Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Green transformation will drive high growth in batteries
Peter Garnry
Chief Investment Strategist
Summary: Today we launching our next equity theme basket with a focus on the battery industry. Our basket covers 30 stocks across lithium-ion manufacturers, battery equipment makers, lithium miners, nickel miners, graphite miners, charging networks for EVs, and recycling of batteries. We also talk about the potential competition from hydrogen as an alternative energy storage and the performance of the battery industry vs MSCI World since December 2015.
Back in August 2020 we wrote about the battery industry and how it will continue to be a high growth industry over the coming decades due to the green transformation and the penetration of electric vehicles. Today, we are updating and revising our battery equity theme basket based on our new research and understanding of the industry. It has been the most difficult basket to create as finding pure plays are difficult, but also questions such as should miners be part of the basket and to what extent. We are humble enough to admit that we are unsure if we have got it right this time, but for now this is our best bet on basket that provides the best exposure to the battery industry.
The basket and the growth profile
Our basket on the battery industry has 30 stocks across a large part of the value chain from lithium miners, graphite miners, nickel miners, battery manufacturer (both for EVs, bicycles, and consumer electronics), charging networks for electric vehicles, and larger battery systems for energy storage. The 30 stocks represent $523bn in market value and although analysts are generally very optimistic on battery related companies (see table), the industry overall had only 7% growth in 2020 and earnings were under pressure. But stocks reflect the future and not the past trouble.
| Name | Category | Market Cap (USD mn.) | Sales growth (%) | EPS growth (%) | Diff to PT (%) |
| Contemporary Amperex Technology Co Ltd (**) | Batteries (cars) | 103,154 | 2.6 | 9.8 | 47.1 |
| Southern Copper Corp | Copper | 52,700 | 9.6 | 12.5 | -10.3 |
| Freeport-McMoRan Inc | Copper | 46,963 | -1.4 | NA | 18.7 |
| LG Chem Ltd (**) | Batteries (cars and mobile) | 48,900 | 9.9 | -18.7 | 59.6 |
| MMC Norilsk Nickel PJSC | Nickel | 45,052 | 14.6 | -38.6 | 26.5 |
| Samsung SDI Co Ltd (**) | Batteries | 38,581 | 11.9 | 63.6 | 40.6 |
| Panasonic Corp | Batteries | 31,135 | -13.9 | -55.7 | 7.0 |
| QuantumScape Corp | Batteries | 21,063 | NA | NA | -9.2 |
| Eve Energy Co Ltd (**) | Batteries | 20,205 | 21.2 | -5.4 | 53.0 |
| Ganfeng Lithium Co Ltd | Lithium | 18,274 | -10.6 | -49.3 | 39.1 |
| TDK Corp | Energy applications | 18,012 | 1.1 | -15.6 | 22.9 |
| Albemarle Corp | Lithium | 17,083 | -12.8 | -28.1 | 5.7 |
| Sociedad Quimica y Minera de Chile SA | Lithium | 13,094 | -6.5 | -24.4 | 5.4 |
| Umicore SA | Batteries and recycling | 13,228 | 18.4 | -40.8 | -5.9 |
| Wuxi Lead Intelligent Equipment Co Ltd | Manufacturing equipment | 10,017 | 27.3 | -15.3 | 46.7 |
| Gotion High-tech Co Ltd | Battery and storage | 7,220 | NA | NA | -0.2 |
| ChargePoint Holdings Inc | EV Charging | 6,369 | NA | NA | 94.1 |
| Guangzhou Tinci Materials Technology Co Ltd | Battery materials | 5,916 | 36.9 | NA | 84.0 |
| Varta AG | Batteries (consumer and cars) | 6,252 | 108.1 | 165.9 | -15.5 |
| Fangda Carbon New Material Co Ltd | Graphite | 4,826 | -54.2 | -86.4 | 40.2 |
| Sunwoda Electronic Co Ltd | Batteries | 4,769 | 17.6 | -42.5 | 50.9 |
| EnerSys | Batteries | 3,982 | -5.0 | -11.5 | 12.9 |
| GrafTech International Ltd | Graphite | 3,009 | -31.6 | -25.6 | 24.3 |
| Livent Corp | Lithium | 2,576 | -25.8 | NA | 3.5 |
| GS Yuasa Corp | Battery, storage and charging | 2,197 | -5.0 | -10.4 | -4.1 |
| Tianneng Power International Ltd | Batteries (bikecycles) | 2,192 | 7.8 | 60.1 | 82.3 |
| Alfen Beheer BV | Storage and charging | 1,764 | 32.1 | 91.6 | 6.4 |
| Blink Charging Co | EV Charging | 1,594 | 50.4 | -10.4 | 43.6 |
| Zaptec AS/Norway | EV Charging | 407 | 40.4 | NA | 65.1 |
| Leclanche SA | Battery and storage | 251 | -43.4 | -2.3 | NA |
| Aggregate / mean | 523,219 | 7.4 | -3.4 | 28.8 |
Source: Bloomberg and Saxo Group
* Sales and EPS growth is measured on 12-month trailing figures, Diff to PT is the difference between consensus price target and the current price in %
** Stocks that cannot be traded with Saxo Group
There are four companies in the basket marked with (**) which means that they do not have a tradable instrument on the SaxoTrader. We have included these companies in the basket because they are an important part of the battery industry and we have decided that the accuracy of the basket is more important than its tradability. Besides the companies not tradable on the SaxoTrader, there are also five companies that have been excluded from our basket.
