摩根士丹利-亚太地区汽车行业-电动汽车：价值链分化及其发挥-2021.5.30-42正式版

May30,202108:00AMGMT

AsiaMulti-Industry

EV–ValueChainDivergence,andHowtoPlayit

HowtopredictwinnersintheEVvaluechainatthisstagehasbecomeclearer–forbatteries,weseerelativelylimitedupsidebecauseofameaningfulcompetitivepushfromnewentrants.WepreferdownstreamOEMsandcharginginfrastructureplayersonrelativevalueandsustainablereturns.

SamsungSDI(006400.KS)

From

To

WHAT'S

Rating

Equal-weight

Underweight

CHANGED

PriceTarget

W570,000

W550,000

WherewillreturnsbemadeinEV?AparadigmshiftinglobalEVbatterymanufacturinghasalteredtheunderlyingdynamicsofthevaluechain,providinginsightintotheanomaly:withtheindustryshowingsaleswellabove20%+10-yearCAGR,whyaremostplayersstrugglingtoconvertthisintohighreturns?WeconcludethattheUpstream(e.g.,batteryproducers)iswherethemoneycontinuestobespentinanattempttoincreasescaleandmarketshare,butalsowherethereturnsareincreasinglydilutedfromcompetition;theDownstream(OEMs,infrastructure)iswherethereturnsarebeingmadeinthelongrun.

Divergenceinthevaluechain.AmeaningfulcompetitivepushfromnewentrantsinEVbatteriesinevitablyacceleratespricedeflationwhileultimatelydrivinghighermarginsandrevenuesviaanincreasedrateofEVpenetration(duetolowercostsandhenceEVpricing).ThisfavorsleadingplayersDownstreamastheycontinuetobuildsignificantcompetitivemoats,resultinginsignificantdivergenceinlong-termreturnsandthepotentialtoincreaseROEby2025–weseeover69%impliedupsidetoourDownstream-orientednamesvs.15%downside,onaverage,forbatterynames.Also,Downstreamcompaniesappeartobeneutralontechnologicalchange–rather,theirstrengthliesinahighcostofentryandabilitytodeliveronservices.Theoppositeisthecaseforbatteries,wheretechnologydisruptionsandafloodofcompetitionaresettoarrive.Basedonouranalysis,wearedowngradingCATL(UW,PTCNY251)andSDI(UW,PTW550,000).

DowngradeCATL(report)andSDItoUW;favordownstreamOEMs.Weturntacticallybearishonthebatterygroup,whichhasdoubledoffMarch2020lowsandoutperformedMSCIAsiaby62%.Webelievethatthefollowingheadwindsneedtobediscounted:(1)theperceivedindustryshortageisunsustainable,(2)ESShighexpectationswilllikelydisappoint,especiallyinChina;(3)fragmentationoftheEVbatteryindustryisacceleratingmorethanweexpected,especiallywithincreasingthreatsfromOEMs'in-housebatteryintegration;(4)disruptionfromsemi/fullsolidstateappearslessdistant;(5)returnsandrelativevaluationsfavorEVOEMsandcharginginfrastructureplayers.

MORGANSTANLEYASIALIMITED+

ShawnKim

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Shawn.Kim@

+8523963-1005

TimHsiao

EQUITYANALYST

Tim.Hsiao@

+8522848-1982

JackLu

EQUITYANALYST

Jack.Lu@

+8522848-5044

RachelLZhang

EQUITYANALYST

Rachel.Zhang@

+8522239-1520

EvaHou

EQUITYANALYST

Eva.Hou@

+8522848-6964

JackYeung

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Jack.Yeung@

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MORGANSTANLEY&CO.INTERNATIONALPLC,SEOULBRANCH+

YoungSukShin

EQUITYANALYST

Young.Shin@

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RyanKim

EQUITYANALYST

Ryan.G.Kim@

+822399-4939

MichaelKoh

RESEARCHASSOCIATE

Michael.Koh@

+822399-9920

MORGANSTANLEYASIALIMITED+

JoeyXu,CFA

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Joey.Xu@

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DaisyDai,CFA

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SarahPark

RESEARCHASSOCIATE

Sarah.Park@

+8522239-7173

MorganStanleydoesandseekstodobusinesswith

S.KoreaTechnology

companiescoveredinMorganStanleyResearch.Asa

result,AsiaPacificinvestorsshouldbeawarethatthefirmmayhaveaconflictIndustryViewofinterestthatcouldaffecttheobjectivityofAttractiveMorganStanleyResearch.InvestorsshouldconsiderMorganStanleyResearchasonlyasinglefactorinmakingtheirinvestmentdecision.

