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Under the Banyan Tree - Why are so many EV-related stocks falling?
30 Plays1 year ago
There’s no doubt Asia, especially China, is embracing electric vehicles. So why are the share prices of so many EV and EV battery makers falling? Herald van der Linde talks to Yuqian Ding and Will Cho to understand what's going on. Disclaimer: https://www.research.hsbc.com/R/61/wFszJhZ Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to Global EV Trends
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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And now onto today's show.
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Why Are Asian EV Shares Falling?
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Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
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I'm Harold van der Linde, Head of Asian Equity Strategy here at HSBC.
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On today's podcast, we're asking why Asian electric vehicle and EV battery makers are seeing their share prices fall as their popularity rises.
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Joining me to tackle this particular subject are Yu-Chen Ding, head of China Autos Research, based in Beijing, and Will Cho, our EV battery autos and technology analyst based in Seoul in South Korea.
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This is a hot topic right now, and we're going to get to the bottom of it right here under the banyan tree.
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We want to bring you a few key numbers that will help put today's conversation in context.
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Electric vehicles globally are about to hit a penetration rate of about 20%, which means sales are on course for one out of five vehicles sold around the world to be an electric car in 2024.
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It's also worth noting that 40% of the production cost of an EV and electric vehicle is a battery alone.
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So the battery is by far the biggest expense that these companies have.
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Now, you might think being on the cusp of an important milestone would be good for the share prices of these electric vehicles.
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But actually, a lot of these electric vehicle companies, they've seen their stocks fall, with losses in the double digits in some cases.
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The same can be said for battery makers in China and Korea.
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So there seems to be something going on.
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On the one hand, we see that the world is adopting EVs.
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On the other hand, share prices are coming down.
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It's time now to bring in my guest to explain what's going on here.
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Will and Yuchen, thank you both for joining us on the podcast.
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Thanks for having us.
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Thank you,
China's Dominance in EV Sales
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Harold.
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So Yuchen, broadly speaking, how many percent decline have we seen in the share prices of these EV makers?
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So we do see this massive variation between different EV stocks in the space.
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We noticed the market leaders such as BYD has rose 30% since beginning of the year, but there's also many subscale laggers.
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The stock price has corrected more than 50% since beginning of the year.
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So I would say it's various between different players.
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Let's take a step back first.
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We spoke about electric vehicles maybe, say, four or five months ago or something like that.
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And at the time, you said that electric vehicles were particularly popular in China.
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I think about one out of three cars in China at the time sold was an electric vehicle.
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Where are we now?
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Are they still going up?
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Is it still a popular product in mainland China?
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Yes, the EV percentage of the new car sales was close to 30%.
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Last time we speak, now it's close to 40%.
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And yes, EV is still popular in China and is increasingly the preferred choice for most of the consumers.
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But on the other side, we do notice that competition is also getting more intense.
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By the beginning of the year, we have around 400 EV models on sale.
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By the end of the year, we might be reaching more than 500 EV models in the market.
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500
Market Dynamics: Winners and Losers
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models.
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How many companies are there that actually sell these models?
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Like 50, 60, 70?
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Yeah, there is probably around 70 to 80 EV brands out there, and the market is quite fragmented.
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The top 10 brands take three quarters of the market share, while the rest, the 60, 70 brands, share the rest of the pie.
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So we clearly see the industry consolidation is taking place now.
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And industry consolidation means that the top five or six brands, they are becoming bigger and bigger in this market?
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Yeah, exactly.
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The market leaders will eventually take more market share while these struggling laggers who is loss making, they eventually will get squeezed out of the competition.
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So they really struggle, right?
Challenges in Global EV Exports
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Now, what we also spoke about in the past is that these Chinese electric vehicle makers, they're now looking to sell their products in other countries, right?
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They want to export.
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Yes, EV did become a new highlight for the China vehicle export, but still so far we see the majority of the China EV export still goes to the emerging market.
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While the developed market such as Europe is strategically important, but we do see the China local brand to build traction there is a decade-long march.
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the local production and local design would be necessary for the China local brand to really build attraction in Europe.
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But of course, to build a plant in Europe and really build up the brand over there, indeed, it would take more time than they do in China.
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And it is meaningfully more difficult.
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And I presume that the exports are still a small portion of their overall sales?
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Yes, people love to talk about it, but taking the leading EV brand BYD, for example, only 10% of the current monthly sales coming from the overseas market.
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So the exposure is indeed quite limited versus the domestic market.
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Okay.
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So...
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We have a market whereby most of it is still sold in China for these companies.
Price Wars in the EV Market
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10% is exported for, at least for the leading, for a lot of them it's even less so.
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But the Chinese market, as you said, is incredibly competitive.
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So what is happening with pricing of these cars?
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Is that coming down now?
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Because a lot of these smaller ones, as you said, they're hardly making any money.
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They must be desperate to try to sell these cars, right?
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Yeah, exactly.
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The price has been coming down since the competition has been crazy.
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And we also noticed that the competition dynamic is quite different in China and outside of China.
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So in China, we noticed the EV space has booked a price cut versus beginning of the year.
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And we also noticed the new model usually set the price lower than their pre-sale price, or the refreshed model with better content is also selling at a lower than last generation's price.
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But the dynamic is different outside of China.
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We noticed BYD's European model is twice the price point of what they've said in China because of the competition environment is rather easy versus what they have in China.
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Wow.
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So can we put a number to this?
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So if I would, for example, you talk about BYD, right?
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But if I would buy kind of the run of the mill electric vehicle, how much does it cost in China now if I would buy one today?
