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Glimmers Of Winners Emerge In Asia's EV Push

Chart 1


Asia will be at the center of the EV era. The region has much of the resources needed for the sector (Indonesia), highly supportive policies (China), and industry-leading technology (Korea, China, Japan). A batch of Asian firms are eclipsing entrenched players, not least in China, which has a larger EV market than the rest of the world combined.

S&P Global Ratings believes the emergence of electric vehicles (EVs) will prompt dozens of Asian enterprises to raise substantial capital. Carmakers could raise US$28 billion through issuance of green bonds in 2023 to pay for development of EVs, according to Bloomberg Intelligence.

Heavy investment into EVs will push up leverage and strain credit metrics for some entities. New projects will come with significant execution risk. Some firms will thrive and some will get left behind.

To get a sense of how this will play out, we consider likely winners and losers in Asia as the EV industry emerges. In the broadest strokes, Chinese companies are the frontrunners, Korean firms are catching up, and Japanese entities are trailing.

Upstream: Indonesia's Nickel Miners Eye Their Prize

Indonesia is emerging as an important player in the global scramble for EV resources. It is the world's largest producer of nickel, a growing portion of which will be battery-grade.

PT Vale Indonesia Tbk and Aneka Tambang Tbk. PT are investing in downstream nickel refining projects. They are also setting up refining joint ventures (JVs) to help them secure offtake agreements, which will be beneficial for the miners' earnings visibility. EV battery makers and car manufacturers are joining these JVs, to secure a stable nickel supply.

Different firms have committed about US$30 billion in announced investments into the Indonesian nickel sector. The capital expenditure (capex) will increase funding needs and raise execution risks for the coming one to three years.

Long lead times and a high reliance on debt funding will increase project owners' sensitivity to swings in nickel prices during the ramp-up phase.

Beyond that critical initial three-year period, the investments should pay off. For miners, growing demand for nickel from the auto sector should support the profitability of their Indonesian projects for a long time. Increasing integration allows battery makers and auto firms to better manage the cost of an increasingly in-demand commodity.

Table 1


Midstream: Battery Makers Will Continue To Shine

Asian firms will continue to dominate global EV battery supply for the next two to three years at least. According to S&P Global Mobility, producers in the region collectively accounted for 98% of the global battery cell supply in 2022. This share will likely stay above 90% by 2025.

Chart 2


We expect Contemporary Amperex Technology Co. Ltd. (CATL) and LG Energy Solution Ltd. (LG Ensol) to remain leaders in the global EV battery market. The pair alone account for nearly half of the global EV battery sales. Their market position, growing profit, and largely stable leverage should underpin their credit profiles over the next one to two years.

In China, competition has been rising in the EV battery market. Carmakers have been diversifying battery procurement to secure stable supply and to enhance their bargaining power.

Local suppliers such as China Aviation Lithium Battery Co. Ltd. have taken market share in the past two years. BYD Co. Ltd. is also expanding its share of EV battery making, largely to supply to own EVs. BYD was the world's biggest EV maker by sales volume in 2022.

Nevertheless, CATL will maintain its top sales position in China over the next two years, in our opinion. The company's strength in ternary lithium-ion batteries and lithium-iron phosphate batteries makes it competitive in the mass-market and premium segments.

CATL's ability to produce batteries at an industry-beating energy density, and its innovation with chemicals that have lower battery costs, will tighten the firm's ties with carmakers.

CATL will likely increase its share of the European market with the commissioning of plant in Germany in 2022. It is also on track to start trial production at a Hungarian plant in 2024.

The firm's access to the U.S. market is somewhat restricted. The country's Inflation Reduction Act (IRA) withholds a US$7,500 tax credit on the purchase of EVs that use batteries or battery materials made by a "foreign entity of concern".

CATL's EBITDA margin should recover modestly in 2023-2024, with falling raw material costs mitigating pricing pressures. Despite the company's heavy research and capex requirements, we expect solid operating profit to keep CATL's free operating cash flow positive. This will help the company stay net cash over the next 24 months.

Korean battery makers to maximize their geopolitical advantages

IRA offers an opportunity for Korean players such as LG EnSol to expand further in the U.S. LG EnSol has also established a solid presence in Europe through cooperation with Volkswagen AG, Renault S.A., and others.

The company will likely prioritize expansion in the U.S. in the to capitalize on rising EV sales and policy support. This includes the establishment of a joint venture with General Motors Co., Stellantis N.V., and Honda Motor Co. Ltd. The company's parent, LG Chem, will also invest US$3.2 billion in a cathode plant in Tennessee over 2022-2025.