Foranalystcertificationandotherimportantdisclosures,refertotheDisclosureSection,locatedattheendofthisreport.

+=Analystsemployedbynon-U.S.affiliatesarenotregisteredwithFINRA,maynotbeassociatedpersonsofthememberandmaynotbesubjecttoFINRArestrictionsoncommunicationswithasubjectcompany,publicappearancesandtradingsecuritiesheldbyaresearchanalystaccount.​

1

ExecutiveSummary

EVvalue-chainanalysisframework.AkeydebateamonginvestorsiswhethertheEVindustrywillliveuptothehighhopesofveryattractivegrowthandreturnsthatmustsurelyresultfromreplacingtheentireplanet'sinstalledbaseofconventionalICE(internalcombustionengine)automobiles.Asisoftenthecase,thingshavenotquiteliveduptoexpectations,andinvestorswehavespokentohavebeenaskinghowbesttounderstandtheunderlyingdynamicsoftheEVindustry,rangingfromthemixedfinancialperformanceatmostAsianEVplayerstothecompetitivechangesatbatterymakers.Tohelpinvestorsre-evaluatethedynamicsofEVvaluechains,wehavecollectivelytakenwhatwebelievetobeaproprietaryin-depthlookacrossthefullspectrumfromtheUpstream(producersofmaterialsandbatteries)totheDownstream(EVOEMsandcharginginfrastructureplayers)toascertaininwhichpartsofthevaluechainthemoneyisbeingmade,andhowthisisdistributedregionally.Thistheninformsourstockrecommendations.

Whatwelearned.WeconcludethattheUpstreambatterysegmentiswherethemoneyisbeingspent(massivecapex)butreturnsarelow,duetocommoditizationandlikelyoversupplyinthecoming2-3years,andthattheDownstreamiswherethemoney(return)isbeingmade–theDownstreamnamesaregeneratingthehighestROIC,cashconversionandROE.WeexaminethisdivergenceofreturnsintheEVvaluechainanditsimplicationsforselectingstocks,below.Basedonourconversationswithinvestors,webelievemanyinthemarketarenotfullycognizantthatthereisafurtherlevelofdivergence,whichouranalysisoftheEVvaluechainbringstothesurface:namelythatbatteryispredominantinthelow-returnUpstreamsegmentthatcompetesglobally,whileDownstream-basedplayers,mainlyinChina,haveentrenchedpositionsintheDownstream.WiththeUpstreamplayersfacingawaveofnewentrantsgloballyanddisruptivetechnologies(cannibalizationrisks),weexpectmoreofthemtomovedownstreaminsearchofreturns,andenteringthissegmentismoreattractivefollowingconsolidationandintermsofrisk-reward.

Exhibit1:Relativereturns–forward-lookingmetricsfavordownstream

EVBattery

AutoOEMs

EVCharging

Materials

Revenue3YCAGR(19-22e)

8%

131%

22%

25%

Revenue5YCAGR(20-25e)

17%

58%

20%

20%

EPS5YCAGR(20-25e)

37%

NA

35%

41%

EBITDAmarginAvg(21e-25e)

14%

2%

14%

29%

EBITDAmarginchange5YCAGR(20-25e)

3%

NA

3%

15%

CashconversionAvg(21e-25e)

82%

225%

85%

72%

ROIC(2021e)

7%

-9%

7%

9%

ROICAvg(23e-25e)

8%

12%

11%

15%

Source:Companydata,MorganStanleyResearch(e)estimates.Note:EVBatteryincludesSKInnovation,SamsungSDI,CATL;AutoOEMsincludeNio,Xpeng,LiAuto;EVChargingincludesTGOOD;MaterialsincludeGanfengLithiumandHuayouCobalt.