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Yeah, taking BYD's average, roughly it's around 20 to 25,000 US dollars.
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Although the price point at the same product offering will be almost twice in Europe.
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Talking about over $40,000.
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Okay.
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So if it's now 20, say 20 to 25,000 US dollars, how much would the price have been, say, two or three years ago?
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I would say generally, today's EV could be around 10 to 20% cheaper than what it used to offer last year.
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Okay, okay.
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It's pretty clear.
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There's intense competition in China.
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There's a lot of producers.
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They try to sell about 500 models.
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Some of them, yeah, will struggle.
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They can't go for the export markets.
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That's not a saver for them.
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So the only way out for them is try to cut their prices to gain market share.
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The leading brands can do so, but a lot of other companies will struggle to do so.
Battery Suppliers Under Pressure
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Now, Will, on the battery side, is that exactly the same what you're seeing there as well?
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That some battery makers have really seen a massive decline in share prices, but a few other ones have hold up reasonably well?
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Yes, correct.
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Concerns about the slowing electric vehicle demand.
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negatively affected the short performance of battery supply chains.
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On average, the battery suppliers' stock price is down around 30% over the past three months.
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However, leading battery makers' stock price decline was smaller than that of small-scale players.
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Let's take that a little bit further.
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As we mentioned earlier, the battery is by far the biggest expense.
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Effectively, an electric vehicle is like a battery with wheels in it, right?
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So if these EV prices are coming down, these battery costs, the prices for these batteries are probably coming down as well.
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Is that correct, Will?
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A good point, Harold.
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Let me explain this way.
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The battery prices have been always a key topic in the sector as battery is a critical component to power electric vehicles.
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As you mentioned earlier, electric vehicles are expected to account for 20% of the total cost sales in 2024.
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And this means that we are about to enter the mass market.
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And the mass market consumers are very price sensitive.
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So to attract these consumers,
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Carmakers will seek to aggressively reduce costs, and this will lead to strong downward pricing pressure on batteries.
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Yeah.
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And broadly speaking, what kind of profit margins does a battery maker make?
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And what were those profit margins, say, two years ago?
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Currently, the leading battery producers operating profit margins are 5 to 10 percent, which contrasts sharply with the operating loss of electric vehicles and major companies.
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But two years ago, battery makers also made a loss or barely break even because of insufficient scale and high material cost.
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However, thanks to EB boom in China and Europe, economies of scale, better product mix, battery producers' profitability has improved significantly over the past couple of years.
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So two years ago, the demand for batteries was rising, but there were not sufficient amount of batteries made to actually make this a profitable business.
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Now this becomes a profitable business because now they can make sufficient amount of batteries.
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If you make one battery, you have a whole factory.
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That's really expensive, right?
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So now there's people want thousands, if not millions of these batteries.
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So now they have economies of scale, as we call this in jargon, right?
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You become big enough to make profits.
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But then at exactly that time, these car companies come through and says, we can't pay you that much for these batteries.
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And you only make 5% margins.
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To be honest, 5% margins, that's not a really profitable business, right?
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Yeah.
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The battery producers seek to lower cost in three ways.
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Firstly, economies of scale.
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And second one is production efficiency.
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And lastly, the technology is also a key part of cost innovation, as technology not only enables the use of cheaper and abundant materials, but also improves the battery performance per unit cost.
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So you see a little bit on the battery side in this industry exactly what happens on the EV
Consolidation in the Battery Industry
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side.
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You have too many people coming in.
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They're not making money.
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At some point in time in the future, a lot of them will probably leave the industry and only the leading players will probably survive, the ones that can actually increase the technology and these sort of things.
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But I guess this will take a bit of time, right, before that really materializes, that you have full consolidation of the industry.
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Yes, in fact, electric vehicle battery industry consolidation has been underway.
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But as you mentioned, at a modest pace so far.
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However, we think the pace of industry consolidation will accelerate going forward with the leading player presence being solidified.
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This is because the challenging environment, such as volatile near-term EV demand, higher material cost burden, regulatory barrier to entry, all these will likely squeeze out small-scale, second-tier players out of the market.
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Only leading battery makers will be able to supply quality batteries
Future Outlook for EV and Battery Makers
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and reduce cost effectively should survive the challenging environment.
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And for these battery makers, is there an other industry where they can sell to?
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Like, I don't know, selling batteries to ships or any other industry that needs batteries?
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Or are they really dependent on these EV makers?
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Battery is a core part of decarbonization of transportation.
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Although the batteries are widely used in various applications, such as a laptop, smartphones, power tools, but still electric vehicles or other mobility tools such as e-bikes and e-scooters will be key demand drive going forward, thanks to policy tailwind.
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So there are other users for these batteries, but it's not big enough to really offset that or help them out, right?
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Yes, correct.
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Now, I think we've answered the question here.
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It is an exciting industry, great for consumers, but not so much for producers.
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Share prices are coming down, and in particular for the ones that the market says, I'm not quite sure if these companies are actually going to come through.
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But it also starts to identify who the leading and winning companies
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electric vehicle makers are and who the leading and winning battery makers are.
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Will and Yu-Chen, thanks a lot for these insights.
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Thank you for having us, Harold.
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Thank you for helping me on podcast.
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That's a wrap for this week's podcast, ladies and gentlemen.
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You've been listening to Under the Banyan Tree from HSBC Global Research.
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Many thanks to our guest Yu-Chen in China and Will in Korea.
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And a big thanks to all of your listeners around the world for joining us.
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We'll be back again next week.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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