This article first appeared on Trend Investing on August 1, 20019; therefore all data is as of that date.
No matter which way you look at it, lithium ion ("Li-ion") battery demand is set to surge about 10 fold between 2018 and 2030 (see BNEF chart below). Another way to get a feel is the Benchmark Minerals megafactory data, which as of a July 5 Tweet: "Assessment published at 1,956.6GWh capacity by 2028, increase of 5.25%, now tracking 91 plants." The 91 number was 3 back in Q1 2015, showing how much megafactory demand has advanced in just 4 years.
The forecast demand surge is due mostly to the electric vehicle boom, as experts now see electric cars going from ~2.0% market share in 2018, to ~25-35% by 2030. At the midpoint (30%), that is a 15 fold increase in electric car demand to 2030, hence underpinning the 10 fold Li-ion battery demand forecast. Added to this will be consumer electronics, other non-car EVs (including e-bikes, e-3 wheelers, e-trucks, e-buses, e-ships, e-trains, & e-planes etc.), and energy storage.
In this article, I intend to focus on the top 5 largest lithium-ion battery manufacturers.
Source: Bloomberg NEF 2019 Electric Vehicle Outlook
The chart below shows the active megafactories (red), planned by 2023 (yellow) and planned by 2028 [blue]. The biggest expansion plans look to me to be for Tesla, LG Chem, CATL, and Wanxiang Group. Next look to be BYD Co., Samsung SDI, EVE and JEVE.
Source: Courtesy Benchmark Mineral Intelligence (note the 1,590GWh is now 1,956.6GWh)
Top 5 lithium-ion manufacturers by capacity (2018)
Source: Benchmark Mineral Intelligence (published 26 January 2019)
For more details on the above 5 companies lithium-ion battery factories, expansion plans, and battery quality, etc., I refer to the expert article of Simon Moores - "Who is winning the global lithium ion battery arms race? (Jan 2019)". The following is more a discussion on the investment side of the top 5 Li-ion battery manufacturers.
1) LG Chem [KS:051910] (OTCPK:LGCLF) - Price = KRW 332,500
Korea's LG Chem is the world's number 1 lithium ion battery manufacturer by capacity.
LG Chem has agreements to supply Volkswagen (OTCPK:VLKAY), General Motors (GM) (Chevy), Ford (F), Geely (OTCPK:GELYY) (Volvo), Renault (OTC:RNSDF), Nissan (OTCPK:NSANY), Hyundai (OTC:HYMTF), Kia (OTC:KIMTF), and others.
LG Chem plans to triple its EV battery production capacity to as much as 110GWh by the end of 2020. LG Chem needs to expand to at least 170GWh in 2024 to meet its growth target. New plants are under development in China and Poland, and LG Chem is considering building a second US factory. More details on LG Chem and their raw materials supply source here. Keep in mind this will require significant CapEx to be funded most likely from equity dilution or further debt.
LG Chem recently reported weaker profits, down 83% on year in 2Q 2019, due to "higher raw material costs and weaker demand." GM's sales have been quite weak, and their other OEMs are mostly still small players in the EV world. LG Chem should start to do a lot better in 2020-2022 as the ICE companies rapidly arrive with new electric car models and quickly ramp up sales.
Analysts' consensus is a buy with a price target of KRW 443,548 representing 31% upside.
LG Chem's financials chart below suggests 2019 was their blip year and revenues, margins and profits should all improve in 2020 and 2021.
LG Chem financials and forecast
2) Contemporary Amperex Technology Co. Ltd. (CATL)[SHE:300750] Price = CNY 75.80
China's CATL is the world's number 2 battery manufacturer and China's number 1 battery manufacturer with huge expansion plans.
CATL has agreements to supply Geely (Volvo), BMW (OTCPK:BMWYY), Daimler (OTCPK:DDAIF), Volkswagen, Toyota (TM), Honda (HMC), Nissan, and several Chinese car manufacturers. China's CATL recently announced plans for yet another megafactory, a $2B German battery plant.
There have been some discussions on their battery quality being lower compared to the Japanese and Korean manufacturers, but this has not seemed to have slowed down their progress.
Analysts' consensus is an outperform with a price target of CNY 74.62 representing 1.8% downside.
CATL's financials chart below forecasts revenues to increase strongly, but margins are forecast to fall, albeit from good levels compared to peers. Profits are forecast to increase.
CATL financials and forecast
China's BYD is the world's number 3 battery manufacturer and China's number 2 battery manufacturer with large expansion plans.
BYD has agreements to supply BYD (their car company, ranked No 2 globally for sales in June 2019), Toyota, and others. It should be noted BYD is not a pure play battery manufacturer, as they have revenues from several segments, most notably electric and conventional car sales and electric buses.
Analysts' consensus is an outperform with a price target of CNY 55.49 representing 0.8% downside.