Upstreambecameglobal,Downstreamremainedregional.ThedynamicsacrosstheEVvaluechainaredifferent,andwethinkitisthisstructurethatexplainsthestarkdivergenceofforwardreturnsbetweentheUpstreamandtheDownstream.TheentireUpstreamsegment(includingmaterials)isnowsupplyingproductsonaglobalbasis,andattheearlystageoffragmentation.Thisfragmentationofthemarkethasspreaddowntolargepartsofthemidstreamsegment,includingcomponentsandassembly.In

2

themeantime,thedownstreampartofthevaluechainhasremainedveryregionalespeciallyinChina,andamorebroadconsolidationisalreadyunderway.WeforecastEVbatteryoversupplyof1%outto2025asnewentrantsaddupto15%toglobalcapacity.Further,anotherwaveofsupplyfromtechnologicallysuperior(albeitmoreexpensive)solidstatebatteriesloomsfortheUpstreamplayers.Asaresult,weseeincreasingstructuraltailwindsforEVOEMstoimproveoncosts(thebatterytake30-40%ofthetotalcostsofanEVtoday)andhencemargin,whiledemandelasticityfromlowerEVpricesdrivehigherrevenuesviaincreasedICEpenetrationlongerterm.Charginginfrastructure(piles)isanotherkeywinner,furtherbenefittingfromregulatorysupportandastrongercompetitivemoatforearlymovers.Themostupstreampartofthevaluechain(lithium,cobalt)ishighlycapexintensiveandvolumedrivenbutfacessupplybottlenecksthatwebelievearereflectedinvaluations.

GrowthisnottheissuefortheUpstream...TheEVindustryhascertainlynotbeenshortongrowth,whichhasaveragedc.24%p.a.overthepasttwoyears.WeestimatethatglobalpenetrationofEVsintheautomobileindustrywillapproach32%by2030inaglobalbatterymarketworthc.US$215bn.Astheindustrygraduallymatures,wehadexpectedthatsuchhighgrowthpotentialwouldtranslateintobetterreturns,especiallyfortheUpstreamplayers.However,allisnotwellintheUpstream,whichisincreasinglybeingweigheddownbyongoingnewcompetition,andthereisanotherwaveoftechnologicalchangealreadyloomingonthehorizon,namelyonprocessandsolidstatebatteries.

andweexpectthebatteryindustrytomoveintofullovercapacitymodeby2023-26e.Thisislargelyattributedtotheadditionstoexistingcapacity,higherutilizationfromthecurrent~50%levelandnewentrants.Butthegeneralexpectationisthatshortageswillremain,withlimitedimpactfromcompetitionduetoperceivedscalingchallengesinEVbatterymanufacturing.However,severalyearsdowntheroad,andwiththeindustry'smaturemanufacturingprocess,weareunconvincedthatwewillseebalancedsupply/demandintheupperpartofthevaluechainby2023,forthefollowingreasons:1)manufacturerswillpushtofullyrampuptheirmostrecentinvestments,2)Teslaplanstoadd100GWhcapacityin2022(andmorethan100%ofglobalexistingcapacity3TWhby2030e–weassumeonlyathirdinourmodel)and,3)weforecastEVpenetrationof32%by2030.Againstthisbackdrop,andassavingsfromtooling,rawmaterialsandprocessesseemlimitedintheindustry,weseeongoingpressureonreturnsandcashflowforthesecompanies.