The expansion in the U.S. is likely to help the company maintain a top-three position in EV battery sales. We expect its EBITDA margin to rise to 13%-17% in 2023, from 12% in 2022. Improving operating efficiency and better economies of scale should help the margin expansion.

The granting of advanced manufacturing production credit (AMPC) to LG EnSol could further expand margins. While heavy capex could push up its debt over the next two to three years, rising operating cash flow and profitability should ensure leverage levels stay largely steady.

SK Innovation Co. Ltd.'s move into EV battery making will bring growth and help mitigate the cyclicality of its oil refining and chemicals businesses. However, its transition to EV battery making will be costly and modestly credit negative in the short term primarily due to significant investments. Our 'BBB-' rating on SK Innovation is on CreditWatch with negative implications.

We expect the company's battery producing subsidiary, SK On, to continue to make an operating loss in 2023 before potentially breaking even in 2024. The aggressive capacity addition plan will drive up SK Innovation's leverage in 2023.

Japan's Panasonic holds its course

Panasonic Holdings Corp. is Japan's most important EV battery player. Its market position may weaken over the next few years given its heavy reliance on Tesla Inc. as its major EV battery buyer, amid intensifying competition.

We expect Panasonic's risk in the automotive battery business to remain within tolerances for our ratings on Panasonic. The company plans to build a new plant to make EV batteries in the U.S. We think the highly capital-intensive nature of the battery business and Tesla's aggressive growth strategy present significant risk to Panasonic.

Panasonic has already launched operations at a plant in Nevada and can apply that experience at the new facility in Kansas.

Panasonic will limit capex to focus on financial health, in our view. Our base-case scenario does not factor in the potential benefits of subsidies for electric vehicles under IRA. The high risk in its car battery business would be slightly mitigated, in our view, if its products are eligible for such subsidies.

Panasonic's diversified business portfolio will likely ensure its overall profit stays stable. The debt-to-EBITDA ratio to remain 1.0x-1.5x over the next one to two years, in our view.

Downstream: Electrification Progress Is Uneven In Asia

Supportive government policies, a well-established supply chain, and widely available charging infrastructure have established China as the clear EV frontrunner. In 2022, the country generated over 60% of global EV sales.

Chart 3


We expect the country's EV sales to rise 15%-25% in 2023-2024, down from 96% in 2022, after the removal of central government subsidies. The slower momentum also reflects an already high EV penetration rate, which climbed to about 30% from about 5% in 2020.

BYD and Tesla will likely remain leaders in the local market over the next two years. Their competitiveness stems from robust cost controls built on large sales volume and vertical integration. As the cost leader, Tesla will most easily manage margin strains, even when growth slows.

Tesla's price cutting in China has weighed heavily on local producers. Firms with brands within similar price ranges have been forced to follow suit. Loss-making EV start-ups with heavy investment are burning cash quickly amid intensifying competition. This makes industry consolidation likely in the next few years.

Everyone else

Korean carmakers are transitioning well to electrification. With Hyundai Motor Co. and Kia Corp. rolling out new EV models, the country's EV penetration reached 10% in 2022, from below 7% in 2021.

Japan and India are lagging, with only a 1%-2% EV penetration rate. The Japanese government wants all new car sales to be electric by 2035. This would include hybrids, plug-in hybrids, and fuel-cell vehicles. The government's support for multiple types of electric vehicles will likely keep growth muted for sales of pure EVs for a number of years.

Pecking Order Emerges Among Rated EV Makers

Chart 4


Incumbents are striving to transition seamlessly from internal combustion engine (ICE) models to EVs without a big shift in profits, revenues, and market share. This is not easily achieved.

Moving fast into EV production hits margins. Sales volumes are still low and raw material and R&D costs are high. Most EV producers in China are loss-making at the EBITDA level. The surge in the lithium carbonate price in 2022 added to the margin strains, most notably for Zhejiang Geely Holding Group Co. Ltd.

Chart 5


Chart 6


Meanwhile, entities have to develop and upgrade production platforms dedicated for EV production. Substantial capital spending is taking a toll on leverage. Most funding comes from internal cash or debt. Equity placements can only partially mitigate the pressure.

Entities with strong free operating cash flow generation and solid balance sheets can manage significant investment without meaningfully raising leverage. Examples of such firms include Toyota Motor Corp. and Hyundai. By contrast, Zhejiang Geely's aggressive electrification has pushed the firm into negative cash flow.

