Battery stocks to play the global EV market, says HSBC

The electric vehicle market is expected to hit a milestone next year, according to HSBC. Its global penetration rate could hit the “important 20% threshold” next year — “heralding entry to the mass market” for the first time, it said. “This has major implications for battery makers,” the bank wrote in a Nov. 1 note. “Mass market consumers are far more price sensitive, so we expect automakers to seek to aggressively cut battery costs, which account for 40% of total EV manufacturing cost,” it explained. HSBC said that while potential buyers will consider several factors — such as infrastructure, driving distance, safety, environmental friendliness and designs — price will, in the mass market, be what determines their final decision. Given that battery packs account for around 40% of the total BEV manufacturing cost, HSBC said, cutting that cost is the “key to price parity” and success in the mass market. Battery makers will, in turn, face strong margin pressure, said HSBC. “The plus side of pricing pressure is that the pace of market consolidation should accelerate. In turn, the scarcity value of competitive battery producers which can reduce the cost of supplying quality batteries will rise,” it said. Stock picks The share prices of major battery makers have underperformed in light of concerns over such margin pressures — despite the bright long-term outlook, said HSBC. But, it said, “We think leading battery makers can handle this challenge and believe concerns about oversupply are overdone.” The bank said it prefers pure battery market leaders, given their cost-competitiveness and strong customer base. It named the following buy-rated companies. LG Energy Solution: HSBC says the firm stands out because of its scale and technology; financial “muscle”; and strong customer base. “[It] should all help to lock in its cost leadership, a critical factor needed to survive the mass market. Those that lack a solid customer base and cost competitiveness are likely to lose ground,” said HSBC. It gave LG Energy Solution a price target of 640,000 Korean won ($485.9), or potential upside of nearly 55%. CATL : HSBC says CATL has been gaining share in the overseas EV battery market, and believes that its tech leadership and strong production commitment will help it continue to do so. “We expect the company to secure more volume and mid-term market share visibility given its leading technology (e.g., Shenxing fast-charging LFP battery, M3P battery), best-in-class delivery track record, and increasing global production,” said HSBC. It gave CATL a price target of 266 Chinese yuan ($36.5), or potential upside of around 41%. Samsung SDI : HSBC said this company has high exposure to the high-end segment of the EV market, which takes around 20% to 30% of it. “SDI has high exposure to that segment through major customers such as BMW, Audi, and Rivian, so we see a relatively limited impact from the aggressive pricing by OEMs to target the mass-market segment,” HSBC said. It gave Samsung SDI a price target of 640,000 Korean won, or potential upside of around 52%.