September 2, 2020
Batteries/ESS (Overweight/Maintain) Key to the green energy revolution
Mirae Asset Daewoo Co., Ltd. Yeon-ju Park [email protected] Chuljoong Kim [email protected] Youngbae Kwon, CFA [email protected]
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. September 2, 2020 Batteries/ESS
CONTENTS
I. Investment summary 3 ESS are key to the green energy revolution 3
II. US: Past the inflection point 4 1. ESS adoption in California 4 2. Increase in utility-scale energy storage projects 6 3. Grid parity and ESS demand growth 7 4. Economic feasibility 9 5. Strong demand prospects in the US 11
III. ESS are key to the green energy revolution 12 1. Global ESS market to grow seven-fold through 2025 12 2. Falling battery costs to accelerate ESS market growth from 2023 13
Ⅳ. Investment strategy 14 Top-tier battery makers to benefit: Higher valuations for ESS businesses 14
Key recommendations 16 LG Chem 17 Samsung SDI 25 CATL 29
Mirae Asset Daewoo Research 2 September 2, 2020 Batteries/ESS
I. Investment summary
ESS are key to the green energy revolution; battery market is undervalued despite high margins and strong growth potential
Late last year, the California Public Utilities Commission called on power providers to secure 3.3GW in new clean energy resources by 2023. In response, two major utility companies— Southern California Edison (SCE) and Pacific Gas and Electric Company (PG&E)—plan to install energy storage systems (ESS) with a combined battery storage capacity of 1.2GW and maximum dischargeable capacity of 4.8GWh. The capacity is expected to be in service by August 2021. These projects are huge in scale, far exceeding the US’s total ESS deployment in 2019 (523MW/1.1GWh).
There are numerous advantages to ESS. Such systems are eco-friendly, have short installation periods, and help to enhance power grid/power supply stability in regions with a high share of renewable resources in the power generation mix (such as California). Most of all, ESS power generation costs have declined over the past two years to the point where ESS are competitive enough to replace gas peaking power plants, which are high-cost, low-efficiency facilities that run only when there is high demand for electricity.
Consensus estimates for the US ESS market are being revised up, despite COVID-19. Market researcher Wood Mackenzie projects US ESS demand to increase sharply from 523MW in 2019 to 1.5GW in 2020, 3.6GW in 2021, and 7GW in 2025. And actual ESS demand may grow more rapidly than expected. We estimate solar-plus-storage projects alone will reach 7.5GW in 2025, and ESS solutions stand a strong chance of replacing peaking power plants. Of note, the massive power shortage that hit California in August is likely to accelerate the ESS market’s expansion.
We expect the global ESS market to expand more than seven-fold to 90GWh in 2025 (from 12GWh in 2020). As the US market illustrates, an increasing share of renewable sources in the power generation mix should spur higher ESS demand to ensure the stability of the electricity grid and power supply. In addition, we foresee ESS battery prices declining further around 2023 (aided by technological innovation), which should cause ESS demand growth to accelerate.
Like the electric vehicle (EV) battery market, the fast-growing ESS battery market is likely to be led by top-tier companies. Accordingly, we revise up the value of battery companies’ ESS businesses and maintain LG Chem, Samsung SDI, and CATL as our top picks.
We forecast global demand for ESS-use lithium-ion batteries to expand seven-fold to 90GWh in 2025 (from 12GWh in 2020). Given that ESS demand in the US is set to expand rapidly over the next two to three years, battery sales to the US may exceed market expectations.
We expect the ESS-use battery market to be highly concentrated, similar to the EV battery market. In addition, margins are likely to be high relative to EV battery margins. Given the conservative nature of the power generation market, we expect batteries with proven track records to be favored over low-priced batteries. In addition, we do not anticipate high price- cutting pressure, as ESS batteries account for just a fraction of total power system costs (whereas EV batteries account for 30-40% of EV costs). In the medium/long term, winners in the EV battery market are well positioned to extend their leadership to the ESS battery market.
We maintain our positive view on global top-tier battery companies, despite recent share rallies. The EV battery market is likely to outperform expectations in terms of growth and margins. Although there are concerns ahead of Tesla’s (TSLA US/CP: US$475.05) Battery Day, we note that Tesla’s innovations have always been a boon to EV battery companies in the past. Moreover, the expansion of the global ESS market should bolster battery companies’ top and bottom lines. We lift our target price on LG Chem by 35% to W1,050,000 and maintain our target prices of W690,000 for Samsung SDI and CNY270 for CATL.
Mirae Asset Daewoo Research 3 September 2, 2020 Batteries/ESS
II. US: Past the inflection point
1. ESS adoption in California
In the US, SCE and PG&E are taking the lead in ESS adoption. SCE is planning to install 770MW/3GWh of battery energy storage by Aug. 2021, while PG&E is set to add 423MW/1.7GWh. Taken together, these capacity plans (1.2GW/4.8GWh) are far higher than the US’s total ESS deployment in 2019 (523MW/1.1GWh; Wood Mackenzie estimates).
Moreover, SCE and PG&E are planning to install total storage capacity of 1.2GW and 717MW, respectively, by 2023. SCE estimates that California will need 10GW of storage by 2030 and 30GW by 2045.
Table 1. California power companies’ ESS projects Company Power capacity Energy capacity Duration Project name Developer Launch (offtaker) (MW) (MWh) (hours) SCE Blythe 2 NextEra Energy Aug. 2021 115 460 4.0 Blythe 3 NextEra Energy Aug. 2021 115 460 4.0 McCoy NextEra Energy Aug. 2021 230 920 4.0 Garland Southern Power Aug. 2021 88 352 4.0 Tranquility Southern Power Aug. 2021 72 288 4.0 Sanborn Terra-Gen Power Aug. 2021 50 200 4.0 Gateway 1-2 LS Power Aug. 2021 100 400 4.0 Total 770 3,080 PG&E Moss 100 Dynegy Marketing and Trade Aug. 2021 100 400 4.0 Blythe Energy Storage 110 NextEra Energy Aug. 2021 63 252 4.0 Diablo Energy Storage Diablo Energy Storage Aug. 2021 50 200 4.0 Diablo Energy Storage Diablo Energy Storage Aug. 2021 50 200 4.0 Diablo Energy Storage Diablo Energy Storage Aug. 2021 50 200 4.0 Gateway Energy Storage LS Power Aug. 2021 50 200 4.0 Coso Battery Storage Coso Battery Storage Aug. 2021 60 240 4.0 Total 423 1,692 Notes: Power capacity is a battery’s maximum output; energy capacity is the amount of energy stored in a battery; duration is the ratio of energy capacity to power capacity. Source: Press materials, Mirae Asset Daewoo Research
Figure 1. SCE to add 770MW/3GWh of ESS capacity by Aug. Figure 2. SCE estimates that California will need 10GW of ESS
2021 capacity by 2030
Source: SCE, Mirae Asset Daewoo Research Source: SCE, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 4 September 2, 2020 Batteries/ESS
In Nov. 2019, the California Public Utilities Commission called on power providers to secure 3.3GW in new clean energy resources by 2023 (50% by Aug. 2021), in anticipation of a major shortfall in grid capacity due to the planned closures of gas-fired power plants and the growing mix of renewables.
In response, several power suppliers, including SCE, have undertaken massive-scale ESS projects. ESS facilities boast numerous advantages; for example, they are more eco-friendly than gas-fired power plants and cheaper than peaking power plants. They also have relatively short installation periods.
ESS facilities also help address the “duck curve” problem—the timing mismatch between peak demand and generation—that poses challenges (e.g., grid pressure and reduced electricity quality) for renewable energy sources. In the state of California, solar/wind power accounts for 20% of total energy production.
Table 2. ESS project size by company (by 2023) Company Power capacity (MW) Energy capacity (MWh) Notes SCE 1,185 4,740 770MW/3GWh by Aug. 2021 PG&E 717 2,868 423MW/1.7GWh by Aug. 2021 San Diego Gas and Electric 293 1,172 California Community Choice Association 800 3,200 Heavy PV/ESS reliance Total 2,995 11,980 Source: CPUC, Mirae Asset Daewoo Research
Figure 3. Energy mix of solar and wind power in California Figure 4. “Duck curve” problem exacerbates grid instability
(% ) 14 Solar PV Wind 12
10
8
6
4
2 2014 2015 2016 2017 2018 2019
Source: California Energy Commission, Mirae Asset Daewoo Research Source: CAISO, press materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 5 September 2, 2020 Batteries/ESS
2. Increase in utility-scale energy storage projects
Utility-scale energy storage projects are gaining significant momentum in the Western part of the US (beyond California).
According to a recent study by the Lawrence Berkeley National Laboratory (published in Jul. 2020), 28% (102GW) of solar PV capacity within interconnection queues were solar-plus- storage hybrids at end-2019. In 2019, stand-alone storage projects also increased by a whopping 50GW.
Indeed, NextEra Energy (NEE US/CP: US$277.13), the largest renewable energy player in North America, has seen its energy storage orders more than triple from 600MW at end-2018 to 2.2GW in 2Q20 (following a surge in 2H19-1H20).
Figure 5. US energy capacity in interconnection queues
Source: Lawrence Berkeley National Laboratory (Jul. 2020), Mirae Asset Daewoo Research
Figure 6. Energy capacity in interconnection queues (end- Figure 7. NextEra Energy: ESS orders 2019)
(GW) (MW)
400 Hybrid Stand-alone 2500 In operation Backlog +630 2,200 2000 Backlog additions 300 +680 1500
200 1000 +250 600 27.7% 500 100
4.8% 0 0.6% 4Q18 1H19 2H19 1H20 Current 0 In operation + portfolio Solar Wind Natural Ggs Storage backlog (backlog)
Source: Lawrence Berkeley National Laboratory, Mirae Asset Daewoo Research Source: NextEra Energy, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 6 September 2, 2020 Batteries/ESS
3. Grid parity and ESS demand growth
ESS demand is surging due to rising renewable energy generation and declining battery prices; indeed, the utilization of storage systems is increasingly being viewed as an efficient way to address the aforementioned “duck curve” problem and ensure grid stability and power quality. Against this backdrop, policy support for ESS is growing, with large-scale installations becoming mandatory in several states that meet a significant portion of their energy needs via renewables. Moreover, with battery prices falling significantly, ESS facilities can now serve as a substitute for peaking power plants and, in some cases, compete with baseload power plants. Simply put, ESS solutions, which were once primarily used for frequency regulation, are now gaining in importance in the electricity market.
In the US, the cost of utility-scale solar power generation is estimated to have fallen from US$250/MWh (excluding investment tax credit) in 2010 to US$53.8/MWh in 2018—lower than the costs associated with coal, nuclear, gas, and even wind generation. The costs are even lower in Western states that enjoy abundant sunlight. In 1H20, solar power accounted for 16% of California’s energy mix, and its contribution is on the rise in Nevada, Hawaii, and Arizona.
Unfortunately, the rising share of renewables has led to increased grid pressure and occasional power supply disruptions. In response, California (1.3GW by 2020) and other states (12GW in ESS capacity to be installed in seven states by 2030) have mandated the installation of energy storage solutions.