BYD's financials chart below forecasts revenues, margins, and profits to all slowly increase in 2020 and 2021.
BYD Co. financials and forecast
4) Panasonic [TSE:6752] (OTCPK:PCRFY) - Price = JPY 911
Japan's Panasonic is the world's number 4 battery manufacturer and Japan's number 1 battery manufacturer with strong links to Tesla.
Panasonic has agreements to supply Tesla, BMW and Toyota. The recent Toyota/Panasonic collaboration has large potential given Toyota's size.
Analysts' consensus is a hold with a price target of JPY 1,061 representing ~17% upside.
Panasonic's financials chart below forecasts flat revenues, margins, and profits through to 2022.
Panasonic financials and forecast
5) Tesla (TSLA) Price = USD 242.41
USA's Tesla is the world's number 5 battery manufacturer and USA's number 1 battery manufacturer. At gigafactory 1 in the USA, Tesla has a JV with Panasonic. Their US gigafactory is the world's largest lithium-ion manufacturing factory.
Tesla is mostly focusing to supply their own vehicles and energy storage products, noting they are currently the No. 1 global seller of electric cars. Tesla is currently constructing their Shanghai China gigafactory, and have plans for a Europe based megafactory next (details not yet released, perhaps in Germany & producing by ~2021). Regarding the new Shanghai factory and Chinese electric car and battery production, Benchmark Minerals states: "In the next three years, Tesla is expected to rely on Chinese lithium ion battery producers or at least Chinese-based cell production to supply Model 3 and the newly planned, Model Y." According to Tesla, the plan for Gigafactory 3 is to produce battery cells along with Model 3 and Model Y cars, at an initial production rate target of 250,000 electric cars per year.
Tesla's new China gigafactory nearing completion
Analysts' consensus is a hold with a price target of USD 271.77 representing ~13% upside.
Tesla's financials chart below forecasts fast growing revenues, improving margins, and reaching profitability in 2020, and good profits in 2021 (a ~4.96% net profit margin on ~USD 38B of revenue for a ~USD 1.9B net profit).
Tesla financials and forecast
Source: Benchmark Mineral Intelligence
The impact on the battery raw materials from the megafactories surge
Source: Benchmark Mineral Intelligence
Top 10 global electric vehicle manufacturers in 2019 (end June)
Source: EV-Sales Blogspot
The lithium-ion battery manufacturers has not been my past favorite sector due to concern of falling battery prices and risk of rising raw material costs squeezing profit margins. We saw this in April 2019 when CATL announced a 48% increase in revenue but a 12.66% fall in net profit for 2018. This was despite a 56.27% increase in sales of their batteries (and a 1,051% increase in energy storage systems sales). The lithium-ion battery manufacturers and electric car manufacturers generally have low profit margins due to fierce competition. Nonetheless, it is still worthwhile taking a look at the sector, and given there are numerous reports of battery shortages (and low quality issues), this may result in some improvement in pricing power to the leading battery manufacturers, and hopefully improving profits.
LG Chem is the current global No. 1 manufacturer and has deals with more car OEMs than any other company (CATL being similar). Clearly, LG Chem is the number 1 choice from the traditional ICE manufacturers (outside China), which may prefer not to buy from electric car competitors such as Tesla and BYD Co.
CATL and BYD Co. are the two Chinese giants. Given China accounts for over 50% of electric car sales (55% in June), it makes sense that the Chinese leaders will do well.
Panasonic and Tesla are doing very well thanks to Tesla's sales success (14% global market share in June) and their combined Nevada megafactory ramping up. Panasonic does carry some extra risk due to their reliance on one large customer (Tesla), and this probably explains why they have the lowest PE ratio of the group. Their recent Toyota alliance could lessen this risk over time.
Overall, the lithium-ion battery manufacturers look set to ride the tailwind of a 10 fold increase in demand for their products from 2018 to 2020. The main and very real risk is not with demand, but due to fierce competition and, if battery prices continue to fall, squeezing margins.
My preferred way to gain exposure to the sector is somewhat indirectly via Tesla and BYD, as they should hopefully in time have higher profit margins from their electric car sales (benefiting from battery price falls), and are by far the top two leading electric car sellers with a combined 27% market share. If I was to choose a pure play lithium-ion battery manufacturer, Panasonic appeals due to valuation (2020 PE of 11) and their new Toyota alliance, LG Chem due to a large OEM customer base, and CATL due to being China's No. 1 and a large customer base. I would probably go with LG Chem based on the fact that the western traditional car manufacturers (Volkswagen, etc.) should be the big movers in terms of sales in the next 2 years starting in 2020. Or I may take a punt on Panasonic doing very well in time from their national peer Toyota.
As usual, all comments are welcome.
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This article was written by
Disclosure: I am/we are long TSLA, BYD CO [HK:1211]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.