3

Exhibit2:EVbatteryself-sufficiencyratioturningpositivein2023e

Exhibit3:EVbatterysupplytrend-BullcaseincludingTesla's3TWhby

EVBatterySelfSufficiencyRatio

2030e

50%

GWh

40%

4000

3500

30%

Bull

3000

20%

10%

2500

Base

0%

2000

-10%

1500

-20%

Bear

1000

-30%

500

0

Source:Companydata,MorganStanleyResearchestimates

2017

2018

2019

2020

2021E

2022E

2023E

2024E

2025E

2026E

2027E

2028E

2029E

2030E

BaseCase

BullCase

BearCase

Source:Companydata,MorganStanleyResearchestimates

Bottomline:Wearelessoptimisticonbatteryexposure.Continuedovercapacitywillbethekeyissueinthemediumterm.Meanwhile,highR&Dandcapexintheindustry(7%and19%ofsalesonaverage–althoughthisnumberisunderstatedforKoreanplayersgiventheirsubstantialnon-batterybusiness)arepressuringmarginsandalsocashflowandreturns.Thisalsohighlightswhatwebelieveisourdifferentiatedviewthatwhilereturnsinthebatteryindustryareunexceptional,incumbentplayersstillplantoexpandsignificantcapacityasjustifiedbygrowthandtheirbeliefinsuccessviatechnologyandlowercosts.Inlinewithourvalue-chainanalysis,wehavedowngradedCATLandSDItoUnderweightgivenourdivergentviewsonlong-termreturnsrelativetothecurrentsharepricevaluation.

Changes–downgradeCATL(UW,PTCNY251)andSDI(UW,PTW550,000):WecutratingsontwoEVbatterysuppliersundercoverage,CATLandSDI.(i)InSDI,wehavepushedthroughEVbatterylong-termpricing/margindowngradestoreflecthighercompetitiveoutcomes,whichleave2021-23eforecasts4%higherin2021eto4%belowconsensusin2023e;(ii)ouranalysisonChinaESSTAMandreturnsaresignificantlybelowmarketexpectationsforCATL;(iii)inSDI,wehaveassumedroughly2.5%turnsofP/Ecompression.CATLhas~39%downsideonthisbasis,SDI~14%downside.

WepreferstockswithDownstreamexposure–first-moveradvantageandhighcostsof

entry–butthisisatoughnuttocrackfornewentrants.Giventheaboveanalysis,itcomesasnosurprisetoseeanincreasingnumberofUpstreamplayerswantingtomovemoretotheDownstream,wherereturnsarelikelytobealmost2xhigherthanintheUpstream.ButtheoppositesideofthecoinisthatthestrengthsoftheDownstreamplayersmakeitatoughnutfornewcomerstocrack.Ouranalysisshowsnewentrantsfacestrongbarriers,especiallyinChina:1)theleadingplayersinthedownstreamsegmentremainexactlythesameand,ifanything,themorerapidswitchtoEVshasactuallyservedtoreinforcetheirposition–weseetraditionalICEOEMsstrugglingtobecomeanEVbrandasastrongillustrationofthat;2)inthelongterm,downstreamplayersappeartobeneutralontechnologicalchange–rather,theirstrengthliesinaccesstodistributionchannelsandabilitytodeliveronproductbreadthsuchasviasoftwareandspecs.WhiletheDownstreamismoreattractive,inourview,breakingintothismarketonanorganicbasisischallengingandrequiressubstantialcapitaland

4

innovationtosucceed.Givenorganicentryischallenging,wewouldexpectpotentialnewentrantstoconsiderentryviaM&A,whichwethinkcouldbequitecostlyovertimeandreturnsarenotguaranteed.Inthemeantime,wethinklargehistoricaldownstreamplayersarelikelytocontinuetoreinforcetheirpositionbycontinuingtoconsolidateastillveryfragmentedmarket.Basedonourvalue-chainanalysis,wefavorXpengandLiAutoamongEVOEMsandinEVcharginginfrastructureTGOODgivenitsleveragetothemarketdownstream.