Looking ahead, we expect ESS demand growth to accelerate, as: 1) solar PV projects are increasing in scale amid falling power generation costs; and 2) several key states are seeking to source more energy from renewable sources under the renewable portfolio standard (RPS). As of end-2019, there was 350GW of solar PV power capacity in interconnection queues.
Figure 8. ESS applications
Source: Lazard, Mirae Asset Daewoo Research
Table 3. ESS installation mandates by state State Notes California Installation of 1.3GW by 2020; in service by 2024 Massachusetts Bill H.4857 (Aug. 2018): 1GWh by 2025 New York Oct. 2018 mandate: 3GW by 2030 New Jersey May 2018 mandate: 2GW by 2030 Virginia Feb. 2020 mandate: 3GW by 2035 Source: Press materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 7 September 2, 2020 Batteries/ESS
Figure 9. Power purchase agreement (PPA) price trends for US Figure 10. US solar PV projects in interconnection queues utility-scale solar PV projects
Source: Lawrence Berkeley National Laboratory, Mirae Asset Daewoo Research Source: Exeter Associates, Mirae Asset Daewoo Research
Table 4. RPS targets by state State Target Arizona 15% (2025) 44% (2024) 52% (2027) California 60% (2030) 100% (2045) 30% (2020; IOU-based) Colorado 100% (2050) Connecticut 44% (2030) Delaware 25% (2025-2026) 30% (2020) 40% (2030) Hawaii 70% (2040) 100% (2045) Illinois 25% (2025-2026) Indiana 10% (2025) 30.5% (2020) Maryland 50% (2030) 50% (2030) Nevada 100% (2050) New Jersey 50% (2030) 40% (2025) New Mexico 80% (2040) 100% (2045) 70% (2030) New York 100% (2040) North Carolina 12.5% (2021; IOU-based) Utah 20% (2025) Source: NCSL, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 8 September 2, 2020 Batteries/ESS
4. Economic feasibility
The economics of ESS have improved significantly amid a sustained fall in battery prices.
IHS Markit estimates that the average power generation cost of ESS in the US has fallen from US$160/MWh in 2017 to US$130/MWh in 2020 (based on four-hour duration batteries), following a drop in ESS installation costs from US$630/kWh in 2017 to US$470/kWh in 2020 (BNEF and GTM Research estimates). Battery costs—which account for 50% of total costs— have plunged by around 43%, and non-battery costs have also fallen.
Although fossil fuel power plants still enjoy a cost edge, ESS facilities are already competitive enough to replace gas peaking power plants. Lazard estimates the power generation costs of US gas peaking power plants at US$150-200/MWh.
In fact, ESS have started to replace peaking power plants in the US. Notably, Elsevier estimates that 28GW of peaking power capacity can be substituted with ESS, and GTM Research and Wood Mackenzie project that over 20GW of additional peaking power capacity will be needed over the next decade.
Figure 11. US utility-scale ESS power generation cost estimates (four-hour duration batteries)
Source: IHS Markit, “Battery Energy Storage Overview,” Mirae Asset Daewoo Research
Figure 13. Fossil fuel power generation cost estimates (Nov. Figure 12. Power supply/demand 2018)
(US$/MWh) 250
200
150
100
50
0 Gas peaker Nuclear Coal Gas
Source: E&I Consulting, Mirae Asset Daewoo Research Source: Lazard, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 9 September 2, 2020 Batteries/ESS
In areas with abundant sunlight, solar-plus-storage projects are more competitive than fossil fuel power plants. The PPA prices of these projects in Nevada and Arizona are only US$25- 40/MWh. The Lawrence Berkeley National Laboratory estimates that the levelized cost of energy (LCOE) for solar-plus-storage projects coming online in 2021-23 has fallen dramatically from US$120/MWh in 2015 to US$20-50/MWh in 2022.
Figure 14. PPA trends for US solar-plus-storage projects
Source: Lawrence Berkeley National Laboratory, Mirae Asset Daewoo Research
Table 5. PPA prices of US solar-plus-storage projects Battery Battery Battery PPA PV capacity State Project Developer Offtaker Launch capacity capacity duration (2018 (MW) (MW) (MWh) (hours) US$/MWh) Arizona Wilmot NextEra TEP Dec. 2019 100 30 120 4.0 40.7 California RE Slate 2 Recurrent MBCP/SVCE Jun. 2021 150 45 180 4.0 ≤31.8 BigBeau EDF Renewable MBCP/SVCE Dec. 2021 128 40 160 4.0 ≤30.9 Eland 8minute LADWP/Glendale Dec. 2023 400 300 1200 4.0 28.5 Hawaii Lawai AES KIUC Oct. 2018 20 20 100 5.0 89.4 Waikoloa Solar AES Hawaiian Electric Jul. 2021 30 30 120 4.0 59.8 Kuihelani Solar AES Hawaiian Electric Jul. 2021 60 60 240 4.0 58.5 Hoohana Solar 1 174 Power Global Hawaiian Electric Dec. 2021 52 52 208 4.0 76.3 Mililani I Solar Clearway Hawaiian Electric Dec. 2021 39 39 156 4.0 68.0 Waiawa Solar Clearway Hawaiian Electric Dec. 2021 36 36 144 4.0 74.0 Hale Kuawehi Innergex Hawaiian Electric Jun. 2022 30 30 120 4.0 65.8 Nevada Battle Mountain Cypress Creek NV Energy Jun. 2021 101 25 100 4.0 22.3 Dodge Flat NextEra Energy NV Energy Dec. 2021 200 50 200 4.0 23.1 Fish Springs Ranch NextEra Energy NV Energy Dec. 2021 100 25 100 4.0 25.9 Arrow Canyon EDF Renewable NV Energy Dec. 2022 200 75 375 5.0 21.8 Southern Bighorn 8minute NV Energy Sep. 2023 300 135 540 4.0 21.9 Gemini Quinbrook/Arevia NV Energy Dec. 2023 690 380 1460 3.8 25.1 Source: Lawrence Berkeley National Laboratory, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 10 September 2, 2020 Batteries/ESS
5. Strong demand prospects in the US
Consensus estimates for the US ESS market are being revised upward, despite COVID-19. Wood Mackenzie projects US ESS demand to increase sharply from 523MW in 2019 to 1.5GW in 2020, 3.6GW in 2021, and 7GW in 2025.
We believe actual demand growth could beat expectations. First, assuming that US solar power demand reaches 25GW in 2025 and that 30% of solar PV projects that year are solar- plus-storage hybrids (based on four-hour duration batteries), we estimate the relevant ESS demand alone will reach around 7.5GW. We believe this assumption is reasonable, given that 28% of solar PV projects within interconnection queues were solar-plus-storage hybrids at end-2019.
In addition, ESS facilities stand a strong chance of replacing peaking power plants. In the US alone, ESS could potentially replace 28GW of peaking power capacity. We also expect the residential/commercial ESS markets to grow steadily.
Based on battery energy capacity (MWh), we forecast ESS demand growth to outpace supply growth going forward. Of note, battery duration has been increasing in line with ESS solutions’ growing importance to overall power supply. While the battery duration averaged less than one hour when ESS applications were confined to frequency regulation, the latest utility-scale ESS projects typically have a battery duration of around four hours.
Meanwhile, the massive power shortage that hit California in August is likely to accelerate ESS market growth. The state experienced its first rotating power outages in 19 years, due to a spike in power demand amid a historic heat wave and supply disruptions caused by the increased energy mix of renewables. Considering California’s commitment to 100% clean energy by 2045, we expect large-scale ESS projects to gain momentum.
Table 6. US solar power demand and solar-plus-storage market estimates (MW, %, hours, MWh) 2020F 2021F 2022F 2023F 2024F 2025F Solar power demand (MW) 18,000 19,000 20,000 22,000 24,000 25,000 Proportion of solar-plus-storage 5 10 15 20 25 30 (%) Battery duration (hours) 2.0 3.0 3.0 3.5 4.0 4.0 Battery demand (MWh) 1,800 5,700 9,000 15,400 24,000 30,000 Source: Mirae Asset Daewoo Research estimates
Figure 16. Power generation trend by source in California Figure 15. US ESS market estimates (Aug. 2020)
(MWh) 40,000 Utilities Residential/commercial
30,000
20,000
10,000
0 2019 2020F 2021F 2022F 2023F 2024F 2025F
Source: Mirae Asset Daewoo Research estimates Source: CAISO, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 11 September 2, 2020 Batteries/ESS
III. ESS are key to the green energy revolution
1. Global ESS market to grow seven-fold through 2025
We expect the global ESS market to expand more than seven-fold to 90GWh in 2025 (from 12GWh in 2020). As the US market illustrates, an increasing share of renewables in the power generation mix should spur higher ESS demand to ensure grid/power supply stability. In addition, we foresee ESS battery prices declining further around 2023 (aided by technology innovation), which should cause ESS demand growth to accelerate.
In the near term, ESS market growth should stand out in the US and Australia. The US ESS market is likely to expand sharply from 2.4GWh in 2020 to 7.1GWh in 2021, supported by the completion of massive-scale projects (e.g., California). Meanwhile, ESS facilities are becoming more economically viable in Australia given its low population density, growing mix of renewables, unstable power supply (stemming from the closure of coal-fired power plants), and aging grids; Australia’s ESS market is likely to double YoY to 1.2GWh in 2020.
In Europe, regulatory hurdles and high population density have weighed on ESS market growth; installations contracted markedly from 1.4GWh in 2018 to 1.1GWh in 2019. However, we think ESS demand in the region will inevitably pick up amid strengthening emissions regulations. The European Commission and governments in major European countries have recently begun to expand policy support for ESS projects.
In China, ESS demand had remained soft until recently due to inadequate government support. However, medium-term growth potential looks strong, in light of the arrival of grid parity for renewables and the expected decline in battery prices. Wood Mackenzie expects China to become Asia’s largest ESS market by end-2024, with ESS installations reaching 12.5GW/32.1GWh (vs. 489MW/843MWh in 2017).
Table 7. Global solar-plus-storage demand estimates 2020F 2021F 2022F 2023F 2024F 2025F New demand (GW) 120.0 140.0 150.0 160.0 170.0 180.0 ESS installations as % of solar energy demand 1.0 1.0 2.0 5.0 5.0 10.0 Battery duration (hours) 2.0 2.0 2.0 3.0 3.0 4.0 ESS demand (GWh) 2.4 2.8 6.0 24.0 25.5 72.0 Source: Mirae Asset Daewoo Research estimates
Figure 18. Estimated power generation cost by source in Figure 17. ESS market outlook by region Australia (1H20)
(MWh) (US$/MWh) 120,000 North America 200 Europe Australia 90,000 China 150 Korea Other
60,000 100
50 30,000
0 0 Solar PV Onshore wind Gas Onshore wind + Solar PV + ESS 19 20F 21F 22F 23F 24F 25F ESS
Source: Mirae Asset Daewoo Research estimates Source: BNEF, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 12 September 2, 2020 Batteries/ESS
2. Falling battery costs to accelerate ESS market growth from 2023
We expect global ESS demand growth to accelerate from 2023, backed by falling battery costs.