Outlook diverges among rated Chinese carmakers

Among rated carmakers, Zhejiang Geely and its core subsidiary, Geely Automobile Holdings Ltd., are moving fast into EVs. The transition has hit the firms' margins and leverage in the past year. Our current base case assumes improving financials.

Dongfeng Motor Group Co. Ltd.'s sales volumes are dropping faster than peers'. Its joint-venture brands have been slow to adopt electrification, and continue to lose share to EVs. This, together with rising EV penetration at its proprietary brands, will keep its EBITDA margin under pressure in 2023.

Beijing Automotive Group Co. Ltd. and China FAW Group Co. Ltd. are accelerating their EV initiatives with joint-venture partners, Mercedes Benz and Volkswagen, respectively. That said, we believe their EV progress will be gradual. This will likely help to protect margins over the next two years.

Japanese players are trailing

Japan's strengths in carmaking are well known. So why are falling behind in EVs? The EV penetration rate of Japan's big three carmakers (Toyota, Honda, and Nissan Motor Co. Ltd.) was only 1%-3% in 2022, far below the global average of 13%.

This stems from their advantages in ICE and hybrid cars, and their commitment to fuel cells. The entities are also more reluctant than most to allow EV-related margin dilution and cash flow strain.

Japanese players have invested meaningfully in fuel-cell vehicles. With Japan heavily reliant on fossil fuels for their electricity generation, fuel-cell cars powered by hydrogen are more in keeping with the country's carbon goals. Fuel cells have a high energy density and short charging time.

However, high operating costs and limited charging infrastructure have so far prevented fuel-cell vehicles from achieving commercialization.

This has steered the Japanese firms to hybrids. The margin on hybrids is similar to that on ICE vehicles. The entities can make them using existing supply chains with limited investment. In our view, demand for hybrids can continue to grow by serving as a transitional technology in emerging markets with a weak EV infrastructure.

The success of Japanese carmakers in EVs will depend on their ability to secure supply of critical materials, develop software, and roll out competitive models. Among the big three, we think Toyota will be the first to ramp up EV sales. Its solid balance sheet and strong brand power will support the firm in this transition, in our view.

Table 2

Japanese carmakers are not in a hurry to go electric
Main EV initiatives among Japan's big three auto firms
EV sales target Supply chain

Toyota Motor Corp.

Introduce 10 EV models with a plan to sell 1.5 million units by 2026; launch 30 BEV models with a plan to sell 3.5 million units by 2030; jointly developing a BEV model with BYD in China Battery JV with Panasonic; recently announced partnership with LG EnSol to build a U.S. plant

Honda Motor Co. Ltd.

To produce >2 million units EVs by 2030; no more gas-vehicle sales by 2040; jointly developing a BEV with General Motors in North America Alliance with CATL and LG EnSol; to invest ¥43 billion in the production line for solid-state batteries

Nissan Motor Co. Ltd.

To introduce 19 BEVs by fiscal 2030; BEV penetration rate to reach 40% in the U.S. by 2030 Has established an alliance with Envision AESC; aims to produce inhouse solid-state batteries by 2025
EV--Electric vehicle. BEV--Battery electric vehicle. JV--Joint venture. Source: Company disclosures.

The firms' continued high sales of ICE cars and a slow rollout of EV models should help Toyota and Honda maintain EBITDA margins of over 10%. This should keep them in net cash position for the next two to three years. However, the expectedly fast electrification trend may threaten their competitiveness in key markets such as China, Europe and the U.S.

Like all booms, the transition to EVs will be disruptive. It is notable that the established ICE players, such as the Japanese carmakers, are generally having the more difficult shift to electrification. They have more invested in the old standards. In comparison, the firms that have launched in the past 10-20 years are freer to embrace EVs.

While the immediate focus is on rising leverage and squeezed margins, the opportunities for the region's miners, battery firms, and carmakers are large.

Writing: Jasper Moiseiwitsch

Digital design: Evy Cheung

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Claire Yuan, Hong Kong + 852 2533 3542;
JunHong Park, Hong Kong + 852 2533 3538;
Katsuyuki Nakai, Tokyo + 81 3 4550 8748;
Stephen Chan, Hong Kong + 852 2532 8088;
Jeremy Kim, Hong Kong +852 2532 8096;
Neel Gopalakrishnan, Singapore + 65-6239-6385;
Ker liang Chan, Singapore (65) 6216-1068;
Secondary Contacts:Hiroki Shibata, Tokyo + 81 3 4550 8437;
Danny Huang, Hong Kong + 852 2532 8078;
Minh Hoang, Singapore + 65 6216 1130;

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