Exhibit4:EVStocks:OrderofPreference

Xpeng

LiAuto

NIO

TGOOD

GanfengLithium

HuayouCobalt

SKInnovation

SamsungSDI

CATL

XPEV.N

LI.O

NIO.N

300001.SZ

1772.HK

603799.SS

096770.KS

006400.KS

300750.SZ

Rating

Overweight

Overweight

Overweight

Overweight

Overweight

Overweight

Equal-Weight

Underweight

Underweight

TradingCurrency

USD

USD

USD

CNY

HKD

CNY

KRW

KRW

CNY

PriceTarget

57.0

39.0

64.0

41.1

143.0

115.0

290,000.0

550,000.0

251.0

CurrentPrice

32.4

23.7

38.9

26.5

99.7

91.5

274,000.0

640,000.0

384.0

Upside/(Downside)(%)

76%

65%

65%

55%

43%

26%

6%

-14%

-35%

MarketCap(inUSDmm)

25,585.0

21,394.8

57,851.6

4,143.5

22,807.6

15,462.5

21,302.5

40,270.7

140,153.9

AvgDailyTradedVol(inUSDmm)

158.7

437.5

472.9

84.9

44.6

368.1

201.1

234.0

726.0

StreetView:Ratings

Buy/Overweight

||||||||||||||||||||81%

|||||||||||||||||||78%

||||||||||||||||64%

|||||||||||||||||||||||||100%

|||||||||||||||||||||||92%

||||||||||||||||||||||||94%

||||||||||||||||||||||89%

||||||||||||||||||||||||94%

||||||||||||||||||||||89%

Hold/Equal-weight

|||13%

||||17%

|||||||27%

0%

||8%

|6%

|||11%

|6%

|||11%

Sell/Underweight

||6%

|6%

||9%

0%

0%

0%

0%

0%

0%

BullCaseValue

99.0

64.0

108.0

53.0

186.0

155.0

370,000.0

790,000.0

345.0

Upside(%)

206%

170%

178%

100%

87%

69%

35%

23%

-10%

BearCaseValue

24.0

18.0

31.0

24.0

73.0

45.0

180,000.0

480,000.0

141.0

Downside(%)

-26%

-24%

-20%

-9%

-27%

-51%

-34%

-25%

-63%

Risk/RewardSkew

7.9

7.1

8.7

10.6

3.2

1.4

1.0

0.9

(0.2)

MorganStanleyEstimates

FY21e

CNY

CNY

CNY

CNY

CNY

CNY

KRW

KRW

CNY

Sales

13,947

18,075

33,218

9,713

8,402

25,899

39,667,786

13,660,253

98,071

EBITDA

(5,425)

(953)

(2,655)

1,226

2,898

3,786

2,591,770

1,654,678

18,413

EBIT

(5,842)

(1,269)

(3,554)

670

2,556

3,097

1,252,237

1,056,348

12,220

EPS

(7.30)

(0.80)

(1.39)

0.33

1.60

1.56

(1,339.50)

16,329.98

3.65

FY22e

Sales

27,897

34,838

65,301

12,184

11,763

31,549

42,396,611

15,917,627

138,269

EBITDA

(2,615)

1,306

2,089

1,656

4,923

5,189

3,006,363

1,993,893

29,986

EBIT

(3,513)

514

1,209

980

4,532

4,035

1,452,760

1,395,563

17,734

EPS

(4.48)

