/2014 Buy 300,000 10/01/2014 Buy 190,000 10/05/2014 Buy 330,000 09/01/2014 Buy 200,000 09/03/2014 Buy 350,000 Iljin Materials (020150) 08/16/2016 Buy 23,000 Samsung SDI (006400) 09/11/2016 Trading Buy 120,000 05/16/2016 Buy 21,000 04/29/2016 Trading Buy 129,000 03/07/2016 Buy 13,600 01/25/2016 Buy 138,000 01/23/2015 Hold - 11/29/2015 Buy 148,000 No Coverage 10/01/2015 Buy 133,000 09/01/2014 Hold -
(W) (W) Samsung SDI (W) LG Chem Iljin Materials 500,000 250,000 25,000
400,000 200,000 20,000
300,000 150,000 15,000
200,000 100,000 10,000
100,000 50,000 5,000
0 0 0 Sep 14 Sep 15 Sep 16 Sep 14 Sep 15 Sep 16 Sep 14 Sep 15 Sep 16
Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price (▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold ( ●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.
Equity Ratings Distribution Buy Trading Buy Hold Sell 70.73% 17.56% 11.71% 0.00% * Based on recommendations in the last 12-months (as of June 30, 2016)
Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has been acting as a financial advisor to People&Technology Inc. for its treasury stock trust.
Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the
Mirae Asset Daewoo Research 57 September 12, 2016 Electric Vehicles
time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.
Disclaimers This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Mirae Asset Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
Mirae Asset Daewoo International Network
Mirae Asset Daewoo Co., Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor
Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong, China United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000
Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte., Ltd. Tokyo Representative Office 41st Floor, Tower 42 Six Battery Road #11-01 7th Floor, Yusen Building 25 Old Broad St. Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511
Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers Room 38T31, 38F SWFC Suite 2103, Saigon Trade Center B-12 Jianguomenwai Avenue 100 Century Avenue 37 Ton Duc Thang St,
Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Dist. 1, Ho Chi Minh City, China China Vietnam Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia 2401B, 24th Floor, East Tower, Twin Towers #406, Blue Sky Tower, Peace Avenue 17 Equity Tower Building Lt.50 B-12 Jianguomenwai Avenue, 1 Khoroo, Sukhbaatar District Sudirman Central Business District Jl.
Chaoyang District, Beijing 100022 Ulaanbaatar 14240 Jendral Sudirman Kav. 52 -53, Jakarta Selatan China Mongolia Indonesia 12190 Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140
Mirae Asset Daewoo Research 58