A BNEF report notes that ESS power generation costs have nearly halved to US$150/MWh over the past two years. We attribute the faster-than-expected decline to lower battery prices, improvements in battery energy density, and lower per-unit costs amid increasing system size.
We expect the decline in ESS power generation costs to accelerate from 2023 thanks to advances in battery technology spurred by EV market growth. By 2023, we expect battery energy density/cost competitiveness to improve by more than 20% vs. 2020 levels. The growing size of ESS should also lead to a further decline in per-unit costs. In addition, battery duration—which averaged less than one hour when ESS solutions were primarily used for frequency regulation—has been extended to two to four hours to support expanded applications (such as the replacement of peaking power plants). Advances in battery management technology, as well as improvements in system/financing efficiency, should also contribute to cost savings.
NextEra Energy projects ESS storage costs to fall 16% annually from US$11-17/MWh in 2020 to US$5-9/MWh beyond 2023.
Figure 20. Estimated cost of utility-scale ESS installation in the Figure 19. Estimated ESS power generation costs (BNEF) US by battery duration (2018)
(US$/kWh)
1000 Other Battery
800
600
400
200
0 0.5 1 2 4 (Duration, hours)
Source: BNEF, Energy Storage News, Mirae Asset Daewoo Research Source: NREL, Mirae Asset Daewoo Research
Figure 21. Lithium-ion battery price estimates Figure 22. NextEra Energy’s ESS cost reduction road map
(US$/kWh) 300
250
200
150
100
50 19 20F 21F 22F 23F 24F 25F
Source: Mirae Asset Daewoo Research estimates Source: NextEra Energy, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 13 September 2, 2020 Batteries/ESS
Ⅳ. Investment strategy
Top-tier battery makers to benefit: Higher valuations for ESS businesses
Like the EV battery market, the fast-growing ESS battery market should increasingly be led by top-tier players. In light of this, we revise up our valuations of leading firms’ ESS business units and maintain LG Chem, Samsung SDI, and CATL as our top picks.
We forecast global demand for ESS-use lithium-ion batteries to expand seven-fold to 91GWh in 2025 (from 12GWh in 2020). In the US, ESS demand is set to expand particularly rapidly over the next two to three years, and we may see sales overshoot market expectations.
We expect the ESS-use battery market to remain highly concentrated, similar to the EV battery market. And significantly, margins are likely to be high relative to EV battery margins.
ESS-use batteries are dominated by the top five players, which collectively control 70% of the market (as of 2018). While most top-tier EV battery suppliers are also major ESS players, we note that LFP batteries account for around 30% of the ESS battery market. Characterized by high stability and low energy density, LFP technology is not widely used in EVs, but is commonly used in ESS (for which safety is more important than density). In recent years, suppliers of LFP batteries have aggressively expanded into the ESS market amid tight supply of NCM and NCA batteries (stemming from the rise of EVs).
Nevertheless, in the medium term, we expect the ESS battery market to be dominated by leading EV battery suppliers, given: 1) the conservative nature of utility companies/power producers; 2) the need for stable after-sales service/maintenance; and 3) efforts to improve the safety and cost competitiveness (20% reduction by around 2023) of NCM batteries.
Figure 23. Lithium-ion battery market outlook by application Figure 24. ESS-use battery market breakdown (2019)
(GWh) 1,500 IT-use ESS-use EV-use 1,200 LFP NCM 30% 900 40%
600
NCA 300 30%
0 20F 21F 22F 23F 24F 25F
Source: Mirae Asset Daewoo Research estimates Source: SNE Research, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 14 September 2, 2020 Batteries/ESS
ESS-use battery margins are likely to stay higher than EV battery margins.
Given the conservative nature of power suppliers, we expect batteries with proven track records to be favored over low-priced batteries. In addition, we do not anticipate high price- cutting pressure, as ESS batteries account for just a fraction of total power system costs (whereas EV batteries account for 30-40% of EV costs). Indeed, ESS-use battery prices fell less sharply than expected in 2018-19. We believe this moderate price decline was attributable to tight EV battery supply. In addition, ESS-use battery prices appear slightly higher than EV battery prices.
In our view, winners in the EV battery market will increasingly extend their leadership to the ESS battery market. For lithium-ion batteries, energy density improvement via superior cathode/anode materials is essential to enhancing cost competitiveness. As such, companies with advanced cathode/anode materials technologies and significant production know-how are better positioned to achieve cost reductions.
All in all, we expect the ESS-use battery market to follow in the footsteps of the EV battery market and become even more concentrated over the next two to three years.
Figure 25. ESS system price trend and outlook Figure 26. LFP and NCM battery pack price est.
0% ($/kWh) -4% 225 -6% -6% -6% -5% -7% -7% -6% -9% 175 -10%
-16% -16% -15% 125
-20%
75 -25% -25% -24% NMC LFP Rapidly declining prices Transitional phase Steady phase -30% 25 2013 2015 2017 2019 2021E 2023E 2019 2020F 2021F 2022F 2023F 2024F
Source: Wood Mackenzie, Mirae Asset Daewoo Research Source: Wood Mackenzie, Mirae Asset Daewoo Research
Figure 27. Combined M/S of top four EV battery suppliers Figure 28. LG Chem: ESS revenue by region
(% ) (Wbn) 90 2,000 US Europe Other 80 1,500
70 1,000 60
500 50
40 0 2015 2016 2017 2018 2019 Jan.-May. 2020 19 20F 21F
Source: SNE Research, Mirae Asset Daewoo Research Source: LG Chem, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 15 September 2, 2020 Batteries/ESS
Key recommendations
LG Chem (051910 KS/Buy) Growth story continues
Samsung SDI (006400/Buy) EV and ESS batteries to serve as dual growth engines
CATL (300750 CH/Buy) Small but mighty ESS business
Mirae Asset Daewoo Research 16 [Korea] Chemicals/Batteries September 2, 2020
LG Chem Buy (051910 KS) (Maintain)
Growth story continues TP: W1,050,000 ▲ Upside: 41.3%
Mirae Asset Daewoo Co., Ltd. Yeon-ju Park [email protected]
Lift TP to W1,050,000 Positive surprises likely to continue; raise TP and maintain as our top pick We lift our target price on LG Chem by 35% to W1,050,000, as we revised up our valuation of the battery business. For the EV battery business, positive surprises (in terms of growth potential and margins) are likely to continue. Tesla’s Battery Day (scheduled for mid-September) should accelerate the expansion of the EV market and thus is likely to be positive overall to LG Chem. Only a handful of companies are capable of supplying high-quality batteries; among the top four suppliers, LG Chem stands to benefit the most from the expansion of the EV market. EV sales in Europe have sharply increased. In 2021, Tesla is set to begin mass production of the Model Y in China and start its Gigafactory in Germany. We expect LG Chem to expand its EV battery capacity and display earnings growth momentum.
Value of battery business to Tesla’s Battery Day to highlight the value of LG Chem’s battery business increase further If Tesla is able to bring battery prices down sharply through technological innovation, the EV market’s growth potential will be enhanced. Given that rival automakers are unlikely to adopt Tesla’s batteries, LG Chem stands to benefit from the expansion of the EV market. In addition, given the nature of battery technology, we expect Tesla to collaborate with existing battery companies rather than attempt to manufacture batteries solo. Tesla’s innovations have always been a boon to battery companies in the past.
ESS still undervalued ESS earnings to expand rapidly in the medium term, after a temporary setback in 2H20 The global ESS market is poised for full-fledged growth, supported by an increasing share of renewable resources in the energy mix and falling battery prices. We expect ESS demand to expand rapidly, driven by the US. From a medium-term perspective, we think the ESS market’s growth potential is as strong as that of the EV market. In 2H20, LG Chem’s ESS sales and earnings should decline HoH due to weak order intake in 1H20. However, ESS earnings are set to expand rapidly from 2021, given the growth potential of downstream markets.
Key data Current price (9/1/20, W) 743,000 Market cap (Wbn) 52,450 260 LG Chem KOSPI OP (20F, Wbn) 2,224 Shares outstanding (mn) 78 210 Consensus OP (20F, Wbn) 1,997 Free float (%) 64.3 160 EPS growth (20F, %) 335.7 Foreign ownership (%) 36.2
110 P/E (20F, x) 42.6 Beta (12M) 1.47 Market P/E (20F, x) 16.5 52-week low (W) 230,000 60 8.19 12.19 4.20 8.20 KOSPI 2,349.55 52-week high (W) 762,000
Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute 30.8 101.9 124.8 Revenue (Wbn) 25,698 28,183 28,625 30,313 42,707 56,935 Relative 25.2 70.7 88.3 OP (Wbn) 2,928 2,246 896 2,224 3,456 5,398 OP margin (%) 11.4 8.0 3.1 7.3 8.1 9.5 NP (Wbn) 1,945 1,473 313 1,365 2,292 3,785 EPS (W) 24,854 18,812 4,003 17,443 29,285 48,346 ROE (%) 12.9 8.9 1.8 7.7 11.9 17.3 P/E (x) 16.3 18.4 79.3 42.6 25.4 15.4 P/B (x) 1.9 1.6 1.4 3.1 2.8 2.4 Dividend yield (%) 1.5 1.7 0.6 0.8 0.8 0.8 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. September 2, 2020 Batteries/ESS
1. Lift TP to W1,050,000 and maintain as our top pick
We lift our target price on LG Chem by 35% to W1,050,000 and maintain the stock as our top pick in the battery sector. Shares of LG Chem have rallied, driven by earnings momentum in 2Q20 (with the EV battery business displaying a turnaround) and the EV market’s strong medium/long-term growth prospects (thanks to Tesla’s strong sales and increased EV subsidies in major European markets since the COVID-19 outbreak). The EV market is likely to outperform recently raised expectations, and LG Chem should achieve faster-than-expected battery margin improvements as the battery market becomes more concentrated. We expect LG Chem’s revenue and battery margins to continue to surprise to the upside.
We changed the base year for the valuation of the EV battery business to 2025 (from 2023). In our view, a less conservative approach is now called for, given that: 1) visibility on EV market growth has increased; and 2) the EV battery market should remain highly concentrated. For the small-sized battery division, we revised up our EV/EBITDA multiple to 8x, as the supply of small-sized cylindrical battery supplies to Tesla has enhanced the division’s growth potential. The division’s margins have also leveled up.
For the ESS battery business, we applied a 2025F EV/EBITDA of 7x. We believe the growth potential of the ESS battery business is as strong as that of the EV battery business, and margins are likely to be higher. The ESS battery business has been discounted due to uncertainties over domestic ESS projects. However, we expect ESS battery earnings to improve, supported by a sharp increase in large-scale ESS projects, especially in the US.