1.08

2.09

0.56

2.74

1.98

6,616.77

20,400.66

5.53

FY21MSevs.ConsensusMean

Sales

-7.7%

-3.7%

-3.9%

-2.2%

-5.2%

-9.1%

-9.5%

-1.9%

8.8%

EBITDA

41.5%

74.4%

42.1%

5.7%

-2.4%

-8.5%

-11.2%

-29.2%

6.9%

EBIT

38.0%

18.0%

5.4%

15.2%

3.4%

-5.9%

-8.2%

-5.6%

15.9%

EPS

94.1%

19.6%

-60.6%

-21.5%

4.5%

-22.5%

-123.9%

4.0%

-9.3%

FY22MSevs.ConsensusMean

Sales

-0.7%

5.1%

16.3%

-4.4%

-2.0%

-9.1%

-14.8%

-5.4%

10.8%

EBITDA

35.1%

-8.2%

32.1%

3.4%

10.8%

-5.0%

-12.5%

-31.4%

21.9%

EBIT

28.4%

130.1%

-393.3%

6.1%

17.0%

-9.2%

-15.4%

-8.7%

17.8%

EPS

114.4%

86.2%

-446.2%

-12.7%

19.4%

-24.6%

-39.4%

-1.0%

-2.7%

ValuationMultiplesatLastClose

FY21e

P/E

-28.3x

-189.0x

-178.4x

79.3x

51.3x

58.6x

-204.6x

39.2x

105.2x

EV/EBIT

-24.6x

-103.0x

-94.9x

44.8x

59.2x

37.1x

26.7x

45.8x

70.0x

EV/EBITDA

-26.5x

-137.1x

-127.0x

24.5x

52.2x

30.3x

12.9x

29.2x

46.5x

EV/Sales

10.3x

7.2x

10.2x

3.1x

18.0x

4.4x

0.8x

3.5x

8.7x

FCFYield

-4.8%

-1.9%

0.3%

-1.1%

0.4%

-5.1%

-14.1%

-1.5%

0.2%

FY22e

P/E

-46.1x

139.5x

118.8x

47.6x

29.9x

46.3x

41.4x

31.4x

69.4x

EV/EBIT

-41.6x

252.8x

265.8x

30.2x

33.3x

29.0x

24.4x

34.5x

49.4x

EV/EBITDA

-55.9x

99.5x

153.9x

17.9x

30.6x

22.5x

11.8x

24.1x

29.2x

EV/Sales

5.2x

3.7x

4.9x

2.4x

12.8x

3.7x

0.8x

3.0x

6.3x

FCFYield

-1.5%

0.6%

4.3%

0.6%

1.0%

-1.2%

-8.6%

1.2%

-2.1%

ImpliedMultiplesonMSPriceTarget

FY21e

P/E

-49.9x

-311.7x

-293.5x

122.9x

73.5x

73.6x

-216.5x

33.7x

68.8x

EV/EBIT

-45.8x

-172.8x

-161.9x

63.5x

11.5x

41.4x

27.8x

39.8x

44.7x

EV/EBITDA

-49.4x

-230.1x

-216.7x

34.7x

10.1x

33.9x

13.4x

25.4x

29.6x

EV/Sales

19.2x

12.1x

17.3x

4.4x

3.5x

5.0x

0.9x

3.1x

5.6x

FY22e

P/E

-81.1x

230.1x

195.4x

73.8x

42.9x

58.2x

43.8x

27.0x

45.4x

EV/EBIT

-89.1x

480.7x

550.5x

46.2x

10.2x

34.7x

17.4x

27.8x

40.9x

EV/EBITDA

-119.7x

189.2x

318.7x

27.3x

9.4x

27.0x

8.4x

19.4x

24.2x

EV/Sales

11.2x

7.1x

10.2x

3.7x

3.9x

4.4x

0.6x

2.4x

5.2x

StockPricePerformance

1Month

2.5%

14.6%

(5.6%)

4.5%

4.4%

22.1%

(2.3%)

(6.6%)

10.2%

3Month

(5.0%)

(6.8%)

(15.0%)

(10.7%)

0.1%

2.4%

5.2%

(5.0%)

19.2%

1Year

52.6%

43.7%

833.1%

33.4%

256.1%

190.9%

123.7%

75.3%

153.5%

YTD

(24.4%)

(18.0%)

(20.2%)

(9.7%)

7.7%

15.4%

44.2%

1.9%

9.4%

Source:MorganStanleyResearch,Refiniitv(consensusmean).e=MorganStanleyResearchestimates.Note:Pastperformanceisnoguaranteeoffutureresults.Resultsshowndonotincludetransactioncosts

5

Exhibit5:EVbatteryoutperformedEVOEMssinceNovember2020... Exhibit6:…andmultipleshaveconverged

Source:Refinitiv,MorganStanleyResearch

Note:EVbatteryincludesSKI,SDI,CATL;OEMsincludeNio,LiAuto,Xpeng

Source:Refinitiv,MorganStanleyResearch

Weoutlineourthinkingoneachpartofthevaluechaininmoredetailbelow:

