Another way to invest in the electric vehicle (EV) ecosystem is to consider the EV battery-makers, providers of the single most expensive component in most EVs.
Having suffered from competition and surging material prices, DBS Group Research says battery-makers are set to enjoy a “full-scale” pickup in earnings in the April to June quarter, building on a tepid recovery already seen in the first quarter of the calendar year.
Analysts Lee Eun Young and Tina Hu state in their April 5 note that “Chinese policies aimed at boosting EV sales locally and EV sales growth in the US and Asia markets fuelled by more competitive EV prices will spur restocking demand in the EV battery value chain”.
“The sector’s share prices have been bottoming out since the end of February and should be poised for further rallies. The sector is now trading at an attractive valuation of 1–2 s.d. (standard deviations) below the historical average,” they add.
Here are Lee and Hu’s top picks for the sector:
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CATL
Contemporary Amperex Technology Co (CATL), already the leading player in this industry, is poised to strengthen its top position through business expansion in the overseas market. Last year, CATL increased its battery sales to 390GWh, up by 35% y-o-y, which lifted revenue by 22% y-o-y and earnings by 44% over the same period.
On April 15, the company reported further growth momentum for its 1QFY2024 ended March, with earnings up 7% y-o-y amid higher margins.
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According to DBS, CATL’s market share in the rechargeable battery and energy storage market was 37% and 40% respectively, making it the largest player globally for several years.
The company is making big gains in its overseas business, which, while currently smaller than domestic China revenue, is growing faster and fetching better margins.
In FY2023, revenue outside China surged 70% y-o-y to RMB131 billion ($25 billion), accounting for a third of the total. Gross margins achieved from non-China sales was 25.2%, 3.4 percentage points (ppts) higher than that of its China business.
“Despite the geopolitical uncertainties, the company still successfully commenced operations at its Germany factory. We believe CATL’s competitiveness based on its procurement advantage, scale effect, reliable product quality, and R&D strengths will drive its growth in the overseas market and strengthen its top position in the global market,” the DBS analysts state, as they keep their “buy” call and RMB244 target price.
Huayou Cobalt
While CATL has a bigger share, Huayou Cobalt is deemed the most vertically integrated player, controlling key pieces along the value chain from mining to cathode production and experiencing strong growth in the overseas market.
DBS, which has a RMB45 target price for this counter, estimates its earnings to see a 12.4% CAGR from 2022 to 2024, with sales volume growth of precursors and cathodes on the back of capacity expansion by 86% and 52% during the same period.
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In addition, it has invested in nickel refining projects in Indonesia, with a total capacity of 348,000 tonnes per year.
“This will enhance its margins due to the internalisation of raw material supply,” says DBS, adding that Huayou Cobalt has been the key supplier of precursors and cathodes and also the partner for key customers such as South Korea’s LG conglomerate.
To bypass US regulations, Huayou Cobalt has set up various joint ventures in South Korea instead of exporting directly from China.
LG Energy Solutions
Besides the market’s growth, LG Energy Solution (LGES) is seen to take advantage of US rules that are curbing China, as it has invested in facilities within the US.
DBS estimates that LGES will generate 59% y-o-y earnings growth this year, led by stronger sales in the US from its second plant in Ultium Cell, which is a joint venture with US auto stalwart General Motors. The first JV plant was completed last year.
LGES is seen to expand its product range catering to mainstream and premium EV segments, says DBS, which has a KRW500,000 ($491.8) price target.
LG Chem
LG Chem, also a key member of the LG conglomerate, is another stock favoured by DBS. Lee and Hu estimate LG Chem to grow its earnings by 65% for the current 2024, and the coming 2025, thanks to capacity expansion in the EV battery value chain.
The company is seen to raise its production capacity of cathodes and precursors by 133% and 44.4% to 280,000 tonnes and 65,000 tonnes in 2025 versus 2023, respectively, says DBS, which has a KRW550,000 price target.
According to DBS, LG Chem will likely divest part of its current 82% stake in LGES and restructure its non-performing petrochemical business. “This should be a rerating catalyst for its share prices, as it will enhance its earnings growth outlook,” state Lee and Hu.