- Tesla: the energy storage business is too small to matter
- BYD: battery business is only 8% of total revenue
- SK Innovation: battery business is only 5% of total revenue
- Akasol: is getting acquired by BorgWarner
The global market for lithium-ion batteries is projected to reach $92bn in 2025 driven by the adoption of electric vehicles and to a smaller degree energy storage more generally. As we wrote in our research note back in August 2020, Bloomberg New Energy Finance estimates that a lithium-ion battery pack costs around $156/kWh in 2019 and will drop to $94/kWh in 2024 and to only $62/kWh in 2030 unleashing more applications and faster adoption of electric vehicles. The main bet on the battery industry is a bet on electric vehicles, consumer electronics, electric bicycles, and maybe semi-trucks. For larger and more heavy transportation batteries may not rule compared to fuel cells running on hydrogen. For energy storage more generally, the debate is raging about whether hydrogen or batteries will prove the winner.
The biggest pure play on batteries is the Chinese battery maker Contemporary Amperex Technology (CATL), with a market value of $103bn, but the stock is unfortunately listed on the ChiNext board under the Shenzhen Stock Exchange and thus only accessible for professional investors. This company has recently been chosen to be the preferred supplier of batteries to both Tesla and Volkswagen, and thus seems to have a strong outlook. Another company worth mentioning is QuantumScape, which is engaged in solid-state batteries which has the potential to hold more energy and recharge faster, and thus is play on the evolution of the lithium-ion battery technology.
Battery related stocks have outperformed the market
Our battery basket has had a tough 2021 down 11% being the worst performing theme basket we are tracking. Performance has been highly correlated to our green transformation basket, but over time we expect the two baskets to reflect different trends. The battery basket is up 422% since December 2015 in total return terms beating the MSCI World. Our theme baskets will always, since we use market cap as a key filter, have a survivorship and selection bias as thus the long-term performance chart should be viewed with a grain of salt. Past performance is no indicator of future performance. However, it is the performance going forward that will create the big value in understanding the market dynamics.
Hydrogen vs batteries for energy storage
The rise of renewable energy will continue over the next three decades and this will create a challenge of intermittent generation of energy. This energy must be stored or get lost and this will create a huge market for energy storage on a far greater scale than batteries used for light transportation or consumer electronics. The Dutch company in our basket Alfen looks to be a promising company in this emerging industry.
Besides batteries, hydrogen has been proposed as an energy storage alternative. Some studies suggest that the electrical energy stored on invested ratio (ESOI) is better for a regenerative hydrogen fuel cell because of lower manufacturing costs compared to batteries, but lithium-ion batteries have better round-trip efficiency and thus for now is the best alternative. It could be that both hydrogen and batteries will be used for energy storage depending on the application. We will get much wiser on this topic over the coming years. Below are two other articles on the hydrogen vs battery topic:
- Batteries and hydrogen technology: keys for a clean energy future
- Batteries and hydrogen in Germany: Comparing crucial components for a modern energy system
Risks
The key risk to our battery basket is the obsolescence of lithium-ion batteries in favour of solid-state as that would cause a huge price risk to the lithium-ion manufacturers including the biggest player CATL. Less government support of electric vehicle adoption could also slow down growth rates more than what is currently priced into the stocks. The basket is valued at 24.5x on EV/EBITDA which is a high premium (twice the global equity market), which means that the basket is vulnerable to growth setbacks or higher interest rates. The rising tensions between the US and China could also impact equity valuations and growth opportunities for many of the Chinese producers and thus negatively impact the basket. These are just to mention a few of the risks sources for this basket.
Previous notes on equity themes:
The commodity sector and the reflation trade in 2021 – 4 January 2021
Bubble stocks go into ‘hyperdrive’ mode – 8 January 2021
Introducing Next Generation Medicine basket – 20 January 2021
Updating our Green Transformation theme basket – 29 January 2021
Launching Saxo’s E-commerce theme basket as more growth lies ahead – 5 February 2021
Be careful of bubble stocks and updating bubble methodology – 12 February 2021
Gaming is a long-term winning industry – 26 February 2021
Black energy takes the lead as green transformation stocks turn negative - 3 March 2021
Is the market getting too excited about travel stocks? - 15 March 2021
India has tremendous upside in the 21st century - 18 March 2021
It takes $300bn to join the mega cap club - 19 March 2021
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