Rechargeable Battery: Rechargeable Cell Names To Enjoy Stronger Negotiating Power

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Includes: BYDDY, GM, LGCEY, PCRFY, SKOVF, SSDIY, TSLA
by: Hyundai Motor Investment & Securities
Summary

EV battery market is becoming more oligopolistic due to Chinese consolidations.

Korean companies, notably Samsung SDI (SSDIY), set to benefit the most if the market for cylindrical cells for EVs expands.

LG Chem (LGCEY) expected to benefit from stronger momentum for rechargeable batteries, as underscored by improving profitability in small batteries in 3Q18.

Chinese consolidations lead to oligopolistic rechargeable battery market

The pace of consolidations of Chinese rechargeable battery cell companies is accelerating. We made an assertion in our previous report that, with a few exceptions (CATL, BYD), most Chinese names would be consolidated due to the change of subsidy policy by Beijing, and that the industry is likely to become more oligopolistic. It appears that this trend is becoming more pronounced. According to SNE Research, the combined market share of CATL and BYD in the Chinese EV battery market has grown from 43.9% in 2017 to 63.6% in 1H18. China’s subsidies are mostly for high- performance rechargeable batteries, and the NEV credit system, which was implemented this year, is designed to give more credits to companies that use high-performance rechargeable batteries. As such, high-end rechargeable batteries are likely to drive demand, but realistically only CATL and BYD (OTCPK:BYDDY) have the capacity to make these batteries in China.

Quality is another problem. According to The Wall Street Journal, GM China plans to ramp up EV production in China but the rechargeable batteries supplied by A123 Systems failed to meet GM’s (GM) quality requirements. Due to the implementation of the NEV credit system, from 2019 finished vehicle makers in China have to purchase the credit unless its credit does not reach 10% of total sales volume, which will become a burden for finished vehicle makers. If the price of NEV credit rises sharply in 2019, they may be better off buying Korea-made rechargeable batteries from an economic standpoint, even if they give up government subsidies.

In all, the rechargeable battery industry is becoming more oligopolistic as demand for high-end batteries grows. There are only a limited number of companies that can produce such batteries, notably LG Chem, Samsung SDI, CATL, Panasonic (OTCPK:PCRFY), and SK Innovation. Of these, Panasonic is not well disposed to expand its client base as freely as it would like because of its relationship with Tesla (TSLA). CATL is busy digesting the demand inside the country. Its track record outside of China is negligible and the deteriorating margins stemming from subsidy cuts are a burden. All of these work to strengthen the negotiating power of Korean names. Korean companies’ profitability is bound to increase greatly from 2018. In particular, growing project scales call for good risk- management skills and as such, clients tend to employ two or three suppliers simultaneously. This opens more opportunities for Korean companies.

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