A detailed analysis of the new energy vehicle industry chain in its 10-year glory

Looking for Alpha in the New Energy Vehicle Industry Chain

Driving force: Policy encouragement is the focus in the early stage, and the importance of industrial chain data is gradually emerging

Characteristics of the new energy vehicle industry: policies consolidate the lower limit, and demand determines the upper limit. The industry is nested with multiple small-cycle growth industries due to policy fluctuations. The industrial chain spans nonferrous metals (resource products), chemicals (battery materials), power equipment new energy (batteries/motors/electronic controls/charging facilities), machinery (equipment), electronics (three small electrics), automobiles and other industries, showing high valuation/high volatility attributes. The core variables and market catalysts include encouraging policies, industrial chain data, industry events, etc.

The industry is moving towards real market demand, and the importance of industry chain data is highlighted. It is expected that as subsidies are gradually withdrawn and traditional car companies focus on new energy, the core driving force of the industry will gradually shift from policies to real market demand. Basic data reflecting the competitive landscape of the industry chain will become the core variable for tracking and studying the industry chain.

Unraveling the differences between each link in the industry chain

Products: Differentiation of upstream, midstream and downstream products from the perspective of financial data

The upstream focuses on resources, the midstream focuses on costs, and the downstream focuses on demand. The higher the voice of supply (resources) in the upstream of the industrial chain, the higher the voice of demand (market) in the downstream of the industrial chain. For the upstream and downstream, high-frequency data such as resource supply and vehicle sales are core variables. The midstream manufacturing link (components/manufacturing/products) is in the middle of the smile curve and is essentially a processing attribute. Therefore, cost control ability is the core competitive factor, and the company's competitive barriers come from the ability to control raw materials and the speed of technological iteration.

Accounts receivable/accounts payable reflect the bargaining power with downstream/upstream parties and help determine the level of voice in the industrial chain.

Comparing from the vertical dimension of the industrial chain, based on the financial data of typical companies in each link, the accounts receivable problem in the upstream (resources) is relatively minimal, and the resource link adopts cash on delivery or even payment before delivery.

In the midstream (materials, batteries, components, equipment), except for solvents (Shida Shenghua), copper foil (Jiayuan Technology), and thermal management (Sanhua Intelligent Control), most companies' accounts receivable account for more than 30% of their revenue. Due to overdue subsidies in the downstream, the proportion of accounts receivable is more than 50%.

From a time perspective, the proportion of accounts receivable in most links has increased from 2016 to 2019, and cash flow pressure has continued to increase.

The leader in lithium resources (Tianqi Lithium) and the leader in batteries (CATL) demonstrated strong bargaining power, with the value ((accounts receivable - accounts payable)/accounts receivable) decreasing instead of increasing.

Power batteries are capital and labor-intensive industries, and their profitability is in the middle of the battery industry chain. For the midstream manufacturing link in the middle of the smile curve, taking power batteries and positive electrode materials, negative electrode materials, diaphragms, and electrolytes as examples, all core indicators are normalized to the unit of GWh, and the characteristics of each sub-industry are compared horizontally.

From the perspective of unit production capacity, the power battery segment is a typical capital and labor-intensive industry (equipment investment, asset-liability ratio, number of technical personnel, etc. are significantly higher than materials).

Judging from the net profit margin and non-recurring ROE, the profitability of power batteries is in the middle of the battery industry chain, lower than artificial graphite, wet-process diaphragms, and copper foil, and higher than positive electrode materials and electrolytes.