Key variables going forward are Tesla’s Battery Day (Sep. 22), 3Q20 earnings, EV sales trends in Europe, and LG Chem’s battery capex plans. There are growing concerns that Tesla may develop a cost-efficient battery manufacturing method based on new technologies. However, if Tesla manages to bring down the price of batteries, this should drive the expansion of the overall EV market, which is favorable to battery companies. Moreover, given the technological requirements for mass production, we expect Tesla to collaborate with existing battery companies rather than attempt to manufacture batteries solo.
We expect LG Chem’s 3Q20 earnings to be robust, supported by strong chemical market conditions. Meanwhile, EV sales in Europe should expand further in 2H20, aided by increased government subsidies and new model releases. We expect battery demand to increase sharply, as mass production of the Tesla Model Y is set to begin in China in 1Q21. Given this, we expect the firm to announce its capex plans earlier than expected.
Table 8. TP calculation (Wbn, mn shares, W, %) 2021F EBITDA Target EV/EBITDA (x) Fair value Operating value Chemicals 2,210.7 5.0 11,053.6 Discount to market avg. given macro uncertainties I&E 171.9 6.0 1,031.1 Market avg. Premium to market avg. assuming growth in Small batteries 754.0 8.0 6,031.8 demand from EVs EV batteries 55,718.0 7x 2025F EBITDA ESS 8,055.0 7x 2025F EBITDA Red bio 420.0 Acq. price Green bio 1,100.0 Avg. 2016 market cap Total 83,409.6 Net debt 7,192.0 Proceeds from sale of the polarizer division Market cap of preferred shares 2,867.0 EV 73,350.6 No. of shares 69.4 Target price 1,050,000.0 Source: Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 18 September 2, 2020 Batteries/ESS
2. Tesla’s Battery Day to highlight the value of the battery business
There are concerns surrounding Tesla’s Battery Day due to the potential competitive threat to existing battery companies if the EV giant slashes battery prices through new exclusive technologies or starts to manufacture batteries in-house.
However, Tesla’s technological innovations have never been detrimental to battery makers, as the resulting growth of the EV market has always had a much larger positive impact. In addition, given the characteristics of battery technologies, we expect Tesla to collaborate with existing battery companies rather than attempt to manufacture batteries independently. All in all, we expect Tesla’s Battery Day to highlight the value of LG Chem’s battery business.
We expect Tesla to present a medium/long-term plan to lower battery costs by applying various technologies (e.g., dry electrode technology, single-crystal anodes, and lithium metal batteries). Back in 2012, Tesla significantly reduced EV battery costs by introducing low-priced cylindrical batteries based on its superior battery management system (BMS) technology.
In the past, such innovations have always proved beneficial to the battery industry by spurring battery companies and automakers to accelerate their own technology development, leading to a decline in prices across the industry and stimulating EV market expansion. If Tesla is successful in reducing EV battery prices, we expect EV market penetration to increase sharply from current levels (less than 5%), and battery applications may go beyond passenger vehicles to include commercial vehicles, ESS, and airplanes.
Another concern is that Tesla may produce batteries in-house and supply them to other automakers. However, these worries seem unwarranted, given that many automakers are scrambling to source EV batteries through joint ventures. Having a stable supply of batteries—a key part that accounts for 30-40% of total EV costs—is critically important, as difficulties in battery sourcing may derail EV production (as seen in some recent disruptions).
Indeed, Volkswagen made equity investments in battery companies such as Northvolt (Sweden) and Gotion High-Tech (002074 CH/CP: CNY25.91; China). The investment in Gotion High-Tech is especially notable, as the Chinese firm is believed to be significantly behind market leaders in terms of technological competitiveness; as such, we believe the primary objective of Volkswagen’s investment is the procurement of steady battery supplies. In light of this, it appears unlikely that automakers appear will choose to rely on a rival for a key component
Figure 29. EV battery prices have fallen amid Tesla-driven Figure 30. Volkswagen has acquired a stake in battery maker technological advances Gotion High-Tech
(US$/kWh) 1,200 1,160
1,000 899
800 707 650 600 577
400 373
200
0 2010 2011 2012 2013 2014 2015
Source: BNEF, Mirae Asset Daewoo Research Source: Press materials, InsideEVs, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 19 September 2, 2020 Batteries/ESS
We also believe Tesla is likely to partner with existing battery companies rather than attempt to manufacture batteries independently. Compared to other IT products, advances in battery technology happen slowly, as technological requirements differ significantly between pilot and mass production. Even established battery companies often face difficulties in the mass production stage, delaying the deployment of new technologies. Given the complexity of battery manufacturing processes, accumulated experience in mass production is key.
Tesla, with its focus on innovation, is likely to aggressively pursue new battery technologies. That said, it would make more business sense for Tesla to work with existing battery companies to deploy those technologies. Indeed, during its 2Q20 earnings release, Tesla announced its plans to expand partnerships with existing battery companies.
That said, Tesla is unlikely to enter an exclusive partnership with a single battery company, as the EV maker can gain a stronger negotiating position when there are multiple suppliers. Moreover, an exclusive partnership could carry risks of battery supply disruptions. We note that there are wide technology gaps among battery companies.
Even removing Tesla from the picture, we expect LG Chem’s EV battery business to gain in value, as the EV market is expanding meaningfully thanks to increased government subsidies and the continued rollouts of new EV models. In particular, mass-market EV models (e.g., Renault Zoe) have seen their sales volume rise sharply, aided by increased subsidies. This should support LG Chem’s earnings.
Meanwhile, Tesla Giga Shanghai is producing the Model 3 in China and is set to produce the Tesla Model Y 1Q21, while Gigafactory Berlin is scheduled to come online in July 2021. Given its track record, LG Chem is well positioned to benefit from a sharp increase in Tesla’s EV battery demand. Although CATL’s LFP batteries (using CTP technology) are beginning to be applied to the Tesla Model 3 Standard Range in 2H20, they are likely unsuitable for the Model Y, which needs larger batteries (LFP battery packs are 10% heavier than NCM counterparts).
Table 9. China-made Tesla Model 3 comparison NCM model LFP model Range (km) 445 468 Battery capacity (kWh) NA NA Battery pack density (Wh/kg) 150 125 Weight (kg) 1,614 1,745 Source: MIIT, Mirae Asset Daewoo Research
Figure 31. Battery technology has advanced slowly relative to Figure 32. Tesla’s battery demand (est.) other key IT products
(MWh) (Wbn) 80,000 Battery requirements (L) 8,000 Battery market size (R)
60,000 6,000
40,000 4,000
20,000 2,000
0 0 20F 21F 22F
Source: Battery University, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 20 September 2, 2020 Batteries/ESS
Table 10. LG Chem: Est. value of EV battery business 20F 21F 22F 23F 24F 25F Passenger car US 13,182 14,237 14,664 14,957 14,957 14,957 sales volume Europe 12,269 13,251 13,648 13,921 16,400 16,500 (‘000 units) China 21,903 25,189 26,448 27,000 27,500 28,000 Other 29,819 32,205 32,849 33,506 34,176 34,860 Total 77,174 84,881 87,609 89,384 93,033 94,316 EV penetration (%) US 3.5 4.0 9.0 12.0 13.0 15.0 Europe 11.0 16.0 20.0 22.0 25.0 28.0 China 4.5 6.0 8.0 12.0 13.0 15.0 Other 1.0 3.0 7.0 8.0 9.0 10.0 Total 4.0 6.1 9.7 12.1 13.6 15.4 EV sales volume US 461 569 1,320 1,795 1,944 2,244 (BEV + PHEV, ‘000 units) Europe 1,350 2,120 2,730 3,063 4,100 4,620 China 986 1,511 2,116 3,240 3,575 4,200 Other 298 966 2,299 2,680 3,076 3,486 Total 3,095 5,167 8,465 10,778 12,695 14,549 Battery capacity per vehicle (kWh) 43.0 50.0 60.0 65.0 65.0 70.0 EV battery shipments US 19,839 28,473 79,184 116,664 126,386 157,048 (‘000 units) Europe 58,033 106,005 163,778 199,072 266,500 323,400 China 42,383 75,567 126,952 210,600 232,375 294,000 Other 12,822 48,307 137,965 174,231 199,930 244,017 Total 133,077 258,352 507,879 700,566 825,191 1,018,464 Battery price (US$/kWh) 145.0 130.0 120.0 110.0 105.0 100.0 LG Chem penetration US 25 25 25 30 30 30 (%) Europe 70 70 70 70 65 55 China 1 2 5 8 10 12 Other 50 50 40 40 35 25 Total 39 41 39 37 37 32 LG Chem EV battery revenue US 849 1,092 2,803 4,543 4,698 5,559 (Wbn) Europe 6,951 11,383 16,234 18,088 21,463 20,989 China 73 232 899 2,187 2,879 4,163 Other 1,097 3,705 7,814 9,046 8,670 7,198 Total 8,969 16,412 27,750 33,863 37,709 37,910 LG Chem EV battery US 4,960 7,118 19,796 34,999 37,916 47,114 shipments (MWh) Europe 40,623 74,203 114,644 139,350 173,225 177,870 China 424 1,511 6,348 16,848 23,238 35,280 Other 6,411 24,154 55,186 69,692 69,975 61,004 Total 52,418 106,987 195,974 260,890 304,354 321,269 Capacity 100,000 130,000 300,000 400,000 450,000 550,000 LG Chem EV battery OP OP 179 821 2,220 3,386 3,771 3,791 (Wbn) OP margin 2 5 8 10 10 10 Depreciation 919 1,144 2,419 3,169 3,544 4,169 EBITDA 1,098 1,964 4,639 6,555 7,315 7,960 EV/EBITDA (x) 7 Fair value 55,718 Source: Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 21 September 2, 2020 Batteries/ESS
3. ESS earnings to expand rapidly in 2021 after a temporary setback in 2H20
In 2H20, LG Chem’s ESS sales and earnings should decline HoH due to weak order intake in 1H20. However, ESS earnings are set to expand rapidly from 2021, given the growth potential of downstream markets. We estimate the value of the company’s ESS unit at around W8tr (applying a 2025F EV/EBITDA of 7x).
We expect the global ESS-use lithium-ion battery market to grow as rapidly as the EV market (seven-fold expansion from 2020 to 2025). Amid a rising renewable energy mix thanks to falling power generation costs, there is a growing need for ESS to ensure grid stability and power quality. In addition, thanks to lower battery prices and increases in system size/efficiency, ESS power generation costs have declined to the point where ESS facilities are competitive enough to replace gas peaking power plants. For these reasons, consensus estimates for the US ESS market are being revised up, despite COVID-19.
We expect the ESS-use battery market to remain highly concentrated, similar to the EV battery market. In addition, margins are likely to be high relative to EV battery margins. Given the conservative nature of power suppliers, we expect batteries with proven track records to be favored over low-priced batteries. In addition, we do not anticipate high price-cutting pressure, as ESS batteries account for just a fraction of total power system costs (whereas EV batteries account for 30-40% of EV costs). In the medium/long term, we believe winners in the EV battery market will increasingly extend their leadership to the ESS battery market.
