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Asian Insights Sparx Regional Automobile, Oil & Metal Sectors Asian Insights SparX Regional Automobile, Oil & Metal Sectors DBS Group Research . Equity 17 JulyRefer 2018 to important disclosures at the end of this report Asia leapfrogs in E-mobility HSI: 28,481 Transportation sector one of the largest generators of ANALYST air pollutants in major global cities Rachel MIU +852 2863 8843 [email protected] Intensifying vehicle electrification could translate to Suvro Sarkar +65 81893144 electric vehicle (EV) penetration rate of over 20% by [email protected] 2030 globally Pei Hwa HO +65 6682 3714 [email protected] For every two EVs sold globally, one will be in China, Lee Eun Young +65 6682 3708 creating a huge EV supply chain network [email protected] Yi Seul SHIN +65 6682 3704 Expect Chinese upstream suppliers to benefit from [email protected] robust development of global EV market Recommendation & valuation E-mobility is a game-changer. Electrification aims to address vehicle pollution. Western governments have plans to phase T arget out or cut fossil-fuel vehicle sales from 2025 to 2040. We Price Price PE Mk t Cap estimate global EV to account for some 20% of total vehicle Company Name Local$ Local$ Recom 18F x US$m sales by 2030, translating to about 27m units. With the rise in Battery EVs, approximately 6% of annual oil demand could disappear Contemporary Amperex 83.90 n.a. NR 55.1 27,566 by 2030. To power EV development, governments are leaning (300750 CH) more on clean energy and by 2030, half of the global energy Guoxuan High-Tech Co 13.64 n.a. NR 14.3 2,345 mix will be from natural gas and renewable sources. The robust Ltd (002074 CH) EV market is also a major driver of the metals sector, such as A uto Parts cobalt and copper. Minth Group* (425 32.25 39.80 BUY 13.1 4,726 EV upstream supply chain to benefit. China, the world’s HK) largest automobile market (both electric and traditional), is Nexteer Automotive 11.54 15.60 BUY 10.5 3,698 leading the E-mobility development, with its strong policies and Group* (1316 HK) fiscal support. The rapid EV market development has created an Auto Makers exciting value chain, one of the most complete in the world. BYD 'H'* (1211 HK) 45.30 60.00 BUY 25.6 17,354 Several Chinese upstream suppliers such as battery Tesla (TSLA US) 310.10 n.a. NR n.a. 52,653 manufacturers and auto parts producers stand to benefit. The Source: Thomson Reuters, *DBS Bank (Hong Kong) Limited (“DBS HK”), Chinese EV market upcycle is expected to increase battery Bloomberg Finance L.P. production by almost 5x to 215GWh by 2022, up from 44.5GWh in 2017. On the other hand, the introduction of the EV quota cum carbon credit dual system in 2019 means automakers could face keen market competition. ASIAN INSIGHTS ed-TH/ JS / sa- AS / CW / CS Asian Insights SparX Regional Automobile, Oil & Metal Sectors The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents Investment summary 3 Rapid economic development brings environmental woes 4 World governments embarking on electric vehicle development to tackle air pollution 7 United States – Exit from Paris Agreement, a potential setback 10 Europe – Set timeline to exit from ICE vehicle productions 11 Asia –China leading in EV adoption 16 India: U-turn on full electric adoption by 2030 23 South Korea: EV market still in an early stage but has huge potential 24 Oil sector – EV unlikely a demand shock 28 Metals sector: Key beneficiary from the EV growth 32 Copper: demand growth powered by EV, from battery to infrastructure 32 Steel – intensifying competition but to remain as key autobody material 34 Aluminium – the lighter the better 34 Profile BYD Company (1211 HK) 40 Contemporary Amperex Technology (300750 CH) 42 Minth Group (425 HK) 44 Nexteer Automotive Group (1316 HK) 46 Special thanks to Hanjoon Lee for his contributions to the Korean EV market analysis Note: Prices used as of 16 July 2018 ASIAN INSIGHTS Page 2 Asian Insights SparX Regional Automobile, Oil & Metal Sectors Investment summary shock from EVs, as the evolution, growth and adoption of EVs will take time. Rather, industry investments and geopolitics will Thriving cities, environmental woes be the major factors in determining oil prices in the future. Rising carbon emissions from transportation sector a concern; But a substantial driver of metals sector. The anticipated robust countries looking at exiting from fossil vehicle sales. Both EV market outlook has spurred prices of raw materials such as developed and developing nations are grappling with rising lithium, cobalt, nickel and copper, the key raw materials for carbon emission levels, due to the rapid economic lithium batteries, automotive parts and infrastructure network