Cost: From the perspective of composition structure/production and manufacturing, the upstream of lithium battery materials is cobalt, lithium, graphite and other materials, and the price cyclical fluctuation characteristics are obvious. Based on the proportion of raw material costs in material production, we believe that the four major lithium battery material links can be divided into two categories: cyclical and growth types:

1) Cyclical (raw material costs account for >40% of total material costs): product costs are mainly affected by upstream raw material prices, such as cathodes and electrolytes. The scale of the enterprise (bargaining power) and R&D intensity determine that the industry barriers of the leading companies are getting higher and higher;

2)成长型(原材料成本在总材料成本中占比<40%):产品成本主要受设备、人工、能耗等影响，典型如负极、隔膜，随生产规模扩大单位生产成本降低下降越显著，高技术壁垒行业的毛利率水平有可能不降反升(如湿法隔膜)。

Due to the different sensitivities between cyclical and growth-type lithium battery materials to their upstream material costs, we believe that the profitability of cyclical lithium battery materials companies is more dependent on raw material procurement strategies and inventory strategies, while the profitability of growth-type materials companies is more dependent on unit capacity investment and yield rate.

The cost difference between positive electrode materials and electrolytes mainly depends on the cost of core raw materials. Taking the ternary material NCM523 as an example, its product price trend is basically consistent with the price trend of core upstream raw materials such as lithium carbonate and cobalt sulfate, and its correlation with cobalt sulfate is stronger.

The price of electrolyte products is closely related to the price of lithium hexafluorophosphate (hereinafter referred to as 6F). The price of 6F diverged from the price trend of its raw material lithium carbonate at the end of April 2017, and the profitability of 6F manufacturers declined sharply until the second quarter of 2018 when they were synchronized again.

The battery manufacturing process is long, and technology and manufacturing are important components of the moat. The profitability of battery products declined sharply from 2017 to 2019 as prices fell, but it is too early to conclude that they have now become homogeneous standard products.

The battery production process involves many steps, the process control is difficult, and the technology is still undergoing rapid iteration, all of which have built up a moat for battery manufacturers. Capital expenditure alone may not necessarily lead to overtaking others.

We believe that manufacturing technology may be the main reason why CATL has a high market share in China and there are only three mainstream power battery manufacturers left overseas (Panasonic, LG Chem, and Samsung SDI).

Left-side sniping: The industry is steadily moving upward, and the leading companies have obvious advantages

1. The industry continues to grow, and demand is steadily increasing. Affected by the decline in subsidies, the sales of new energy vehicles in 2019, the implementation of the double-credit policy, and Tesla's increased sales, the sales of new energy vehicles at home and abroad in 2020 are expected to exceed 1.58 million units, and the sales of new energy vehicles abroad are expected to reach 1.35 million units.

2. Capacity utilization rate differentiation, leading companies have obvious advantages in positive electrode materials

According to Gaogong Lithium Battery, the industry's average capacity utilization rate was 20%-40% from 2016 to 2019, and production seasonality was not obvious. Due to the flexibility of production capacity (two-shift to three-shift, etc.), some companies had a capacity utilization rate of more than 100% in some periods. The capacity utilization rate of leading companies is concentrated in the range of 95%-110%, showing a typical structural overcapacity.

Diaphragm: According to the disclosure of Gaogong Lithium Battery, the average capacity utilization rates of dry-process/wet-process diaphragms were 20%-60% and 30%-90% respectively from 2016 to 2019. Q1 of each year is the lowest point of capacity utilization. Among them, the supply elasticity of dry-process diaphragms is obvious. The capacity utilization rates of Xingyuan Materials (2016Q2) and Cangzhou Mingzhu (2018) far exceed 100%, and Enjie Co., Ltd.'s utilization rate is higher than the industry average.

There is an oversupply of ternary materials in terms of total production capacity, and the homogeneity of NCM523 and below products is obvious, making it difficult to improve profitability.

Domestic companies have different high-nickel product development strategies, but their profitability is generally higher than that of ordinary ternary products.

Some companies focus on 622 (Dangsheng Technology), while some companies skip 622 and directly develop 811 and higher nickel content materials (Rongbai Technology).

Due to the special demand for high-nickel material manufacturing equipment, latecomers to the market have certain latecomer advantages in production line layout.

性能方面，根据公司官网披露，住友、TODA国外已实现量产产品克容量180-190mAh/g，但基本不向国内大批量供货，国内部分产品已接近或超过国外水平。盈利能力方面，622、811产品盈利能力显著高于常规产品。

3. Industry concentration: Except for ternary materials, the concentration of other lithium battery materials is on the rise

1) Positive electrode materials: The concentration of the ternary material industry is still relatively low, and companies with high-nickel ternary materials as their main products are expected to further expand.

