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After raising their price target on Chinese electric vehicle (EV) maker NIO (NYSE: NIO) sharply to $40 in a report released on Wednesday, JP Morgan analysts led by Nick Lai gave a positive review on the Chinese EV supply chain in a new report on Thursday.
The report noted that China’s battery supply chain has been breaking new records every day post the National Day holiday Golden Week.
"While one can be tempted to take profit, we think the positive momentum may persist towards year-end or early 2021, with solid EV sales and several near-term catalysts in the sector," the report said.
Along with an upbeat top-down view, JP Morgan further lift the price targets of several stocks in the supply chain.
The Wall Street bank is bullish on Chinese EV makers NIO, BYD and XPeng "as we believe China’s ‘Tesla fever’ is not ‘winner takes all’ but a ‘rising tide lift all boats’. "
JP Morgan sharply raises NIO price target to $40, representing 85% upside potential
Here is the full report:
China’s battery supply chain JPCABATT index (which includes all relevant stocks under JPM coverage) has been breaking new records every day post Golden Week.
While one can be tempted to take profit, we think the positive momentum may persist towards year-end or early 2021, with solid EV sales and several near-term catalysts in the sector.
We summarize the upcoming catalysts and the latest release of September NEV sales/battery installations below.
We recently lifted our long-term NEV demand forecasts in China by >50% in 2025 (note), expecting NEV penetration to accelerate and quadruple from <5% in 2019 to 20% in 2025.
Along with an upbeat top-down view, we further lift the PTs of several stocks in the supply chain. We are bullish on Chinese EV makers Nio, BYD and XPeng as we believe China’s ‘Tesla fever’ is not ‘winner takes all’ but a ‘rising tide lift all boats’.
For suppliers, we like Huayu and Minth among auto parts; Wuxi Lead, CATL, Yunnan Energy & Putailai along the battery supply chain.
Analysts expect strong sales in China's new energy vehicle market in H2
Near-term catalysts:
1) VW China’s MEB launch on 22 Oct (CATL is the major battery supplier for the VW MEB platform in China).
2) Tesla’s 3Q result and analyst call on 22 Oct – potential comments around accelerated capacity of its Shanghai plant or a confirmation of battery supplier for its Berlin production could act as further catalyst to suppliers.
3) 14th Five-Year Plan later this month where China is expected to unveil its NEV ambition in global market place and emission targets likely tighten with government’s ambitious target to achieve carbon neutrality by 2060.
4) EV suppliers’ 3Q20 result in late October (Table 1) should see a meaningful recovery (key battery makers CATL and BYD's production was up 26% y/y and 64% q/q in 3Q20).
5) Solid shipment data of the new Model 3 installed with CATL’s battery released in early November.
Remarkable growth in September, with CAAM reporting 74% y/y in China NEV sales and MIIT’s 82% y/y growth in NEV installation (YTD at -16% and - 17% respectively).
ICCSino’s recent release of key battery & material makers’ latest production trends in Oct reaffirm our view that solid momentum should continue into year-end or 1H21 where we expect >50% growth (note).
EV battery installation was 6.6GWh in Sep, up 66% y/y (YTD -19%).
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CATL remains the dominant supplier with a 48% market share in Sep (or 65% excluding Tesla & BYD), followed by BYD and LG Chem at 17% and 11%.
LFP share increased sharply to 35% in Sep (vs 28% in 8M20). Within PV, LFP share jumped to 16% (vs 6% in 8M20) driven by solid sales of BYD’s Han and several other EV models.
With launch of Tesla LFP version from Oct, we forecast LFP share to increase in the next 2 years (Table 5) but NCM may regain lost ground in 1-2 years. We note CATL may launch its NCM CTP in mid-2021.
NEV credit status update: According to CPCA estimates, China’s passenger vehicle industry generated a total of ~200k units of NEV credit in 8M20, or at ~20% of total production.
This is ahead of the government’s target of 12% this year, implying NEV credit could still be worth little value this year.
We expect credit value to accelerate going forward as bars are set higher each year towards 2023 (note) although the industry may continue to remain in net NEV credit surplus based on our forecasts.
A longer-term CAFC/ emission target may also be introduced at the 14th Five-Year Plan.
New NEV model launch highlights
MIIT's latest suggested NEV model list (the 10th batch in 2020) “Suggested NEV model” lists (《新能源汽车推广应用推荐车型目录》)” published on Sep 21, 2020 showed LFP batteries' penetrations were accelerating.
14 LFP PV models were included in the list out of a total of 41 PV NEV models, accounting for ~35%.
Also, two battery-swap compatible versions of SAIC Roewe Ei5 appeared on the list with LFP battery and NEDC driving range of 401km. Other key OEMs supporting battery swap function are NIO, BAIC, JAC etc.