Materials.Whilethecurrentverylowvaluationsmaybeboostedbyelevatedspotcommoditypricing,thesectorcontinuestolookreasonablypricedonmorenormalizedmetricstoo.Whileperformanceandinvestorinterestinthespacehasperkedupinrecentmonths,thiscomesaftermanyyearsofunderperformanceandrelativedisinterestfrominvestorswhohavepreferredtofocusonQualityandGrowthnamesratherthanValue.Corporatebalancesheetsaregenerallystrongacrossthespace,especiallyinlightoftheexceptionalfreecashflowbeinggeneratedthisyear.Whilecapexactivitywilllikelyrisegoingforwardaftertherecentriseincommodityprices,weexpectcompaniestoremainquitedisciplinedandfocusedongivingcashbacktoshareholders.

Batteries.Whilethesectorisoffrecenthighs,valuationscontinuetolookveryhigh

onEV/Salesthesectorrecentlyhitanall-timehighatthebeginningoftheyearandisstill125%abovethe10Yaverage,andevenwhencomparedtoEVOEMsinaggregate,itiscloseto1.1standarddeviationsabovetheaveragevaluationYTD.

Soaringdemandiswellunderstoodbutafloodofnewcompetitionsettoarriveinthemarketisnot.ThisappliestobothEVandESSbatteries.Customers,start-ups(solidstatebatteries)andnationsareaggressivelyenteringbatteryproduction.Thenetresultisthatperceivedlong-termorderbookswillinevitablydevaluetoaccommodatenewentrants.Unfortunatelyforbatterymakers,that’sjusttheproblemwithproducingahotcommodityincompetitivemarkets–everyoneelsewantstostartproducingittoo.

OEMs.MajorEVmakers'stockshavefallenina23%sell-offYTDamidmajorchangestosectorrotationandpositioningwhilesectordevelopmentlooksbenign.Keydebatesfocusonsupplybottlenecksandcompetitionrisk.Tightchipsupplyappearslessofastructuralissue-increasingwafercapacityflowstoautosemisamidsmartphoneweaknessandTSMC'splantoincreaseautoMCUoutput60%YoYthisyearshallserveaspotentialreliefinto2Handbodewellforsectorsentiment.Asforcompetition,wethinkthekeyissueisqualityatthemoment,whichwillexpeditetheEVadoptionattheexpenseofICEtoaccommodatemorequalityplayers.Inthelongrun,competinginEVdemandsmorethangreathardware,includingbatteries;ittakesastrongecosystemofsoftwareandservicetoshine,andwebelieveselectEVplayerscanstillgrowmarketshareandimprove

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profitability.

Charginginfrastructure.RegulatorytailwindsincludeagovernmentshiftinsubsidiesfromelectricvehiclepurchasestoEVcharging,andwethinktheongoingmarketconsolidationwillbenefitthetopplayers,andTGOOD.Thecompanyisbuildingitscompetitivemoatasafirstmover,wellpositionedatthetop,andweforecastittobenefitfromstrongoperatingleverageasitscalesitscharginginfrastructurenetworkinChina.China'scharginginfrastructuremarketwillcontinuetoconsolidate.Theutilizationrateofchargingfacilitiesmaynotbeabletorampupquicklyinthenearterm,aspilesarelikelytogrowmoderatelyaheadofEVs,withbigChargePointOperators(CPOs)occupyingprimelocationsandgridcapacity.

Overthepast18months,thebest-performingsegmentofthevaluechainhasbeenthematerials(+405%),thoughshowingaveryvolatilepattern,followedbybattery(+209%),OEM(+181%)anddownstream+charging(+133%).However,thishasreversedsinceFebruary2021withallfoursegmentsnowshowinganegativeperformance,withmaterials-26%,battery-12%,OEM-44%andCharging-34%,themodestoutperformer.Weseethisasanopportunitytotakesomeprofitsupstreamonaselectivebasisandtakeadvantageofamorefavorableentrypointintothedownstreamplayers.