Increase market share;

2) Negative electrode materials: The concentration and market share of artificial and natural graphite have stabilized, among which natural graphite has become a substantial oligopoly;

3) Diaphragm: The market share of leading enterprises in the wet-process diaphragm industry has further increased;

4) Electrolyte: The industry's capacity utilization rate continued to decline, with products becoming more homogeneous and downstream customers choosing diversified supply.

Business related;

5) Batteries: The industry as a whole and the leading companies’ capacity utilization rates have decreased and increased, as well as the industry concentration and leading companies’ market share have increased. The industry may have substantially entered an oligopolistic structure.

4、盈利能力:毛利率显著分化降价是2015-2019年中游环节关键词，不同材料环节毛利率分化显著。

Taking the gross profit margins of typical companies in each link as an example, the gross profit margins of solvents and aluminum foil links showed an upward trend, the gross profit margins of equipment, thermal management, natural graphite, electrolyte and ternary materials links remained basically stable, and the gross profit margins of batteries, cobalt, lithium, lithium iron phosphate, artificial graphite, diaphragms, lithium hexafluorophosphate, motors and electronic controls showed a downward trend.

1)磷酸铁锂材料(以下简称LFP):在下游需求(客车)趋缓背景下，相关企业盈利能力显著下滑;

2) NCM: It tends to be a fixed processing fee model, and the price follows the market. Some leading companies benefit from their inventory advantages, and their profitability fluctuates less;

3) Graphite: stable with a slight decline. The natural graphite industry is stable, while artificial graphite is driven by consumption, and the gross profit margin has declined;

4)隔膜:干法产品受LFP产品需求下滑拖累，毛利率下滑较显著;

5)电解液:显著下降。产品价格下行，毛利率整体下滑，其中有专利配方或海外客户占比较高的盈利能力相对较强。溶剂受益于供需改善，盈利能力提升。

Ceiling: Segmented market demand determines the market value space of the leader

Battery industry chain: Based on the 1.58 million electric vehicles in the domestic electric vehicle market in 2020 and the average price and net profit margin of each segment in 2019, the top three profit contributions of the new energy vehicle market to the battery and material segments are power batteries (7.08 billion), ternary materials (750 million), and wet-process diaphragms (740 million). At the same time, considering domestic consumption and energy storage needs, as well as overseas market demand, the material segment is expected to produce a leader with a net profit of more than 1.5-2 billion in 2022-2023.

Non-battery industry chain: Combined with our forecast of new energy vehicle production above, we believe that the market space for electronic control, relays, and thermal management components will reach 65.4 billion, 27 billion, and 33.8 billion yuan, respectively, in 2025.

Concentration: There may be opportunities for counterattack in the ternary material/diaphragm segment. From the perspective of the material supply structure, through the accumulation of the consumer battery era, China has the strength to share the world with Japanese material companies.

以各环节市占率来看，2013-2018年，中国在负极(石墨)、电解液的市占率已实现了对海外同行的反超;正极材料、隔膜的市占率有了显著提升，与头部企业的差距正在快速缩小。

Globalization: Potential performance elasticity of domestic disadvantaged links may be greater

Among domestic material companies, negative electrodes and electrolytes account for a relatively high proportion of their supply to overseas leading customers. Compared with overseas companies, Putailai, BYD, Xinzhoubang and other companies have advantages in customers, scale and resources.

As the scale of my country's new energy vehicle industry rapidly increases, the strength of power batteries and wet-process diaphragms has also risen. From the perspective of performance elasticity brought by globalization, the wet-process diaphragms with a low localization rate and the positive electrode materials with small processing fee fluctuations may have higher incremental development space.

结合上述对各细分子行业所处阶段和成长性的横向对比，我们认为在中游产业链中，动力电池的价值量高，市场空间大，马太效应显著。材料环节中，值得关注的是走差异化路线的标的(比如高镍三元材料、新配方电解液)。