In China, 9% of new energy vehicles sold by their owners in less than a year
CATL - A
Investment Thesis, Valuation and Risks
Contemporary Amperex Technology Co. Ltd - A (Overweight; Price Target: Rmb270.00)
Investment Thesis
We believe China's NEV penetration is set to accelerate from here and quadruple by 2025 to 20% from less than 5% in 2019, driven by a shift of customers, including from B2C and ICE to EV, and expected production cost-parity between ICE and EV by 2022/23 as battery costs drop further.
Tesla is driving a ‘rising tides lift all boats’ phenomenon which not only leads to a fast growing NEV addressable market but also benefits suppliers relevant to the broader EV supply chain.
CATL is the dominant market leader in China and we expect the company to maintain a ~45-50% market share in the next two years despite some penetration from KR/JP peers.
Outside China, we expect CATL to gain market share from the fast-growing Europe EV market (JPMe ~30% market share by 2025, up from <10% in 2019).
CATL had also been aggressively expanding its footprint on non-EV applications such as e-bike, electric ferry and ESS markets.
We have revised up our 2021-22 earnings by 6-9% on the back of Tesla's launch of new Model 3 as well as more bullish estimates on China’s NEV demand.
Valuation
Our Jun-21 PT is Rmb270 based on 90x forward P/E (vs previous Rmb250 on 88x P/E).
We believe China’s EV adoption will accelerate towards 2025 where penetration could quadruple from <5% this year to 20% in 2025, driven by continued (battery) cost reduction (where we expect production cost-parity by 2023), fast increase of individual buyers and attractive smart EV content/ functionality vs traditional ICE car.
We believe valuation multiples of Smart EV players during this period could expand further and potentially range between 2-3x the previous average, a similar pattern to what was seen in the smartphone industry.
We apply such logic on valuations of smart EV players and set a target multiple of 90x on CATL, which is at the higher end of the company’s trading history, taking into account the company’s leading position domestically and globally.
China's saw 20,000 new energy vehicle-related company registrations in Q2
Risks to Rating and Price Target
Downside risks to our rating and price target include:
1) worse-than-expected NEV industry recovery in 2H20-2021 in China, 2) slower-than-expected EV adoption in EU or softer-than-expected policy stimulus, 3) potential disruptive technology being unveiled by Tesla on its Battery Day, or Tesla becoming a battery supplier (i.e. competitor to CATL).
Summary Investment Thesis and Valuation
We believe China's NEV penetration is set to accelerate from here and quadruple by 2025 to 20% from less than 5% in 2019, driven by a shift of customers, including from B2C and ICE to EV, and an expected production cost-parity between ICE and EV by 2022/23 as battery costs drop further.
Tesla is driving a ‘rising tides lift all boats’ phenomenon which not only leads to a fast growing NEV addressable market but also benefits suppliers relevant to the broader EV supply chain.
CATL is the dominant market leader in China and we expect the company to maintain a ~45-50% market share in the next two years despite some penetration from KR/JP peers.
Outside China, we expect CATL to gain market share from the fast-growing Europe EV market (JPMe ~30% market share by 2025, up from <10% in 2019).
CATL had also been aggressively expanding its footprint on non-EV applications such as e-bike, electric ferry and ESS markets.
We revised up our 2021-22 earnings by 6-9% on back of Tesla's launch of new Model 3 as well as more bullish estimate on China’s NEV demand.
Our Jun-21 PT is based on 90x forward P/E. We believe China’s EV adoption will accelerate towards 2025 where penetration could quadruple to 20% in 2025, driven by continued (battery) cost reduction (where we expect production cost-parity by 2023), fast increase of individual buyers and attractive smart EV content/ functionality vs. traditional ICE car.
We believe valuation multiples of Smart EV players during this period could expand further and potentially range between 2-3x the previous average, a similar pattern to what was seen in the smartphone industry.
We apply such logic on valuations of smart EV players and set a target multiple of 90x on CATL, which is at the higher end of the company’s trading history, taking into account the company’s leading position domestically and globally.
Volkswagen to equip China-made new energy vehicles with CATL batteries this year
Yunnan Energy - A
Investment Thesis, Valuation and Risks
Yunnan Energy New Material Co., LTD. - A (Overweight; Price Target: Rmb120.00)
Investment Thesis
We believe China's NEV penetration is set to accelerate from here and quadruple by 2025 to 20% from less than 5% in 2019, driven by a shift of customers, including from B2C and ICE to EV, and expected production cost-parity between ICE and EV by 2022/23 as battery costs drop further.
Tesla is driving a ‘rising tides lift all boats’ phenomenon which not only leads to a fast growing NEV addressable market but also benefits suppliers relevant to the broader EV supply chain.
Yunnan Energy is the largest battery separator supplier in China and among the top three players globally.