Table 11. LG Chem: Est. value of ESS business 20F 21F 22F 23F 24F 25F USD/KRW 1,180 1,180 1,180 1,180 1,180 1,180 Global market size (MWh) 12,410 19,612 28,418 43,403 64,818 90,795 Battery price (US$/kWh) 238 226 214 193 174 160 Market size (Wbn) 3,478 5,221 7,188 9,880 13,279 17,113 LG Chem Penetration (%) 33 35 35 35 35 35 Revenue (Wbn) 1,148 1,828 2,516 3,458 4,648 5,990 OP (Wbn) 92 183 302 415 558 719 OP margin (%) 8 10 12 12 12 12 EBITDA (Wbn) 250 341 520 717 890 1,151 EV/EBITDA (x) 7 EV (Wbn) 8,055 Source: Company data, Mirae Asset Daewoo Research estimates
Figure 33. Estimated US ESS demand Figure 34. LG Chem: Revenue forecasts by region
(MWh) (Wbn) 40,000 Utilities 2,000 US Residential/commercial Europe Other 30,000 1,500
20,000 1,000
10,000 500
0 0 2019 2020F 2021F 2022F 2023F 2024F 2025F 19 20F 21F
Source: Mirae Asset Daewoo Research estimates Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 22 September 2, 2020 Batteries/ESS
4. Earnings to remain robust in 3Q20
For 3Q20, we forecast LG Chem to report solid operating profit of W711.5bn. The chemicals unit should deliver robust earnings growth QoQ thanks to 1) positive lagging effects (input of lower-priced raw materials) and 2) robust ABS spreads. We also look for battery earnings improvement driven by top-line growth and yield improvements at the European plants.
Although positive lagging effects should moderate somewhat as we approach 4Q20, we expect chemicals earnings to remain healthy thanks to solid ABS (flagship product) spreads. In contrast to other chemicals, solid spreads are continuing for ABS thanks to strong home appliance demand in China.
We expect battery earnings to improve toward 4Q20, as revenue should grow markedly on the back of European automakers’ new EV model releases. In particular, small-sized battery earnings should remain solid thanks to growing EV-use cylindrical battery revenue. We believe LG Chem may expand capacity for small-sized and EV-use batteries, depending on downstream market growth. If so, this would boost the company’s medium/long-term growth potential.
Table 12. LG Chem: Quarterly and annual earnings (Wbn) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20P 3Q20F 4Q20F 2019 2020F 2021F Revenue 6,639.1 7,177.4 7,347.3 7,461.2 7,115.7 6,548.6 7,883.1 8,765.0 28,625.0 30,312.5 42,706.8 Chemicals 3,748.8 3,936.4 3,964.8 3,898.0 3,695.9 3,312.8 3,143.3 3,438.0 15,548.0 13,590.0 15,094.2 Advanced materials 1,233.5 1,253.5 1,217.9 1,201.1 1,107.4 789.2 656.8 656.8 4,769.3 3,210.1 2,827.1 Batteries 1,650.1 2,009.4 2,210.2 2,480.6 2,260.9 2,823.0 3,810.6 4,429.4 8,350.3 13,323.9 23,464.3 Red bio 143.5 154.0 165.9 164.4 159.3 160.3 182.5 180.8 627.8 682.9 751.2 Green bio 228.0 169.6 93.7 98.8 221.2 177.8 90.0 60.0 590.1 549.0 570.0 OP 275.4 267.5 380.3 -27.5 236.5 541.0 711.5 735.3 895.6 2,224.3 3,455.9 Chemicals 398.6 382.2 321.2 315.8 242.6 434.7 535.6 443.3 1,417.8 1,656.2 1,650.7 Advanced materials 3.6 19.0 32.8 8.3 62.1 35.0 16.8 16.8 108.1 130.8 67.4 Batteries -147.9 -128.0 71.2 -249.6 -51.8 155.5 164.9 296.1 -454.3 564.8 1,675.3 Red bio 11.8 10.9 16.1 -1.6 23.5 14.1 9.1 9.0 37.2 55.8 37.6 Green bio 38.2 9.1 -11.1 -15.3 35.0 11.6 -15.0 -30.0 20.9 1.6 25.0 Pretax profit 279.6 192.9 243.9 -155.9 149.3 493.1 663.8 686.5 560.6 1,992.8 3,217.5 NP 194.5 68.1 128.6 -77.8 21.1 382.3 473.0 489.1 313.4 1,365.5 2,292.5 Source: Company data, Mirae Asset Daewoo Research estimates
Figure 35. HDPE spot and one-month lagging spreads Figure 36. ABS spread
(US$/tonne) (US$/tonne) (US$/tonne) 600 Lagging spread Spot spread 3,000 ABS (L) ABS-0.54SM-0.15BD-0.27AN (R) 1,200
2,500 1,000 500 2,000 800
400 1,500 600
1,000 400 300 500 200
200 0 0 1/19 4/19 7/19 10/19 1/20 4/20 7/20 10/20 14 15 16 17 18 19 20 Source: Cischem, Mirae Asset Daewoo Research Source: Cischem, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 23 September 2, 2020 Batteries/ESS
LG Chem (051910 KS)
Income statement (summarized) Balance sheet (summarized) (Wbn) 2019 2020F 2021F 2022F (Wbn) 2019 2020F 2021F 2022F Revenue 28,625 30,313 42,707 56,935 Current assets 11,870 14,486 17,832 24,027 Cost of revenue 23,779 24,068 35,230 47,517 Cash & equivalents 1,889 2,476 2,355 1,404 Gross profit 4,846 6,245 7,477 9,418 AR & other receivables 3,933 5,131 6,746 10,076 SG&A expenses 3,950 4,020 4,020 4,020 Inventory 5,034 5,880 7,731 11,547 OP (adj.) 896 2,224 3,456 5,398 Other current assets 1,014 999 1,000 1,000 OP 896 2,224 3,456 5,398 Non-current assets 22,155 24,989 27,508 29,684 Non-operating profit -335 -246 -238 -291 Investments in associates 308 308 308 308 Net financial income -164 -193 -238 -290 PP&E 18,594 21,163 23,829 26,135 Net income from associates 22 2 0 0 Intangible assets 2,206 2,258 2,112 1,982 Pretax profit 561 1,978 3,218 5,107 Total assets 34,024 39,475 45,340 53,711 Income tax 184 525 804 1,124 Current liabilities 8,942 10,979 11,875 13,723 Profit from continuing operations 376 1,453 2,413 3,984 AP & other payables 2,380 2,847 3,743 5,591 Profit from discontinued operations 0 15 0 0 Short-term financial liabilities 1,356 2,926 2,926 2,926 NP 376 1,468 2,413 3,984 Other current liabilities 5,206 5,206 5,206 5,206 Attributable to owners 313 1,365 2,292 3,785 Non-current liabilities 7,699 9,641 12,641 15,641 Attributable to minority interests 63 103 121199 Long-term financial liabilities 7,059 9,001 12,001 15,001 Total comprehensive income 449 1,590 2,413 3,984 Other non-current liabilities 640 640 640 640 Attributable to owners 383 1,456 2,236 3,691 Total liabilities 16,641 20,620 24,516 29,364 Attributable to minority interests 65 135 177 292 Equity attributable to owners 17,005 18,329 20,178 23,501 EBITDA 2,752 4,508 6,137 8,421 Capital stock 391 391 391 391 FCF -3,117 -2,439 -2,676 -3,491 Capital surplus 2,275 2,275 2,275 2,275 EBITDA margin (%) 9.6 14.9 14.4 14.8 Retained earnings 14,799 16,007 17,854 21,179 OP margin (%) 3.1 7.3 8.1 9.5 Minority interests 379 526 646 846 Net margin (%) 1.1 4.5 5.4 6.6 Shareholders' equity 17,384 18,855 20,824 24,347
Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F Operating cash flow 3,121 3,309 2,524 1,709 P/E (x) 79.3 42.6 25.4 15.4 NP 376 1,468 2,413 3,984 P/CF (x) 7 12.8 9.56.9 Non-cash income/expenses 3,161 3,068 3,721 4,436 P/B (x) 1.4 3.1 2.8 2.4 Depreciation 1,720 2,124 2,534 2,894 EV/EBITDA (x) 11.1 14.5 11.2 8.6 Amortization 137 160 147 130 EPS (W) 4,003 17,443 29,285 48,346 Other 1,304 784 1,040 1,412 CFPS (W) 45,188 57,941 78,366 107,552 Chg. in working capital 115 -775 -2,570 -5,299 BPS (W) 221,764 238,682 262,287 304,756 Chg. in AR & other receivables 595 -1,198 -1,537 -3,169 DPS (W) 2,000 6,000 6,000 6,000 Chg. in inventory -719 -972 -1,851 -3,816 Dividend payout ratio (%) 36.7 28.2 17.1 10.4 Chg. in AP & other payables 217 998 896 1,848 Dividend yield (%) 0.6 0.8 0.8 0.8 Income tax -577 -464 -804 -1,124 Revenue growth (%) 1.6 5.9 40.9 33.3 Cash flow from investing activities -6,111 -5,014 -5,200 -5,200 EBITDA growth (%) -26.3 63.8 36.1 37.2 Chg. in PP&E -6,159 -5,744 -5,200 -5,200 OP growth (%) -60.1 148.2 55.4 56.2 Chg. in intangible assets -232 -42 0 0 EPS growth (%) -78.7 335.7 67.9 65.1 Chg. in financial assets -54 43 0 0 AR turnover (x) 7.1 7 7.6 7.1 Other 334 729 0 0 Inventory turnover (x) 6.1 5.6 6.3 5.9 Cash flow from financing activities 2,301 2,325 2,555 2,540 AP turnover (x) 10.5 9.2 10.7 10.2 Chg. in financial liabilities 3,045 3,446 3,000 3,000 ROA (%) 1.2 4 5.7 8 Chg. in equity 0 0 0 0 ROE (%) 1.8 7.7 11.9 17.3 Dividends -484 -154 -445 -460 ROIC (%) 2.7 5.5 8.5 11.4 Other -260 -967 0 0 Debt-to-equity ratio (%) 95.7 109.4 117.7 120.6 Chg. in cash -625 587 -120 -951 Current ratio (%) 132.7 131.9 150.2 175.1 Beginning balance 2,514 1,889 2,476 2,355 Net debt-to-equity ratio (%) 37.3 50.1 60.4 67.9 Ending balance 1,889 2,476 2,355 1,404 Interest coverage ratio (x) 4.3 9.8 12.9 16.7 Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 24 [Korea] Batteries September 2, 2020
Samsung SDI Buy (006400 KS) (Maintain)
EV and ESS batteries to serve as dual growth engines TP: W690,000 Upside: 51.8%
Mirae Asset Daewoo Co., Ltd. Chuljoong Kim [email protected]
ESS revenue to grow 41% YoY in Global ESS market to expand rapidly, driven by North America; Samsung SDI’s shared 2020 and 73% YoY in 2021 production lines make it well positioned to meet a short-term increase in demand In 2021, we forecast the ESS market to expand 191% YoY in North America and 57% YoY globally. Growth should be driven by: 1) the resumption of investments in renewable energy (e.g., solar PV and wind power) once COVID-19 subsides; and 2) increased battery content per unit amid a decline in ESS battery prices. The expansion of the ESS market in North America and Europe over the next one to two years is likely to benefit Korean battery companies more than their Chinese rivals (which have yet to enter these markets). Unlike its domestic rivals, Samsung SDI uses shared production lines that can easily switch between ESS and EV batteries. As a result, the company is better positioned to meet a short- term increase in demand without the burden of additional capex. Notably, unlike EV batteries, the supply of ESS batteries is not based on long-term contracts with fixed prices. Thus, prices are poised to rise when demand outpaces supply (exhibiting similar supply/demand dynamics as the memory semiconductor market).
