Electric vehicles | CHINA INDUSTRIALS / AUTOS & AUTO PARTS NOMURA INTERNATIONAL (HK) LIMITED NEW Yankun Hou +852 2252 6234 [email protected] THEME Action Stocks in focus We believe that various electric vehicles (xEV) are the ultimate solution for the We believe the EV theme will sustainability of the global auto industry. We think current EV technology is not support BYD’s share price, although sophisticated enough to compete with the internal combustion engine, but can be we find it difficult to see upside from applied to niche markets. Penetration in niche markets will probably depend on here without clearer milestones; CSR government policy. We are cutting our rating for BYD to NEUTRAL (from Buy) on could benefit due to its strong R&D possible slower sales of EV products in 2011 and a demanding valuation. We think ability in EV buses. WATG, Tianneng Power, A123, Ningbo Yunsheng and CSR (NEUTRAL) have exposure to the EV theme. Price Catalysts Stock Rating Price target BYD (1211 HK) NEUTRAL 42.75 40.00 Government policies on EV; auto sales volume. CSR (1766 HK) NEUTRAL 10.78 11.20 Anchor themes Downgrading from Buy. Cutting PT. We think the niche auto market, including buses, taxis, and LSEVs, provides the Closing prices as of 12 January 2011; local currency first entry point for EV producers. So near and yet so far Analysts Yankun Hou +852 2252 6234 Technology ready to take off as a niche product [email protected] We believe the current EV technology cannot compete with the conventional internal combustion engine (ICE) on driving experience, but that it is ready to be Ming Xu applied to niche markets, though the speed of penetration depends on government +852 2252 1569 commitment. We forecast EV (including plug-in hybrid) will account for only a 5% [email protected] market share of annual passenger vehicle sales in 2020. We believe the current EV technology is ready to take off in niche markets. Paul Gong +852 2252 6177 [email protected] Not just a question of technology, but policy Instead of technology, we believe the speed of EV penetration depends on policy Leping Huang, PhD support, encompassing a solution to public transportation, the economics of new +852 2252 1598 infrastructure construction, and total CO2 emission from well to wheel. Consumer [email protected] attitudes about driving experience could also be a hurdle for EV penetration, while government commitment is likely to be the key to success. In our view, China will be the largest EV market due to its large niche segments of the auto market and strong government execution power. BYD could be the most promising EV maker, in our view, due to its distinct positioning in the battery and auto industry. Assume coverage of BYD with a NEUTRAL rating We believe the investment story is more complicated than the development of the industry, as growth of EV sales is non-linear, and is highly dependent on government policies. For China in 2020F, we forecast EV to account for 5% of annual private passenger vehicle sales, 20% of the total taxi fleet, and 50% of the total city bus fleet. Successful penetration into niche markets will likely drive the China EV battery market to 69MWh (RMB137bn, ASP=RMB2,000/kwh) in 2020F, larger than the current size of the global lithium-battery market. We believe electrification of automobiles will provide more opportunities for component makers, including battery makers, than for OEMs. We are downgrading BYD to NEUTRAL, due to potential downside risk from short-term earnings growth, slow auto sales, and rich valuations, in our view. We base our HK$40.0 price target on an SOTP methodology. WATG, Tianneng Power, A123, Ningbo Yunsheng and CSR are possible rising stars for the upcoming EV theme. Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 97 to 100. Nomura 1 17 January 2011 Electric vehicles | China Yankun Hou Contents Executive summary 7 China electric vehicle industry cheatsheet 10 Valuation: how to value concept stock 11 Words of wisdom 14 Simple facts that we believe 15 Eco car – a puzzle for three decades 16 What is an eco car? 16 At present, eco cars are still a top-down question 17 Eco-car development in China 22 Automakers’ eco strategies 22 Improvement potential in ICE fuel economy 25 Public transit system 26 Electric vehicles: promises and compromises 27 Battery electric vehicle: running purely on electricity 28 Hybrid electric vehicle (HEV): a compromise 29 Fuel-cell vehicle (FCV): still in the labs 32 Right timing, right place and right technology? 