Yunnan Energy has been able to gain market share massively in China, from 9% in 2016 to 30% in 2019 and over 40% in 1Q20. Globally, we project Yunnan Energy’s market share could grow towards ~25% in 2025, from <5% in 2016.
We have revised up Yunnan Energy’s 2020-22 earnings by 10-20% on back of a more bullish estimate for industry demand as well as the company’s solid YTD momentum.
Valuation
We lift Yunnan Energy’s PT to Rmb120 following earnings revision while maintaining the same multiple (previous PT at Rmb100 on 80x PER).
We believe China’s EV adoption will accelerate towards 2025 where penetration could quadruple from <5% this year to 20% in 2025, driven by continued (battery) cost reduction (where we expect production cost-parity by 2023), fast increase of individual buyers and attractive smart EV content/ functionality vs traditional ICE car.
We believe valuation multiples of Smart EV players during this period could expand further and potentially range between 2-3x the previous average, a similar pattern to what was seen in the smartphone industry.
We apply such logic on valuations of smart EV players and set a target multiple of 80x on Yunnan Energy.
Our target multiple is at the higher end of the company's historical trading ranges which we believe is reasonable given the company's leadership position in global separator space and continued market share gains.
Risks to Rating and Price Target
Yunnan Energy currently has a very high share within CATL’s wet separator supply. We do not rule out the possibility that the company’s share might potentially decrease in the future given a few suppliers have recently penetrated into CATL's wet separator supply chain (Senior, Chinaly) and production kickoff by a CATLbacked separator supplier Horizon New Energy from 4Q20. Potentially slower adoption of wet separator given the rise of LFP battery in the China EV space.
Summary Investment Thesis and Valuation
We believe China's NEV penetration is set to accelerate from here and quadruple by 2025 to 20% from less than 5% in 2019, driven by a shift of customers, including from B2C and ICE to EV, and expected production cost-parity between ICE and EV by 2022/23 as battery costs drop further.
Tesla is driving a ‘rising tides lift all boats’ phenomenon which not only leads to a fast growing NEV addressable market but also benefits suppliers relevant to the broader EV supply chain. Yunnan Energy is the largest battery separator supplier in China and among top three player globally.
Yunnan Energy has been able to gain market share massively in China, from 9% in 2016 to 30% in 2019 and over 40% in 1Q20. Globally, we project Yunnan Energy’s market share could grow towards ~25% in 2025, from <5% in 2016.
We revised up Yunnan Energy’s 2020-22 earnings by 10-20% on back of a more bullish estimate for industry demand as well as the company’s solid YTD momentum. We lift Yunnan Energy’s PT to Rmb120.
We believe China’s EV adoption will accelerate towards 2025 where penetration could quadruple from <5% this year to 20% in 2025, driven by continued (battery) cost reduction (where we expect production cost-parity by 2023), fast increase of individual buyers and attractive smart EV content/ functionality vs traditional ICE car.
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Putailai New Energy - A
Investment Thesis, Valuation and Risks
Shanghai Putailai New Energy Technology Co., Ltd - A (Overweight; Price Target: Rmb130.00) Investment Thesis We believe China's NEV penetration is set to accelerate from here and quadruple by 2025 to 20% from less than 5% in 2019, driven by a shift of customers, including from B2C and ICE to EV, and expected production cost-parity between ICE and EV by 2022/23 as battery costs drop further.
Tesla is driving a ‘rising tides lift all boats’ phenomenon which not only leads to a fast growing NEV addressable market but also benefits suppliers relevant to the broader EV supply chain.
Among the four major battery materials, our pecking order considering industry entry barriers, integration risk and margin profile is anode > cathode = separator > electrolyte. Putailai is a leading battery anode material supplier in China and globally.
With its high-end artificial graphite products, Putailai has been gaining market share in the past few years and we project the company to further gain share in the next few years, hence our positive stance on the company.
We have revised up our 2021-22 forecasts by ~10% to reflect a more bullish view on China’s NEV demand.
Valuation
We lift June-21 PT to Rmb130 following earnings revisions, while maintaining the same target multiple (vs. previous PT Rmb115 based on 70x forward PER).
We believe China’s EV adoption will accelerate towards 2025 where penetration could quadruple from <5% this year to 20% in 2025, driven by continued (battery) cost reduction (where we expect production cost-parity by 2023), fast increase of individual buyers and attractive smart EV content/ functionality vs traditional ICE car.
We believe valuation multiples of Smart EV players during this period could expand further and potentially range between 2-3x the previous average, a similar pattern to what was seen in the smartphone industry. We apply such logic on valuations of smart EV players and set a target multiple of 70x on Putailai.
This is at the higher end of the company’s historical trading range which we believe is reasonable given the company’s leadership position in anode material space globally.
