EV Batteries /Components Understanding the true demand picture Overweight (Maintain) Europe’s EV demand; Top picks are LG Chem and Samsung SDI Korean electric vehicle (EV) battery suppliers have been seeing a sharp increase in Industry Report orders from European automakers. The question now is how quickly orders will June 18, 2019 translate into earnings. While there are some concerns that demand could be underwhelming, we see strong visibility on growth in Europe’s EV market. First, a number of new models with much more advanced features are coming to the market. In 2018, Nissan’s (7201 JP/CP: JPY757.9) LEAF and Renault’s (RNO FP/CP: Mirae Asset Daewoo Co., Ltd. EUR56.19) ZOE were practically the only two EV models available in Europe, with both models having limited 250km driving ranges. In 2019-21, roughly 100 models, including Yeon -ju Park both battery electric vehicles (BEVs) and plug-in hybrid EVs (PHEVs) , will be rolled out in +822 -3774 -1755 Europe. In 2019-20, major au tomakers will release five to six premium BEVs with long [email protected] ranges and other compelling features to counter Tesla’s (TSLA US/CP: US$225.03) advance. In 2020-21, mass-market EV models using dedicated platforms, such as Minkyung Kim Volkswagen’s (VOW GR/CP: EUR145.0) ID 3, will hit the market. +822 -3774 -1732 [email protected] Second, and most importantly, automakers’ EV sales need to reach a certain level in order to meet Europe’s environmental regulations, which will cap CO 2 emissions per Chuljoong Kim vehicle at 95 grams/km by 2021, a 19% reduction from the 2018 level. If automakers +822 -3774 -1464 fail to meet the new target, the industry could collectively face total fines of W40tr [email protected] (W10tr in the case of Volkswagen). For example, we estimate Volkswagen would have to sell at least 250,000-300,000 EVs in 2020 to comply with the ne w standards. While it may cost more to manufacture an EV than a conventional vehicle, it is clearly more economical than paying trillions of won in fines. Furthermore, for premium EVs coming out in 2019-20, automakers are likely to pass the cost of powertrains directly onto EV prices. Having already poured huge amounts of money into development, we think it makes sense for automakers to sell a certain number of EVs and achieve economies of scale. In the medium term, we believe EVs will become more econo mical than conventional vehicles, as the manufacturing cost of EVs is likely to decline on the adoption of dedicated platforms, scale effects, and falling battery prices, while the manufacturing cost of conventional vehicles is likely to increase, due to the need to meet new emissions standards. Third, releasing compelling EV models is critical for automakers to remain competitive in the market. For consumers, EVs are also appealing when taking into account government subsidies and potential fuel cost savings. We expect Europe’s EV market to grow sharply in the coming years, from 390,000 units in 2018 to 620,000 units in 2019, 1.26mn units in 2020, and 4.41mn units in 2025. In this process, the revenue and profits of Korean battery suppliers are likely t o grow faster than market expectations. There are only four to five companies in the world capable of supplying batteries to European automakers. Among them, the gaps in technology and manufacturing costs are continuing to widen, leading to a concentration of orders among top-tier suppliers. While some European companies have been looking to produce batteries internally, we think such production is unlikely to begin before 2022-23. Moreover, e ven after the production facilities are in place, it will likely be difficult for European companies to catch up to Korean suppliers, which will have significant scale and manufacturing know-how by then. In the end, we believe Korean battery producers will enjoy stronger negotiating power, leading to profit margins that are higher than market expectations. The increasing likelihood of entry into China could provide an additional boost. We continue to recommend LG Chem and Samsung SDI as our top picks in batteries. Thanks to its industry-leading position in the EV battery market, LG Chem’s negotiating power is gradually strengthening. While the stock has come under pressure on worries about the chemicals cycle, we think the recent weakness offers an attractive buying opportunity, considering the company’s value. We also expect Samsung SDI to re-rate higher, driven by improving EV battery margins and the potential advance into China. Within the EV supply chain, we also remain positive on Hanon Systems and Iljin Materials. June 18, 2019 EV