development in the past decade. Asia’s share of the carbon to hit record levels. Based on International Copper emission pie is huge, and China alone accounted for 26% in Association’s estimates, the amount of copper needed to make 2016, double that of the US. Of this, transportation is one of one battery-electric vehicle (BEV) and hybrid electric vehicle the main culprits causing rising carbon emissions. Several (HEV) is about four times and two times respectively the European countries have made plans to exit fossil fuel vehicles amount needed for an internal combustion engine vehicle starting from 2025 to 2040, such as Norway, Switzerland, (ICEV). From 2017-2030, we estimate copper demand to rise Netherlands, Germany, United Kingdom and France. China is by 19% per annum to 1.91m tons solely from EVs alone. Other looking at a time frame after 2025. metals such as advanced high strength steel and aluminium are expected to ride on the EV trend, as these metals are widely Policies and government directives to spur global electric used by automakers to reduce the weight of the EVs to vehicle (EV) market development; financial incentives an enhance battery performance. important driver. Globally, several government bodies (from the developed countries and Asia, particularly China) are China dominates global EV penetration rate. China has the pushing for EV development as part of their initiatives to largest electric vehicle (EV) market in the world. For every two reduce carbon emissions. Policies (including financial incentives EVs sold globally, one is in China. To accelerate the EV and tax credits) have been implemented to encourage development, the government introduced the EV quota and automakers and car buyers to switch over to EVs. In China, the carbon credit dual system. The EV quota-credit policy effective “stick and carrot” approach since 2010 has produced some from January 1, 2019, requires passenger vehicle makers in rather favourable results. From 2013 to 2017, the Chinese China to generate a certain amount of credit points from EVs government have spent around Rmb50bn on EV subsidies. (equivalent to10% of total production in 2019 and 12% in 2020). In addition, automakers have to comply with higher Rapid global EV market expansion; Asia to lead the race. In vehicle fuel standards under the corporate average fuel 2017, EV sales accounted for around 2% of the global vehicle consumption (CAFC) policy. Starting from June 2018, only EVs market. Due to strong policies and government directives, we that meet the higher drive range will be entitled to subsidies. project global EV sales to increase from about 1.26m units in This shift effectively forces EV makers to develop more 2016 to approximately 27m units by 2030. This translates to an advanced technologies to level up with the international EV penetration rate of about 20% (from 2%% in 2017). And players. Hence, we forecast EV sales to reach approximately the bulk of the EV consumption is expected to come from Asia. 15m units by 2030, up from 777,000 units in 2017. By 2030, Europe ranks second, well supported by several of the Nordic China’s EV penetration is expected to hit 33%. countries’ aggressive policy on EV adoption. Broadly, the Asian EV market is expected to be 3.5 times the size of North Top players in EV value-chain. Along the EV value-chain, we America and 2.6 times of Europe by 2030. prefer upstream EV parts suppliers, as they directly tap on the global EV market trend. These include high-end EV batteries Future power source for EVs. Currently, vehicle energy comes and light-weight automotive parts. China has a relatively large largely from fossil fuels. As governments increase their EV supply chain given its scale. By end-2017, China EV market investments into clean energy, reliance on clean fuel is size has reached approximately 1.8m units, the largest in the expected to play a bigger role in powering EVs in the future. By world. Among the Chinese EV battery makers, Contemporary 2030, clean energy (natural gas and renewables) is projected to Amperex Technology Ltd (CATL; 300750 CH) is the largest account for about half of the energy mix to power EVs, up player in the world. The Chinese EV market upcycle is expected from 39% in 2016. to create a battery market size of 215GWh by 2022, almost 5x up from 44.5GWh in 2017. CATL has locked in several EVs unlikely to create a demand shock on oil sector. The international automakers to be their battery supplier. In the passenger vehicle market (factoring in improving efficiencies, lightweight automotive parts segment, Minth (425 HK) is one share mobility and EV) accounts for about 21% of global oil of the leading global players.
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