Top Picks: Samsung SDI and Dongwha Enterprise
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.
Over 2020~2021, even during the Covid-19 crisis, sales of BEVs have exceeded market expectations, in turn leading finished car makers to place aggressive battery orders. In response, cell/materials firms have expanded production capacity, resulting in upward revisions to their earnings estimates and share price growth.
Orders from major car makers in 2021 are estimated at W196tn, W100tn of which have been from Ford. EcoPro BM is the major beneficiary of most of Ford’s orders. In 2022, major car makers are expected to place orders of at least W100tn. Accordingly, new capacity expansion should follow. Although we expect to see share price growth in 2022, the growth is unlikely to be as aggressive as the level witnessed in 2021.
Tesla plans to start in-house production of 4680 battery cells (10GWh) from mid-2022 at its factory in Fremont (US). Evolving from an EV firm to a battery maker, Tesla is projected to start purchasing materials. Including its plants in Berlin (target of 50GWh by end-2022, design capacity of 250GWh) and Texas, the company plans to secure battery production capacity of around 100GWh by end-2022. Once materials firms for Tesla are disclosed, they should enjoy exponential upward revisions to earnings estimates and share price growth.
I. Sector share prices move in line with mid/long-term earnings estimates
The share prices of rechargeable battery players tend to move in line with mid/long-term earnings estimates. In 2H21, 2021~2024 OP estimates for major material firms have been revised upwards by 30~50%, which has ushered in steep share price growth. Among the key variables for earnings—price (P), sales volume (Q), and cost (C)—the most important is Q. To increase Q, battery orders from finished car makers are essential. Orders from major car makers in 2021 are estimated at W196tn. Their orders should come in at more than W100tn in 2022. Although the absolute order amount is to decline y-y, cell/materials firms are forecast to continue expanding their capacity in 2022. We view securing mid/long-term earnings visibility as being a more important issue than one-off variables (eg, production disruptions).
II. Key technology changes in 2022
1) Mass production of large cylindrical batteries: As advantages have started to be highlighted, a growing number of OEMs are projected to adopt cylindrical batteries.
2) Rise of Waste battery recycling market: Waste battery recycling will become essential. Of domestic waste battery recycling players, SungEel HiTech and EcoPro CNG have secured clients and are in the mass production process. As EcoPro CNG plans to pursue mass battery recycling from 2022, EcoPro BM should benefit in terms of cost.
3) Demand for silicon-based anodes is set to grow in earnest: In 2022, LGES (GM, Porsche), Samsung SDI (Gen5), and SK On are all projected to start adopting silicon anodes for their batteries.
III. Cathode market to segment
The cathode market is projected to be segmented into high-end (Ni-rich batteries), mid-end (cobalt-free and Mn-rich batteries), and low-end (LFP and Mn-rich batteries). With the rise of LFP batteries, concerns are rising over Ni-rich batteries. In our view, adoption of LFP batteries is to grow only in low-end EVs and household ESSs, meaning that LFP batteries will not be in direct competition with Ni-rich batteries.
IV. Top picks
We present Samsung SDI and Dongwha Enterprise as our top picks. Samsung SDI is projected to secure orders for VW’s MEB and BMW’s Gen 6 and to benefit from cylindrical battery market expansion.
Electrolyte capacity at Dongwha Electrolyte, Dongwha Enterprise’s subsidiary, is forecast to expand to at least 136,000 tons by end-2025 (vs end-2021: 53,000 tons) upon its plant expansions in Hungary and the US. With the firm likely to secure more new clients, additional upward adjustments to earnings estimates are in the cards.