Sharp rise in Europe’s PHEV sales European PHEV sales are growing rapidly, driven by increased subsidies is positive to EV battery business According to SNE Research, PHEV sales volume in Europe expanded 335% YoY in July (vs. +99% YoY for BEVs). Notable PHEV models include the BMW 330e (2019), BMW X1, Audi Q5, Audi A3 e-tron, and Volkswagen Passat GTE. In Europe, PHEV sales growth is outpacing BEV sales growth, supported by increased government subsidies. Given its high exposure to PHEVs compared to global peers, Samsung SDI stands to benefit.
Valuation and recommendation Maintain Buy and TP of W690,0000 We estimate the values of the ESS/EV battery businesses at W6.2tr and W24.7tr, respectively. We expect Samsung SDI to display steady earnings growth in 2H20, supported by the robust EV and ESS markets. Shares of Samsung SDI still look cheap relative to Chinese peers.
Key data Current price (9/1/20, W) 454,500 Market cap (Wbn) 31,253 210 Samsung SDI KOSPI OP (20F, Wbn) 746 Shares outstanding (mn) 70 160 Consensus OP (20F, Wbn) 638 Free float (%) 73.4 EPS growth (20F, %) 31.9 Foreign ownership (%) 42.0 110 P/E (20F, x) 68.0 Beta (12M) 1.37 Market P/E (20F, x) 16.5 52-week low (W) 183,000 60 8.19 12.19 4.20 8.20 KOSPI 2,349.55 52-week high (W) 488,000
Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute 14.3 54.1 82.2 Revenue (Wbn) 6,347 9,158 10,097 11,438 14,921 18,549 Relative 9.5 30.3 52.6 OP (Wbn) 117 715 462 746 1,319 1,670 OP margin (%) 1.8 7.8 4.6 6.5 8.8 9.0 NP (Wbn) 657 701 357 470 957 1,275 EPS (W) 9,338 9,962 5,066 6,684 13,600 18,113 ROE (%) 6.0 6.0 2.9 3.7 7.2 8.9 P/E (x) 21.9 22.0 46.6 68.0 33.4 25.1 P/B (x) 1.2 1.3 1.3 2.4 2.3 2.1 Dividend yield (%) 0.5 0.5 0.4 0.2 0.2 0.2 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. September 2, 2020 Batteries/ESS
Table 13. Samsung SDI: Quarterly and annual earnings (Wbn, %) 1Q20 2Q20 3Q20F 4Q20F 1Q21F 2Q21F 3Q21F 4Q21F 2019 2020F 2021F Revenue 2,397 2,559 2,834 3,648 2,998 3,316 3,873 4,734 10,098 11,438 14,921 Batteries 1,795 1,921 2,201 3,004 2,372 2,634 3,176 4,015 7,719 8,921 12,196 Small-sized (IT) 835 942 1,058 1,215 1,093 1,099 1,180 1,226 4,373 4,050 4,598 Mid/large-sized (EV, ESS) 960 978 1,143 1,789 1,279 1,535 1,996 2,789 3,346 4,871 7,599 EM 602 638 633 643 626 682 697 719 2,379 2,517 2,725 OP 54 104 221 367 211 272 358 479 462 746 1,319 Batteries -16 15 123 238 137 176 244 361 278 360 918 Small-sized (IT) 29 73 106 145 108 117 128 133 522 353 486 Mid/large-sized (EV, ESS) -46 -57 17 93 29 60 116 228 -244 7 432 EM 70 89 98 129 74 95 114 118 390 386 401 Other ------207 0 0 OP margin 2.2 4.1 7.8 10.1 7.0 8.2 9.2 10.1 4.6 6.5 8.8 Batteries -0.9 0.8 5.6 7.9 5.8 6.7 7.7 9.0 3.6 4.0 7.5 Small-sized (IT) 3.5 7.7 10.0 11.9 9.9 10.6 10.9 10.9 11.9 8.7 10.6 Mid/large-sized (EV, ESS) -4.8 -5.9 1.5 5.2 2.3 3.9 5.8 8.2 -7.3 0.1 5.7 EM 11.7 13.9 15.5 20.0 11.8 14.0 16.3 16.4 16.4 15.3 14.7 Source: Company data, Mirae Asset Daewoo Research estimates
Table 14. Samsung SDI: Valuation table (Wbn, x, %, W, ‘000 shares) Operating value EBITDA Fair EV/EBITDA EV Notes IT 814 8.8 7,162 2021F global peer avg. EV/EBITDA EV 3,527 7.0 24,692 2025F EV/EBITDA ESS 890 7.0 6,231 2025F EV/EBITDA EM 585 10.0 5,852 2021F global peer avg. EV/EBITDA Total operating value (A) 43,937 Investment asset value (Samsung Display) 30% discount to avg. 12MF multiple of LGD, Innolux, AUO, Samsung Display 10,156 5.4 5,835 and BOE Investment asset value (listed) Market cap Discount EV Hotel Shilla 2,775 30.0 2 0.1% ownership S1 3,621 30.0 27911.0% ownership Samsung Engineering 2,323 30.0 190 11.7% ownership Samsung Heavy 3,257 30.0 9 0.4% ownership Investment asset value (unlisted) Book value Discount EV Valuation gains/losses on investment securities 589 30.0 412 Total investment asset value (B) 6,728 Net borrowings (C) 3,326 Based on estimate for end-2021 Equity value (A)+(B)-(C) 47,339 No. of shares outstanding 68,765 Value per share 690,000 Source: Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 26 September 2, 2020 Batteries/ESS
Table 15. ESS market assumptions and Samsung SDI’s ESS-use battery earnings forecasts 19 20F 21F 22F 23F 24F 25F Market by country (MWh) US 1,113 2,372 7,123 11,135 18,602 28,803 37,205 EU 1,250 1,438 1,869 2,803 4,205 6,307 9,461 Australia 499 1,200 1,500 2,000 2,500 3,000 4,000 China 2,000 2,400 3,120 4,680 7,956 13,525 22,993 Korea 5,000 5,000 6,000 7,800 10,140 13,182 17,137 Other 9,800 12,410 19,612 28,418 43,403 64,818 90,795 Market size (US$mn) 2,450 2,947 4,425 6,091 8,373 11,254 14,503 Market size (Wbn) 2,818 3,478 5,221 7,188 9,880 13,279 17,113 Samsung SDI M/S (%) 36 41 47 45 40 38 30 Revenue (Wbn) 1,009 1,426 2,454 3,198 3,952 5,046 5,185 OP (Wbn) -73 39 205 320 395 555 615 OP margin (%) -7 3 8 10 10 11 12 EBITDA (Wbn) 18 145 339 507 603 794 890 Valuation EV/EBITDA (x) 7 7 EV (Wbn) 4,222 6,231 Source: Mirae Asset Daewoo Research estimates
Figure 37. Samsung SDI: ESS revenue and OP margin
(Wbn) (% ) 1,000 ESS revenue (L) ESS OP margin (R) 20
800 10
600 0
400 -10
200 -20
0 -30 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 3Q20F 1Q21F 3Q21F
Source: Company data, Mirae Asset Daewoo Research estimates
Figure 38. July EV battery shipment growth Samsung SDI displayed the sharpest MoM growth thanks to PHEV strength
(% ) 200 183 YoY MoM 171
150 142
100
54 50 36 23 3 1 0 -1 -1 -2 -14 -25 -21 -50 Samsung SDI SK Innovation LG Chem BYD CATL Panasonic Total
Source: SNE Research, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 27 September 2, 2020 Batteries/ESS
Samsung SDI (006400 KS)
Income statement (summarized) Balance sheet (summarized) (Wbn) 2019 2020F 2021F 2022F (Wbn) 2019 2020F 2021F 2022F Revenue 10,097 11,438 14,921 18,549 Current assets 5,181 6,207 7,302 8,669 Cost of revenue 7,882 8,986 11,449 14,063 Cash & equivalents 1,156 1,002 547 181 Gross profit 2,215 2,452 3,472 4,486 AR & other receivables 1,932 2,499 3,243 4,063 SG&A expenses 1,753 1,705 2,153 2,816 Inventory 1,708 2,209 2,866 3,583 OP (adj.) 462 746 1,319 1,670 Other current assets 385 497 646 842 OP 462 746 1,319 1,670 Non-current assets 14,671 15,444 16,322 18,272 Non-operating profit 103 -44 75 186 Investments in associates 6,763 6,831 6,899 6,968 Net financial income -64 -63 -67 -71 PP&E 5,427 6,280 7,103 9,002 Net income from associates 179 138 271 388 Intangible assets 831 785 724 684 Pretax profit 565 702 1,394 1,856 Total assets 19,852 21,651 23,624 26,941 Income tax 162 193 386 514 Current liabilities 3,742 5,111 5,871 6,877 Profit from continuing operations 402 508 1,008 1,342 AP & other payables 1,018 1,317 1,709 2,227 Profit from discontinued operations 0 0 0 0 Short-term financial liabilities 1,781 2,575 2,581 2,588 NP 402 508 1,008 1,342 Other current liabilities 943 1,219 1,581 2,062 Attributable to owners 357 470 957 1,275 Non-current liabilities 3,450 3,363 3,635 4,671 Attributable to minority interests 46 38 50 67 Long-term financial liabilities 1,827 1,542 1,542 1,942 Total comprehensive income 541 519 1,008 1,342 Other non-current liabilities 1,623 1,821 2,093 2,729 Attributable to owners 494 505 1,016 1,353 Total liabilities 7,192 8,474 9,507 11,548 Attributable to minority interests 47 14 -8 -11 Equity attributable to owners 12,325 12,801 13,690 14,898 EBITDA 1,318 1,828 2,558 3,010 Capital stock 357 357 357 357 FCF -975 -519 -411 -850 Capital surplus 5,002 5,002 5,002 5,002 EBITDA margin (%) 13.1 16 17.1 16.2 Retained earnings 6,907 7,310 8,201 9,408 OP margin (%) 4.6 6.5 8.8 9 Minority interests 335 376 427 494 Net margin (%) 3.5 4.1 6.4 6.9 Shareholders' equity 12,660 13,177 14,117 15,392
Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2019 2020F 2021F 2022F 2019 2019 2020F 2021F Operating cash flow 3,121 3,309 2,524 1,709 P/E (x) 79.3 79.3 42.6 25.4 NP 376 1,468 2,413 3,984 P/CF (x) 7 7 12.89.5 Non-cash income/expenses 3,161 3,068 3,721 4,436 P/B (x) 1.4 1.4 3.1 2.8 Depreciation 1,720 2,124 2,534 2,894 EV/EBITDA (x) 11.1 11.1 14.5 11.2 Amortization 137 160 147130 EPS (W) 4,003 4,003 17,443 29,285 Other 1,304 784 1,040 1,412 CFPS (W) 45,188 45,188 57,941 78,366 Chg. in working capital 115 -775 -2,570 -5,299 BPS (W) 221,764 221,764 238,682 262,287 Chg. in AR & other receivables 595 -1,198 -1,537 -3,169 DPS (W) 2,000 2,000 6,000 6,000 Chg. in inventory -719 -972 -1,851 -3,816 Dividend payout ratio (%) 36.7 36.7 28.2 17.1 Chg. in AP & other payables 217 998 896 1,848 Dividend yield (%) 0.6 0.6 0.8 0.8 Income tax -577 -464 -804 -1,124 Revenue growth (%) 1.6 1.6 5.9 40.9 Cash flow from investing activities -6,111 -5,014 -5,200 -5,200 EBITDA growth (%) -26.3 -26.3 63.8 36.1 Chg. in PP&E -6,159 -5,744 -5,200 -5,200 OP growth (%) -60.1 -60.1 148.2 55.4 Chg. in intangible assets -232 -42 0 0 EPS growth (%) -78.7 -78.7 335.7 67.9 Chg. in financial assets -54 43 0 0 AR turnover (x) 7.1 7.1 7 7.6 Other 334 729 0 0 Inventory turnover (x) 6.1 6.1 5.6 6.3 Cash flow from financing activities 2,301 2,325 2,555 2,540 AP turnover (x) 10.5 10.5 9.2 10.7 Chg. in financial liabilities 3,045 3,446 3,000 3,000 ROA (%) 1.2 1.2 4 5.7 Chg. in equity 0 0 0 0 ROE (%) 1.8 1.8 7.7 11.9 Dividends -484 -154 -445 -460 ROIC (%) 2.7 2.7 5.5 8.5 Other -260 -967 00 Debt-to-equity ratio (%) 95.7 95.7 109.4 117.7 Chg. in cash -625 587 -120 -951 Current ratio (%) 132.7 132.7 131.9 150.2 Beginning balance 2,514 1,889 2,476 2,355 Net debt-to-equity ratio (%) 37.3 37.3 50.1 60.4 Ending balance 1,889 2,476 2,355 1,404 Interest coverage ratio (x) 4.3 4.3 9.8 12.9 Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 28 [China] Technology September 2, 2020
CATL Buy (300750 CH) (Maintain)
Small but mighty ESS business TP: CNY270 Upside: 31%
Mirae Asset Daewoo Co., Ltd. Youngbae Kwon [email protected] Jay (Jaeil) Lee [email protected]
Valuation and recommendation Maintain Buy and TP of CNY270 CATL’s ESS solutions business has demonstrated strong growth potential, with revenue growth set to accelerate. In 2H20, we expect CATL to solidify its dominant position in China’s EV battery market. Trading at a 2021F P/E of 69.3x, CATL looks undervalued relative to its strong growth potential and solid market leadership.