Batteries/Components C O N T E N T S I. The true European demand picture 3 1. European EV demand dynamics 3 2. A number of advanced EV models to hit the market 4 3. The true demand picture 9 4. EV strategies of major automakers 16 II. Global EV market outlook 25 III. Supply chain outlook 26 1. Batteries: Margin upside; Top picks are LG Chem and Samsung SDI 26 2. Battery materials: Full-fledged supply for EVs + ESS demand recovery 31 3. Next-generation vehicles: Platforms to take center stage 35 LG Chem (051910 KS) 37 Samsung SDI (006400 KS) 40 Hanon Systems (018880 KS) 45 Iljin Materials (020150 KS) 48 Mirae Asset Daewoo Research 2 June 18, 2019 EV Batteries/Components I. The true European demand picture 1. European EV demand dynamics In 2017, global automakers announced massive plans to invest in EVs, in response to: 1) the slowing sales volume of diesel vehicles after the dieselgate emissions test cheating scandal in Europe; 2) tightening CO2 regulations; 3) Tesla’s strengthening presence; and 4) China’s EV subsidies. This year, the release of third-generation EVs will start in earnest, and because automakers are setting high sales targets and placing battery orders on a platform basis, battery suppliers are seeing a sharp rise in orders. There are only four to five companies in the world capable of supplying batteries to European automakers. Among them, the gap in technology and manufacturing costs is continuing to widen, leading to a concentration of orders among top-tier suppliers. For example, LG Chem’s EV battery orders reached W110tr in 1Q19 and will likely continue to grow rapidly. The question now is how quickly orders will turn into earnings. Automakers place EV battery orders based on their sales volume projections. As such, actual sales volume determines the pace at which orders translate into earnings for suppliers. In this report, we provide an overview of the major EV models set for release in Europe over the next two to three years and discuss the visibility of Europe’s EV demand growth. In addition, we forecast EV battery supply/demand dynamics and earnings. Figure 1. Evolution to third-generation EVs Figure 2. LG Chem’s battery orders (Wtr) 120 90 60 30 0 4Q17 2Q18 4Q18 1Q19 Source: Press reports, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 June 18, 2019 EV Batteries/Components 2. A number of advanced EV models to hit the market 1) Roughly 100 models to be rolled out in Europe in 2019-21 In 2018, BEVs and PHEVs accounted for only 2.5% of total auto sales volume in Europe. The Nissan LEAF and Renault ZOE were the best-selling EV models in the European market, with both models having limited driving ranges of 200-250km and annual sales volumes of 30,000-40,000 units. This year will be a different story. Starting with the arrival of Tesla’s Model 3 in Europe, major automakers will release premium BEVs with long range and other compelling features, including the Audi E-Tron, Mercedes-Benz EQC, BMW (BMW GR/CP: EUR62.1) iX3, and Volvo (VOLVB SS/CP: SEK140.65) XC40 and Polestar 2. These new EVs are mostly premium sedan or SUV models with price tags around EUR60,000, ranges of 400-500km, and 0-100km/h times of less than five seconds. They also boast robust brand awareness, sleek designs, and stable service networks. While official sales targets are unknown, we expect automakers to target around 50,000- 100,000 units per year for these models, judging by media reports and considering economies of scale. The E-Tron has secured pre-orders of 20,000 units and has sold around 1,000 units monthly since its release in Europe in March. The EQC is already sold out for 2019-20 (25,000 units to be produced in 2019 and 50,000 units in 2020). Volvo plans to start production of the Polestar 2 in China (with annual production volume of 50,000 units) and export the model to the US and Europe. Figure 3. Major EV models’ prices and driving ranges Price (US$'000) Volvo Polestar 2 70 (2020) BMW i3 (2018) 60 Peugeot e-208 BMW i4 (2020) Tesla Model 3 (2021) (2019) 50 VW e-Golf Mercedes-Benz EQA 40 (2017) (2020) VW ID3 VW ID Crozz 30 Nissan LEAF (2020) (2021) (2018) 20 Renault ZOE (2018) 10 0 0 100 200 300 400 500 600 700 800 Source: Industry data, Mirae Asset Daewoo Research Table 1. Major EV models in Europe (2018) Model Nissan LEAF Renault ZOE BMW i3 Price (US$) 29,990 23,650 44,450 Style Hatchback Hatchback Hatchback Battery (kWh) 40 41 33.2 Range (km) 240 260 200 0-100km/h acceleration (s) 7.9 11.4 8.1 European sales volume (2018) 40,609 38,538 24,432 Source: Industry data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 4 June 18, 2019 EV Batteries/Components Table 2.