China Materials 25 September 2020 China Battery Materials Expert call takeaways: lithium the weakest part of Tesla’s Battery Day presentation Our expert was impressed by Tesla’s new form factor, CTP, focus on capex, pilot Fremont line and differentiated cathode approach Dennis Ip, CFA Confusing cell chemistry presentation: lack of incentives for miners (852) 2848 4068 and disservice to lithium industry with over-simplification of extraction [email protected] Leo Ho Not all projects announced will come to fruition: some will over-deliver; (852) 2848 4469 some will be terminated; some new projects will come up [email protected] What’s new: We hosted an expert call with Vivas Kumar, principal at BMI China’s dominance of LiB supply chain and a former Tesla employee, who specialises in global lithium sourcing. What’s the impact: A few impressive breakthroughs. Vivas was impressed by Tesla’s development of a 46x80 form factor, cell-to-pack (CTP) cell installation, and emphasis on capex efficiency. He said some of these breakthroughs had been under way for years before his departure from Tesla in April 2019. He was also upbeat on its diversified cathode approach, which Tesla is the first in the industry to clearly outline. He was surprised by Tesla opting for silicon anode while not mentioning lithium Source: Benchmark Mineral Intelligence (BMI) metal on Battery Day. He commended the 10GWh Fremont line, which is the 13th largest battery production line in the world despite just being a Tesla: diversified cathode approach “pilot line”. He also believes Tesla already has a convincing answer to ensure safety of the larger 46x80 form factor and module-less battery pack. Confusing cell chemistry presentation. Vivas had expected Tesla to incentivise upstream miners on Battery Day, but Tesla appeared instead to have created “market friction”. The lithium part was deemed by Vivas as the weakest section. He believes Tesla’s bold claim of NaCl-based extraction (see our flash) on Battery Day did a “disservice to the lithium Source: Tesla industry” as it has over-simplified the lithium extraction and conversion processes, which led to market doubts over lithium majors, as evidenced Tesla: US cathode production by their share-price declines the day after Battery Day, rather than incentivising lithium players to mine more. Vivas also suggested that cobalt-free cathode is not quite feasible and recalled that it took 15 years of R&D before commercialisation of NCA. Moreover, Tesla provided neither a timeline for implementation nor a further explanation of the “de-risking” function of vertical integration in the US. Not all projects will be implemented. Vivas said not all 15 projects Source: Tesla announced on Battery Day will be realised eventually; some will over- deliver while some may be terminated prematurely due to capital-allocation Tesla: cell production plan concerns. Also, new projects not announced on Battery Day will come up alongside ongoing R&D. He also explained that Giga Texas (possibly with the co-location of Tesla Cathode and Tesla Lithium) rather than the Fremont factory would be the main contributor to the “100GWh in 2022”. The cell production will likely be replicated for Giga Berlin but not Giga Shanghai given the cost advantage of CATL (300750 CH) in China. What we recommend: Our top pick is Ganfeng (1772 HK, HKD36.70, Buy Source: Tesla [1], see our flash). Key risk: delay in Tesla’s execution of cell production. How we differ: We dissect the impacts of changing cell chemistry in depth. See important disclosures, including any required research certifications, beginning on page 3 China Battery Materials: 25 September 2020 Global battery production lines Source: Benchmark Mineral Intelligence (BMI) Existing LiB supply chain Future LiB supply chain Source: Benchmark Mineral Intelligence (BMI) Source: Benchmark Mineral Intelligence (BMI) Global megafactory capacity growth Global lithium chemicals supply demand balance Source: Benchmark Mineral Intelligence (BMI) Source: Benchmark Mineral Intelligence (BMI) Note: Tesla’s goal of 3TWh by 2030 has higher battery production capacity than pipelines of all Note: Shortage of lithium chemicals is possibly due to the lack of incentive pricing. other battery makers combined. 2 China Battery Materials: 25 September 2020 Important Disclosures and Disclaimer This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. 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