Investment points Small but fast-growing ESS business Recently, CATL’s first overseas ESS project (California) was successfully connected to the power grid. CATL’s ESS solutions are based on LFP batteries, which have the advantages of long life, high stability, and low prices. In 1H20, CATL’s ESS revenue expanded 136% YoY, exhibiting stronger-than-expected growth. The revenue contribution of the ESS battery business increased from 1.3% in 2019 to 3.0% in 1H20. The business should continue to gain in importance. Share of China’s EV battery market likely to increase in 2H20 In 2H20, Tesla’s new Model 3 equipped with CATL’s LFP batteries will be marketed in China. Chinese companies such as NIO (ES6) and GAC (Aion S) are recording healthy EV sales, and new EV model releases should gather pace. We expect CATL’s share of China’s EV battery market to increase by more than 5%p. Earnings to recover rapidly in 2H20, following a weak 1H20 CATL’s 2Q20 revenue fell 7.5% short of our estimate due to the impact of COVID-19, but OP margin remained resilient. CATL said that its revenue has been recovering strongly since July. Earnings should pick up sharply in 2H20. We forecast revenue and operating profit to grow 38% and 26% HoH, respectively.
Risks Risk factors include: 1) changes in China’s subsidy policies; 2) dramatic changes in battery technologies; and 3) serious production disruptions.
Key data
OP (20F, CNYmn) 5,220 Market cap (CNYbn) 480.69 EPS growth (20F, %) 10.2 Market cap (Wtr) 83.3 P/E (20F, x) 105.5 Shares outstanding (mn) 824.1 Market P/E (20F, x) 45.6 52-week low (CNY) 68.38 Dividend yield (%) 0.11 52-week high (CNY) 224.29 Exchange Shenzen
Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute -2.7 52.1 185.5 Revenue (CNYmn) 19,997 29,611 45,788 44,853 68,835 89,208 Relative -0.4 15.5 68.6 OP (CNYmn) 3,608 3,831 4,974 5,220 8,289 11,715
OP margin (%) 18.0 12.9 10.9 11.6 12.0 13.1 NP (CNYmn) 3,878 3,387 4,560 4,268 6,498 9,136 EPS (CNY) 2.01 1.64 2.08 1.95 2.97 4.17 ROE (%) 17.5 11.4 12.5 10.6 14.4 17.4 P/E (x) N/A 45.0 50.8 105.5 69.3 49.3 P/B (x) N/A 4.9 6.1 10.7 9.3 7.9 Notes: Under GAAP Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. September 2, 2020 Batteries/ESS
Figure 39. CATL: Storage system business (ESS) revenue
(CNYmn) 7,000
6,000
5,000
4,000
3,000
2,000
1,000
0 2015 2016 2017 2018 2019 2020F 2021F 2022F 2023F 2024F 2025F
Source: Company data, Mirae Asset Daewoo Research
Figure 40. CATL: Revenue breakdown (2020F)
5% 12% 3% Power batteries Storage systems Lithium materials Other (non-core)
80%
Source: Company data, Mirae Asset Daewoo Research
Figure 41. CATL: ESS product system overview
Source: Company material, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 30 September 2, 2020 Batteries/ESS
Figure 42. CATL: P/E band chart
(CNY) 240 100x
200 80x 160 60x 120
40x 80
40 20x
- 6/18 12/18 6/19 12/19 6/20
Source: Bloomberg, Mirae Asset Daewoo Research
Table 16. Peer valuation table: EV/battery/materials players
Market cap P/E (x) P/B (x) Company Ticker Exchange (US$mn) 2019 2020F 2021F 2019 2020F 2021F Tesla TSLA US Nasdaq 412,493 N/A 1,237.9 730.3 11.4 186.4 136.6 CATL 300750 CH Shenzhen 69,876 50.8 91.0 68.5 6.1 8.9 8.0 BYD 1211 HK Hong Kong 31,715 69.5 63.3 56.5 1.8 3.2 3.0 LG Chem 051910 KS KOSPI 44,001 77.7 51.0 33.6 1.3 3.1 2.9 Panasonic 6752 JP Tokyo 22,693 7.8 22.8 22.8 1.2 1.1 1.1 Samsung SDI 006400 KS KOSPI 26,210 44.3 59.1 29.5 1.3 2.5 2.3 Albemarle ALB US NYSE 9,819 12.4 26.3 21.7 2.0 2.3 2.1 SQM SQM US NYSE 7,502 N/A 35.4 24.9 N/A 3.9 3.8 Tianqi Lithium 002466 CH Shenzhen 4,898 N/A N/A 84.1 4.9 3.7 3.6 Simplo Technology 6121 TT Taipei 2,111 14.7 14.6 12.8 2.4 2.5 2.3 GS Yuasa 6674 JP Tokyo 1,375 13.2 13.5 13.5 1.0 0.8 0.8 Source: Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 31 September 2, 2020 Batteries/ESS
Table 17. CATL: DCF valuation
(CNYmn) 2019 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F Terminal Revenue 45,788 44,853 68,835 89,208 113,423 153,682 196,220 235,464 280,202 327,836 377,011 392,092 EBIT 4,974 5,220 8,289 11,715 15,398 22,417 29,906 35,320 42,030 50,815 58,437 59,990 Depreciation/amortization 4,252 3,723 5,782 7,583 9,641 13,063 16,679 19,308 22,416 26,227 30,161 19,605 Taxes -748 -677 -1,055 -1,483 -1,943 -2,821 -3,757 -4,437 -5,280 -6,384 -7,341 -7,499 Net working capital 284 -2,523 -7,883 -5,423 -7,265 -12,078 -12,761 -5,000 -5,000 -5,000 -5,000 -5,000 Capex -9,627 -4,850 -5,000 -11,400 -9,750 -12,200 -13,000 -21,192 -22,416 -22,949 -26,391 -19,605 Cash flow for DCF -865 893 133 991 6,081 8,381 17,066 23,999 31,750 42,709 49,866 47,491 Discount factor 0.91 0.83 0.76 0.69 0.63 0.58 0.53 0.48 0.44 0.40 PV of FCF 814 111 753 4,214 5,300 9,846 12,633 15,250 18,717 19,939 Sum of PV 87,576 Terminal value FCFn+1 47,491 WACC 7.8 g 4.0 Terminal value 1,264,748 Discount factor 0.40 PV of terminal value 505,706 Fair value 593,283 WACC 7.8% Risk-free rate 3.0% Equity risk premium 6.0% Cost of debt 5.5% Cost of equity 9.6% Debt to total capital 45% Value of debt (CNYmn) 2,546 Value of equity (CNYmn) 590,736 Equity value/share (CNY) 270.00 No. of shares outstanding (mn) 2,190.4 Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 32 September 2, 2020 Batteries/ESS
Table 18. CATL: Annual earnings and key assumptions (CNYmn) 2015 2016 2017 2018 2019 2020F 2021F 2022F 2023F 2024F 2025F Battery sales (MWh) 1,728 6,188 10,808 23,393 32,517 34,810 58,461 79,606 105,785 149,925 201,388 (%, YoY) 557.7% 258.2% 74.7% 116.5% 39.0% 7.0% 67.9% 36.2% 32.9% 41.7% 34.3%
Revenue 5,703 14,879 19,997 29,611 45,788 44,853 68,835 89,208 113,423 153,682 196,220 (YoY) 0.0% 160.9% 34.4% 48.1% 54.6% -2.0% 53.5% 29.6% 27.1% 35.5% 27.7% Power batteries 4,981 13,976 16,657 24,515 38,584 36,063 58,110 76,342 98,486 136,432 176,214 (YoY) 0.0 180.6% 19.2% 47.2% 57.4% -6.5% 61.1% 31.4% 29.0% 38.5% 29.2% ASP (CNY/kWh) 2,883 2,258 1,541 1,048 1,187 1,036 994 959 931 910 875 (US$/kWh) 458 332 237 154 170 148 142 137 133 130 125 Storage systems 89 39 16 189 610 1,220 2,074 3,111 4,045 5,056 6,320 (YoY) 0.0 -55.9% -58.1% 1052.0% 221.9% 100.0% 70.0% 50.0% 30.0% 25.0% 25.0% Lithium materials 591 611 2,471 3,861 4,305 5,166 6,199 7,253 8,341 9,593 11,031 (YoY) 0.0 3.4% 304.2% 56.3% 11.5% 20.0% 20.0% 17.0% 15.0% 15.0% 15.0% Other (non-core) 42 253 853 1,046 2,289 2,404 2,452 2,501 2,551 2,602 2,654 (YoY) 0.0 502.2% 237.3% 22.6% 118.9% 5.0% 2.0% 2.0% 2.0% 2.0% 2.0% COGS 3,539 8,377 12,740 19,902 32,483 32,499 50,458 65,664 84,289 113,880 145,175 Raw materials/other 3,350 7,597 11,386 17,681 28,820 28,776 44,676 58,082 74,648 100,817 128,496 Depreciation/amortization 189 779 1,355 2,221 3,663 3,723 5,782 7,583 9,641 13,063 16,679 Gross profit 2,164 6,502 7,257 9,709 13,305 12,354 18,378 23,543 29,134 39,803 51,045 (YoY) 0.0% 200.5% 11.6% 33.8% 37.0% -7.2% 48.8% 28.1% 23.7% 36.6% 28.2% (Gross margin) 37.9% 43.7% 36.3% 32.8% 29.1% 27.5% 26.7% 26.4% 25.7% 25.9% 26.0% Power batteries 2,062 6,266 5,872 8,360 10,977 10,819 16,561 21,376 26,591 36,837 47,578 (Gross margin) 41.4% 44.8% 35.3% 34.1% 28.5% 30.0% 28.5% 28.0% 27.0% 27.0% 27.0% SG&A 647 1,584 1,952 2,970 3,989 3,812 5,507 6,691 7,940 9,836 11,773 R&D 281 1,134 1,632 1,991 2,992 1,983 2,905 3,435 3,939 5,321 6,696 OP 1,154 3,375 3,608 3,831 4,974 5,220 8,289 11,715 15,398 22,417 29,906 (YoY) 0.0% 192.5% 6.9% 6.2% 29.8% 4.9% 58.8% 41.3% 31.4% 45.6% 33.4% (OP margin) 20.2% 22.7% 18.0% 12.9% 10.9% 11.6% 12.0% 13.1% 13.6% 14.6% 15.2% EBITDA (adj.) 1,343 4,154 4,963 6,052 8,637 8,943 14,071 19,297 25,039 35,480 46,584 (EBITDA margin) 23.5% 27.9% 24.8% 20.4% 18.9% 19.9% 20.4% 21.6% 22.1% 23.1% 23.7% Pretax profit 1,100 3,400 4,848 4,205 5,761 5,420 8,439 11,865 15,548 22,567 30,056 Taxes 149 482 654 469 748 677 1,055 1,483 1,943 2,821 3,757 NP (GAAP) 951 2,918 4,194 3,736 5,013 4,742 7,384 10,381 13,604 19,746 26,299 Minority interests 20 67 316 349 452 474 886 1,246 1,633 2,370 3,156 NP attributable to owners 931 2,852 3,878 3,387 4,560 4,268 6,498 9,136 11,972 17,376 23,143 (YoY) 0.0% 206.4% 36.0% -12.7% 34.6% -6.4% 52.3% 40.6% 31.0% 45.1% 33.2% Fully diluted EPS (CNY) 0.78 1.87 2.01 1.64 2.08 1.95 2.97 4.17 5.47 7.93 10.57 Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 33 September 2, 2020 Batteries/ESS
