Rechargeable batteries: China’s shift to ternary batteries: Winners and losers

2016. 9. 30 Rechargeable batteries (OVERWEIGHT) China’s shift to ternary batteries: Winners and losers WHAT’S THE STORY? Key takeaways from China trip: During a visit to China over Aug 31-Sep 3, we met with major EV and battery makers, EV dealers, government agencies, and EV analysts. This report covers the key takeaways regarding China’s EV market conditions and current issues. Battery certification: Chinese industry insiders are positive about the chances of the Chinese government granting certification to Korean rechargeable battery makers (which boast quality and price competitiveness)—provided political tensions between the two countries do not escalate again. BYD to launch ternary battery-based EVs; ternary battery production rises: BYD, the world’s largest EV manufacturer, is preparing to launch EVs powered by a ternary battery—a significant departure from its strategy heretofore of using only LiFePO4 (LFP) batteries. We believe this offers a valuable insight into what will happen across the industry. BYD’s move should trigger a sea change amongst both its rivals and players in the materials value chain. Some in China are forecasting that the ternary-battery adoption rate there will rise from its current 20-30% to more than 70% in the not-so-distant future. Threats and opportunities for Korea’s battery value chain: Some may view China’s shift to ternary batteries as a threat, in that it may lead to increased competition in the ternary battery market, which is currently led by Korean and Japanese firms. We note, however, that the shift may also throw up opportunities for battery materials vendors making products for NCM622 batteries and above (ie, those with high nickel content), which are needed to make ternary batteries with high nickel content. (Such batteries have greater energy density than LFP batteries. See appendix for details.) Though Chinese firms may aggressively expand capacity, it takes 3-4 years to go from platform development to mass production at automakers—and this assumes no questions over product quality. The developments in China bode well for L&F and Ecopro, both of which have experience mass producing high-nickel ternary batteries. SK Innovation, which has the world’s second-largest capacity in wet separators (where China is relatively weak), also looks promising. Our top pick remains Korea’s only anode materials firm, Posco Chemtech. Korean battery maker discount (2016) Korea: Major battery material firms Company Market cap (KRWb) P/E (x) P/B (x) 16E17E 16E17EL&F 410 n/a n/a n/an/aEcopro* 250 37.417.5 2.32.0Posco Chemtech* 673 14.58.5 1.21.1Soulbrain* 1,039 10.39.4 1.71.5SK Innovation* 14,702 8.39.4 0.90.8Foosung 638 16.911.3 4.73.3Iljin Materials 645 16.219.8 2.42.1Note: * Samsung Securities estimates Source: QuantiWise, Samsung Securities estimates Note: P/B multiples Source: DataStream Analyst JungHoon Chang Rechargeable batteries/OLED jhooni.chang@samsung.com 822 2020 7752 Rocky Byeon Strategy (China) kr.byeon@samsung.com 822 2020 7389 Research Associate Wonyong Park Research Associate wkrw.park@samsung.com 822 2020 7847 Sector Update AT A GLANCE Ecopro (086520 KS, KRW14,200) Target price: KRW15,000 (5.6%) Posco Chemtech (003670 KS, KRW11,800) Target price: KRW14,000 (18.6%) Soulbrain (036830 KS, KRW62,200) Target price: KRW76,000 (22.2%) L&F (066970 KS, KRW18,850) Iljin Materials (020150 KS, KRW16,500) BYD (1211 HK, HKD52.45) Guangzhou Tinci Materials (002709 SZ, CNY46.5) BTR New Energy Materials (835185, Not listed) Jan Mar May Jul Sep1.2x3.5x0.9x4.4xKorea average(Samsung SDI and LG Chem)China (BYD) Rechargeable batteries 2016. 9. 30 2 WHY SHOULD YOU READ THIS REPORT? In Guangzhou, Beijing, and Tianjin over Aug 31-Sep 3, we met with EV analysts, the China Industrial Association of Power Sources, and several major materials suppliers. We discussed trends in China’s EV market, industry conditions for battery-cell and materials makers, and issues facing the country’s EV market, such as battery certification and subsidies. We learned that Chinese battery makers are eager to enter the ternary battery market since Chinese EV makers have expressed a preference for such batteries (the market for which is currently led by Korean and Japanese firms) over the mainstream lithium iron phosphate (LiFePO4) ones. Though this is potentially problematic for some Korean players, it should also heighten expectations about the growth of the ternary battery market (in a way reminiscent of how Apple’s adoption of OLED panels triggered explosive sales growth in Korea’s OLED value chain). If we assume the industry’s direction is now set, we must ask which firms will survive (and for what reasons) and provide investors with fat returns. In this report, we do not seek to cover the overall EV industry or provide an overview of battery-cell makers, equipment providers, or charging infrastr