China's Sept passenger car sales up 7.3% year on year to 1.91 million units
Risks to Rating and Price Target
Downside risks to our rating and price target include: 1) worse-than-expected NEV industry recovery in 4Q20-2021 in China, 2) slower-than-expected EV adoption in EU or softer-than-expected policy stimulus, 3) private placement with ~13% share dilution expected in 4Q20.
We note A-share stock prices have historically tended to rally before placement and decline post placement.
Summary Investment Thesis and Valuation
We believe China's NEV penetration is set to accelerate from here and quadruple by 2025 to 20% from less than 5% in 2019, driven by a shift of customers, including from B2C and ICE to EV, and expected production cost-parity between ICE and EV by 2022/23 as battery costs drop further.
Tesla is driving a ‘rising tides lift all boats’ phenomenon which not only leads to a fast growing NEV addressable market but also benefits suppliers relevant to the broader EV supply chain.
Among the four major battery materials, our pecking order considering industry entry barriers, integration risk and margin profile is anode > cathode = separator > electrolyte. Putailai is a leading battery anode material supplier in China and globally.
With its high-end artificial graphite products, Putailai has been gaining market share in the past few years and we project the company to further gain shares in the next few years, hence our positive stance on the company.
We revised up our 2021-22 forecasts by ~10% to reflect a more bullish view on China’s NEV demand. We lift June-21 PT to Rmb130 following earnings revision while maintaining the same target multiple.
We believe China’s EV adoption will accelerate towards 2025 where penetration could quadruple from <5% this year to 20% in 2025, driven by continued (battery) cost reduction (where we expect production cost-parity by 2023), fast increase of individual buyers and attractive smart EV content/ functionality vs. traditional ICE car.
Tesla slashes prices again in China, dropping RMB 23,000 on two Model S models
Minth
Investment Thesis, Valuation and Risks
Minth Group (Overweight; Price Target: HK$40.00) Investment Thesis In a slow demand environment, we recommend investors focus on players with content growth, rather than volume growth.
Minth fits into this thesis well with its newly expanded aluminum battery pack business, where the ASP is tenfold of the company’s existing product portfolio.
Positive drivers: 1) Meaningful content growth, as the ASP of aluminum battery packs (Rmb2-5k) is tenfold Minth’s existing content per vehicle (Rmb300-400) – Minth is now one of the largest aluminum battery pack suppliers globally, with backlog orders from VW, BMW, Daimler, Honda, Nissan and others; and 2) stronger momentum from Japanese and German brands where Minth has high exposure – we expect Japanese/German brands to continue to gain market share in China, as they have in the past two years, given better fuel economy and premiumization trends.
Over 65% of Minth’s sales are from JP/ EU brands. We revised up earnings forecast slightly by 1-3% in 2021-22 to reflect improved demand environment of global auto market.
Valuation
We lift our June-21 PT to HK$40 based on 23x 2021E PER (previous HK$35 based SOTP or blended 20x 2021E PER).
Our PT translates to 1.0x PEG (2-year CAGR) which is similar to the current valuation of Fuyao Glass and a discount to Tesla supplier Tuopu (2.1x).
This is also at the higher end of Minth’s historical trading ranges and we believe it is reasonable given 1) Minth’s increasing penetration into the NEV supply chain, and 2) the overall improved demand environment in China as well as overseas markets post the COVID-19 pandemic.
SAIC, China's largest auto group, reportedly plans to launch premium electric car brand
Risks to Rating and Price Target
Downside risks include: 1) the battery pack business is likely margin-dilutive; we expect ~20-25% GPM compared to over 30% for existing products; and 2) Uncertainty around the US-China trade relationship as increased tariffs could weigh on component makers' margins.
Summary Investment Thesis and Valuation
In a slow demand environment, we recommend that investors focus on players with content growth, rather than volume growth.
Minth fits into this thesis well with its newly expanded aluminum battery pack business, where the ASP is tenfold of the company’s existing product portfolio.
Positive drivers: 1) Meaningful content growth, as the ASP of aluminum battery packs (Rmb2-5k) is tenfold Minth’s existing content per vehicle (Rmb300-400) – Minth is now one of the largest aluminum battery pack suppliers globally, with backlog orders from VW, BMW, Daimler, Honda, Nissan and others; and 2) stronger momentum from Japanese and German brands where Minth has high exposure – we expect Japanese/German brands to continue to gain market share in China, as they have in the past two years, given better fuel economy and premiumization trends. O
ver 65% of Minth’s sales are from JP/ EU brands. We lift our June-21 PT to HK$40 based on 23x 2021E PER. Our PT translates to 1.0x PEG (2-year CAGR) which is similar to the current valuation of Fuyao Glass and a discount to Tesla supplier Tuopu (2.1x).
This is also at the higher end of Minth’s historical trading ranges and we believe it is reasonable given 1) Minth’s increasing penetration into NEV supply chain, and 2) the overall improved demand environment in China as well as overseas markets post the COVID-19 pandemic.