Table 19. CATL: Quarterly earnings and key assumptions (CNYmn) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20F 4Q20F 1Q21F 2Q21F 3Q21F 4Q21F
Mirae Asset Daewoo Research 34 September 2, 2020 Batteries/ESS
CATL (300750 CH)
Income statement (summarized) Balance sheet (summarized) (CNYmn) 2019 2020F 2021F 2022F (CNY mn) 2019 2020F 2021F 2022F Revenue 45,788 44,853 68,835 89,208 Current assets 71,695 69,850 91,039 107,787 COGS 32,483 32,499 50,458 65,664 Cash & equivalents 24,590 26,902 32,854 36,234 Gross profit 13,305 12,354 18,378 23,543 Receivables 17,988 20,184 32,353 41,035 Operating expenses 8,332 7,134 10,088 11,829 Inventories 11,481 10,765 15,832 20,518 EBIT 4,974 5,220 8,289 11,715 Other current assets 17,636 12,000 10,000 10,000 Non-operating profit 791 400 450 450 Non-current assets 29,657 28,554 27,772 31,589 Net financial income 789 300 300 300 PP&E 21,427 22,554 21,772 25,589 Net other income 2 100 150 150 Other long-term assets 8,230 6,000 6,000 6,000 Pretax profit 5,761 5,420 8,439 11,865 Total assets 101,352 98,404 118,810 139,376 Income taxes 748 677 1,055 1,483 Current liabilities 45,607 37,379 50,638 61,453 Minority interests 452 474 886 1,246 Payables 18,536 17,493 26,846 34,791 Net profit attributable to owners 4,560 4,268 6,498 9,136 Short-term debt 20,623 19,386 23,292 26,162 Other current liabilities 6,448 500 500 500 Non-current liabilities 13,557 14,661 15,195 15,626 Long-term debt 6,513 7,661 8,695 9,626 Other non-current liabilities 7,044 7,000 6,500 6,000 Total liabilities 59,164 52,040 65,833 77,079 Owners of the parent 38,135 42,074 48,244 56,942 Paid-in capital 23,426 23,426 23,426 23,426 Retained earnings 14,750 18,690 24,859 33,557 Other capital & adj. (41) (41) (41) (41) Minority interests 4,053 4,290 4,733 5,356 Shareholders’ equity 42,188 46,364 52,977 62,298
Cash flow statement (summarized) Key valuation metrics/ratios (CNYmn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F Cash flow from operating activities 13,210 6,491 10,280 14,218 P/E (x) 50.8 105.5 69.3 49.3 NPAT-MI 4,560 4,268 6,498 9,136 P/B (x) 6.1 10.7 9.3 7.9 D&A 4,252 3,723 5,782 7,583 EV/EBITDA (x) 35.4 50.4 32.0 23.3 Chg. in working capital/other 4,398 (1,500) (2,000) (2,500) EPS (CNY) 2.08 1.95 2.97 4.17 Cash flow from inv. activities 1,854 (5,850) (6,000) (12,400) BPS (CNY) 17.41 19.21 22.03 26.00 Capex (net (9,627) (4,850) (5,000) (11,400) DPS (CNY) 0.15 0.15 0.15 0.20 Other 11,481 (1,000) (1,000) (1,000) Payout ratio (%) 7.2 7.7 5.1 4.8 Cash flow from fin. activities 4,433 1,671 1,671 1,562 Dividend yield (%) 0.1 0.1 0.1 0.1 Dividends (309) (329) (329) (438) Accounts receivable turnover (x) 2.5 2.2 2.1 2.2 Increase/decrease in equity 496 0 0 0 Inventory turnover (x) 4.0 4.2 4.3 4.3 Increase/decrease in debt 2,198 2,000 2,000 2,000 Accounts payable turnover (x) 2.5 2.6 2.6 2.6 Net increase in cash 19,511 2,312 5,952 3,380 ROA (%) 5.2 4.3 6.0 7.1 Beginning cash 4,241 24,590 26,902 32,854 ROE (%) 12.5 10.6 14.4 17.4 Ending cash 24,590 26,902 32,854 36,234 ROIC (%) 7.1 6.4 9.2 11.2 Source: Company data, Mirae Asset Daewoo Research estimates Liabilities/equity ratio (%) 140.2 123.2 121.3 117.9 Current ratio (%) 157.2 186.9 179.8 175.4 Net debt/equity ratio (%) 6.0 0.3 -1.6 -0.7
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Appendix 1
Important disclosures and disclaimers Two-year rating and TP history
Company Date Rating TP (W) Company Date Rating TP (W) LG Chem (051910) Samsung SDI (006400) 09/02/20 Buy 1,050,000 08/26/20 Buy 690,000 07/31/20 Buy 780,000 07/29/20 Buy 560,000 06/26/20 Buy 650,000 06/01/20 Buy 480,000 06/01/20 Buy 570,000 05/04/20 Buy 390,000 03/16/20 Buy 500,000 01/30/20 Buy 350,000 02/23/20 Buy 550,000 10/01/19 Buy 315,000 02/03/20 Buy 500,000 01/14/19 Buy 350,000 09/24/19 Buy 460,000 07/30/18 Buy 330,000 09/18/19 Buy 500,000 CATL (300750 CH) (CNY) 07/24/19 Buy 530,000 5/15/20 Buy 200 05/23/19 Buy 500,000 7/7/20 Buy 270 01/31/19 Buy 520,000 9/2/20 Buy 270 01/14/19 Buy 480,000 07/17/18 Buy 460,000
300 (W) LG Chem (W) Samsung SDI 270 270 1,200,000 800,000 250 1,000,000 200 600,000 200 800,000 CATL 150 600,000 400,000 100 400,000 200,000 50 200,000
0 0 0 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Se p 1 8 Se p 19 Se p 2 0 Se p 18 Se p 1 9 Se p 2 0
Stock ratings Sector ratings Buy Expected 12-month performance: +20% or greater Overweight Expected to outperform the market over 12 months Trading Buy Expected 12-month performance: +10% to +20% Neutral Expected to perform in line with the market over 12 months Hold Expected 12-month performance: -10% to +10% Underweight Expected to underperform the market over 12 months Sell Expected 12-month performance: -10% or worse
Rating and TP history: Share price (─), TP (▬), Not Rated (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆) * Our investment rating is a guide to the expected return of the stock over the next 12 months. * Outside of the official ratings of Mirae Asset Daewoo Co., Ltd., analysts may call trading opportunities should technical or short-term material developments arise. * The TP was determined by the research analyst through valuation methods discussed in this report, in part based on estimates of future earnings. * TP achievement may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.
Ratings distribution and investment banking services Buy Trading Buy Hold Sell Ratings distribution 76.22% 11.59% 11.59% 0.60% Investment banking services 75.00% 10.00% 15.00% 0% * Based on recommendations in the last 12 months (as of June 30, 2020)
Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Samsung SDI, LG Chem as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies.
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 or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in 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. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading, and private client divisions. At the 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.
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Disclaimers This report was prepared 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 in good faith and from sources believed to be reliable, 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. In case of 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. 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 or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person, and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates, and their directors, officers, employees, and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views, and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. 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. 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. For further information regarding company-specific information as it pertains to the representations and disclosures in this Appendix 1, please contact [email protected] or +1 (212) 407-1000.
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