36 Once upon a time in 1900 … 36 Performance: high price unjustified 37 Socio-economic considerations: macro concerns 38 Policy: shifting to EV 41 Governments are beefing up support 41 Focus shifting to BEV 42 Niche market: buses, taxis and LSEV 44 Demand from public transportation 44 Growth prospects for the xEV private market 46 Low-speed electric vehicle (LSEV): power to the people 49 Li-ion battery for EV 54 Market overview: big demand from EV 54 Four key materials for Li-ion batteries 55 Requirement for EV: more safety and output 56 In search of new materials 57 Comparison of cathode chemistries 59 Comparison with different approaches 61 BYD’s potential market share 62 Other Chinese companies’ participation 63 Nomura 2 17 January 2011 Electric vehicles | China Yankun Hou Glossary 64 Appendix 66 Latest company views BYD 71 CSR Corporation 80 Tianneng Power 84 A123 87 Wonder Auto Technology 90 Ningbo Yunsheng 93 Also see our Anchor Report: China Autos & auto parts — Passengers in front (18 November, 2010) Nomura 3 17 January 2011 Electric vehicles | China Yankun Hou Index of exhibits Exhibit 1. Electric vehicle ownership forecasted by US Department of Energy in 1978 7 Exhibit 2. Price difference breakdown between ICE car and BEV................................. 7 Exhibit 3. xEV market and battery market forecast........................................................ 8 Exhibit 4. China EV battery market (MWh) .................................................................... 9 Exhibit 5. China EV battery market (RMBmn) ............................................................... 9 Exhibit 6. Life cycle carbon emission........................................................................... 10 Exhibit 7. Energy need and CO2 emission per 1km by different drive-trains............... 10 Exhibit 8. Energy flows for a midsize passenger car during urban driving .................. 10 Exhibit 9. Energy density comparison.......................................................................... 10 Exhibit 10. Government subsidies to xEV R&D projects through 863 program........... 10 Exhibit 11. Performance of EV batteries...................................................................... 10 Exhibit 12. Share price of Ballard (1997~2011) and catalysts..................................... 11 Exhibit 13. Share price of Amazon(1997~2011) and catalysts.................................... 12 Exhibit 14. BYD: to be or not to be .............................................................................. 12 Exhibit 15. Valuation comp table ................................................................................. 13 Exhibit 16. Growing concerns on sustainable drivability.............................................. 17 Exhibit 17. Global daily oil consumption, with rising share from China and other Asian countries ...................................................................................................................... 18 Exhibit 18. Crude-oil shortage in China ....................................................................... 18 Exhibit 19. Breakdown of oil consumption by industry (global, 2007).......................... 18 Exhibit 20. Breakdown of oil consumption by industry (China, 2007).......................... 18 Exhibit 21. Shift of vehicle sales mix in the US............................................................ 19 Exhibit 22. Prices of comparable models with different fuel economy......................... 19 Exhibit 23. Fuel efficiency & CO2 emissions standards in the US............................... 20 Exhibit 24. CO2 emissions of new cars sold in EU in 2008 & 2009 vs EU target........ 20 Exhibit 25. CO2 emissions breakdown by industry, China (2009)............................... 20 Exhibit 26. CO2 emissions breakdown by industry, US (2009) ................................... 20 Exhibit 27. Global automakers’ eco-car strategies ...................................................... 22 Exhibit 28. Slowing growth of fuel ethanol production in China ................................... 23 Exhibit 29. Emissions per 1km, CNG vs gasoline........................................................ 23 Exhibit 30. Lack of CNG refuelling stations ................................................................. 23 Exhibit 31. CNG vehicle ownership and forecast......................................................... 23 Exhibit 32. Diesel PV sales volume and market share in China .................................. 24 Exhibit 33. Diesel/gasoline ratio trend in China vs. international levels....................... 24 Exhibit 34. China: diesel usage breakdown (2008) ..................................................... 25 Exhibit 35. Overall cost comparison ............................................................................ 25 Exhibit 36. Energy flows for a midsize passenger car ................................................