Research Publication: China set to metamorphosize with the transition toward electric vehicles


13 May 2020

    HONG KONG, 13 May 2020. Pengyuan International has today published an automobile sector research report, in which we highlight a key message that with a relatively strong manufacturing base in battery and battery component – the core parts used for electric vehicles (EV), China is capable of winning the global competition towards electrification that will reshape the future of the global automobile manufacturing industry.

    In our view, having built solid accumulation of technology related to producing core components used for EV, such as battery and battery components, China has evolved to be sufficiently competitive in the global battery manufacturing battleground against Korea and Japan. Noticeably, Contemporary Amperex Technology Co. Limited (CATL) - the No.1 motive-battery manufacturer in China - has also topped the global ranking of battery suppliers for three straight years since 2017, followed by Panasonic and LG Chem. The company has extended its well-known footprint in the local market to overseas as it has become one of the key battery suppliers to BMW and Volkswagen, as well as other automakers around the world.

    We believe developing EV sector is strategically vital for China as it helps the country reverse the currently lagging position in the global automobile industry. Traditional fuel-engine cars are endangered by the substitution from EV in the future: many countries around the world have devised a timetable for eventually prohibiting ICE cars and unveiled several incentives for encouraging more EV production. Moreover, electrification will lead to a radical change in the cost structure for conventional vehicles. Batteries – a less important component in ICE vehicle – will become one of the most crucial components in EV, making up about 43% of total manufacturing cost for EV. With such a profound change, together with Tesla’s rising level of domestically souring their components used for the made-in-China Model 3, China can further leverage its accumulated knowledge in manufacturing battery and battery components to compete against Korea and Japan for a leading role in the global battery manufacturing sector, and hence redefine its role in the global automobile manufacturing industry.

    We believe the investment in electrification will in the short run negatively weigh on the credit profile of companies, no matter whether in traditional auto-parts or battery and battery components manufacturing sectors, but will pay off in the long term. Conclusively, companies from global and Chinese auto-parts manufacturing industries, as well as Chinese battery and battery component manufacturing industries will, in our opinion, further escalate their debt level to finance the development of electrification amidst global low interest rates; Corporate profitability in the Chinese auto-parts manufacturing, and battery and battery component manufacturing industries will face a high pressure in near terms thanks to rising competition within the industry. In the longer term, we expect companies in Chinese battery and battery components manufacturing industries will stand out with a higher ROIC as they are more valued-added in the EV supply chain. Given the fact that some of the Chinese large-scale battery manufacturers have accelerated their global expansion, taping the cheaper money via debt creation from offshore market, in our view, could be a feasible way for them to acquire funding for this move.  


    ANALYST CONTACTS

    Primary Analyst

    Danny Chen

    +852 3615 8346

    danny.chen@pyrating.com

    Secondary Analyst

    Tony Tang

    +852 3615 8278

    tony.tang@pyrating.com

    Committee Chair

    Tony Tang

    +852 3615 8278

    tony.tang@pyrating.com

    MEDIA ENQUIRIES 

    Charley Lui 

    +852 3615 8296

    charley.lui@pyrating.com

    RATING SERVICES ENQUIRIES

    Gloria Song

    +852 3615 8324

    gloria.song@pyrating.com


    DISCLAIMER

    Pengyuan Credit Rating (Hong Kong) Company Ltd (“Pengyuan International”, “Pengyuan”, “the Company”) prepares various credit research and related commentary (collectively “research”) in compliance with the established internal process. The Company reserves the right to amend, change, remove, publish any information on its website without prior notice and at its sole discretion.

    The research is subject to disclaimers and limitations. RESEARCH AND CREDIT RATINGS ARE NOT FINANCIAL OR INVESTMENT ADVICE AND MUST NOT BE CONSIDERED AS A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITIES AND DO NOT ADDRESS/REFLECT MARKET VALUE OF ANY SECURITIES. USERS OF RESEARCH AND CREDIT RATINGS ARE EXPECTED TO BE TRAINED FOR INDEPENDENT ASSESSMENT OF INVESTMENT AND BUSINESS DECISIONS.

    This research is based solely on the public data and information available to the authors at the time of publication of this research. For the purpose of this research, the Company obtains sufficient quality factual information from public sources believed by the Company to be reliable and accurate. The Company does not perform an audit and undertakes no duty of due diligence or third-party verification of any information it uses in the research. The Company is not responsible for any omissions, errors or inconsistencies of the public information used in the research.

    NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF ANY INFORMATION GIVEN OR MADE BY THE COMPANY IN ANY FORM OR MANNER. In no event shall the Company, its directors, shareholders, employees, representatives be liable to any party for any damages, expenses, fees, or losses in connection with any use of the information published by the Company.

    This research focuses on observing trends from the credit markets. This research has not been made available to any issuer prior its distribution to the public. The Company does not receive compensation for its research.

    The Company reserves the right to disseminate its research through its website, the Company’s social media pages and authorised third parties. No content published by the Company may be modified, reproduced, transferred, distributed or reverse engineered in any form by any means without the prior written consent of the Company.

    The Company’s research is not indented for distribution to, or use by, any person in a jurisdiction where such usage would infringe the law. If in doubt, please consult the relevant regulatory body or professional advisor and ensure compliance with applicable laws and regulations.

    In the event of any dispute arising out of or in relation to our research, the Company shall have absolute discretion in all matters relating to resolving the dispute, including but not limited to the interpretation of disclaimers and policies.

    Copyright © 2020 by Pengyuan Credit Rating (Hong Kong) Company Ltd. All rights reserved.