Exhibit7:EVIndustrySharePricePerformancesinceJan2020

500

450

400

350

300

250

200

150

100

50

Jan-20

Mar-20

May-20

Jul-20

Sep-20

Nov-20

Jan-21

Mar-21

May-21

Battery

OEM

Charging

Materials

Source:Refinitiv,MorganStanleyResearch.Note:BatteryincludesSKI,SDI,CATL;OEMincludesNio,Xpeng,LiAuto;ChargingincludesTGOOD;MaterialsincludeGanfengLithium,HuayouCobalt

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Battery–Re-RatingLooksFragile

EvaluatingEVinacompletelyunbiasedway.Althoughthereissomevalueinlookingbackathistoricalperformanceandthepotentialfortheelectricvehicle(EV)market,itismoreimportanttoconsiderfuturepotentialandemergingrisks.Inthissection,wehaveattemptedtorevisittheEVbatterysegmentwithafreshpairofeyes,almostasifwewereanalyzingitforthefirsttime.Wego'backtobasics'onanumberofkeyevaluationcriteria,makinganassessmentbasedonfundamentalsandquantitativemetrics.Ourgoalhasbeentoassessthesesupplychainsrelativetooneanother.Basedonthisrelativequantitativeassessmentoffuturepotential,whatshouldbetheirrespectivevaluationmultiples?Basedonafaircomparison,whataretheimplicationsforshareprices–wherecouldtherebeupsideordownsideforinvestors?

TheEVopportunityisreal(wearenottakingaviewagainstit),butthenumberofnewplayersandscaleofinvestmentintoEVbatteriesfromnewentrantsisstaggering.

Reasonably,anytechnologicalchangeormeaningfulnewcompetitioninanindustryshouldbeexaminedintermsofboththebenefitsandtherisks,giventherelativelynascentstageoftheEVindustryandexcitementaboutthenewgrowthopportunities.Takingastepback,wearealsoremindedthatallnewindustriesandtechnologystockstravelthrougha'hypecycle'nomatterhowfavourablefundamentalsappear–theoutcomefromastockperspectivedoesnotdependonthenatureofthetechnologyitselfbutonthesustainabilityofreturnsandapeakininflatedexpectations.

Toomuchlong-termgrowthpriced-intoday.WeexpecttheglobalEVbatteryTAMtoregisteran24%CAGRriseover2020-30e,toUS$215bnin2030,fromUS$25bnin2020,withvolumegrowthslightlyabovetrendata28%CAGR,to1.6TWh(drivenbyhigherEVpenetrationfrom2.8%on2020to26%by2030).Welookforanormal7-8%annualdropinbatterypricesinthenextdecade–apricelevelwebelieveisreasonableinlightofbatteriesbeingasignificantpartoftheoverallbillofmaterialscostsforEV.Our"What'sinthePrice"analysisshowsthatstockscurrentlyimplylong-termgrowthratesofaround40%+withhigh-singledigitpercentageprofitmarginsandeverycompanyneedingtotakemarketshare.Webelievethisisexcessive,implyingtheneedforasignificantaccelerationinEVtoICEpenetrationratesand/orsignificantpricingerosiondrivingelasticityandgrowthinthelongterm.

ItisimportanttonotethattheCAGRisbasedonvalueratherthanvolume,andweassumehighsingle-digitpricedeflationslightlyaheadofcostdeclinesinthebasecasetoreflectsomeexcesscapacityfromnewentrants,10%lowerinthebearcaseandverylittledeflationinthebullcase.Wethinktheseassumptionsarenotparticularlypunitivearoundpricing.WethinkpricedeflationwillbeafeatureinaccommodatingnewentrantsandcouldrepresentachangefromusualpricedeclinesinEVbatteriestopassoncostbenefitstotheOEMcustomer.Weassumeherenochangeinmarketsharebetweenexistingstandardsversussolidstatebatteryproductsintheouteryears–theimpactcouldbemoremeaningfulonpricinggiventhestepchangeinrelativedensity/costs.

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Exhibit8:EVbatteryindustryin2030–basecaseUS$215bn(24%CAGR),bullcaseUS$287bn(28%CAGR)

Source:C