U.S. President Joe Biden announced a nonbinding executive order on August 5 that said that up to half (between 40-50%) of all new car and truck sales in the U.S. should come from electric vehicles by 2030.
Morningstar analysts forecast that electric vehicles and hybrids will make up two of every three autos sold globally by 2030, with 30% coming from EVs. By 2025, EVs are expected to become cheaper for entry-level cars and reach performance parity with internal combustion engines, or ICEs.
In the world of EVs, the process of assembling a battery-driven car is similar to making one with an internal combustion engine, though EV makers source different raw materials and specialty chemicals. Cobalt, lithium, and nickel are some of the raw materials that are needed for EV batteries.
Battery chemistry is one of the opportunities that could be derived from the evolving auto supply and demand chain. We asked Kazunori Ito and Phelix Lee from Morningstar equity research in Asia to handpick four principal beneficiaries under Biden’s order in our stock coverage. They selected companies based on their existing business segments and projected growth rate in the EV industry. “We look for companies with visible participation in the EV value chain, specifically connecting to the U.S. market. Then we infer a growth outlook for the next three to four years,” they said. Here are the stocks they highlighted:
- lens supplier Sunny Optical (02382)
- propulsion component supplier Delta Electronics (2308)
- battery supplier Samsung SDI and
- multilayer ceramic capacitor, or MLCC, supplier Yageo (2327).
Sunny Optical (02382)
Morningstar rating: 2
Economic Moat (Moat Trend): Narrow (Stable)
Starting as a handset camera module provider, Sunny Optical is becoming one of the most attractive EV play for two reasons.
First, Sunny Optical has a market-leading position in the automotive camera module market with a 32% market share globally. Second, its product quality, scale and are reliability at the core of its strength, which will determine future growth and its ability to stay ahead of local competitors.
Producing modules with better quality is Sunny Optical’s growth strategy. “Increasing pixels, better optical performance, and product mix shift to more safety-critical applications will be the catalysts that foster Sunny’s business for years to come,” adds Lee.
The company’s partnership with Chinese EV players will also unlock some of the growth, which will allow it to outpace peers like Japan’s Nidec Sankyo and Tamron. Lee says: “New generations appear more often than before as Chinese EV players are more adventurous in trying out new specifications through annual refreshes, compared to the three- to five-year cycles of international brands.”
Delta Electronics (2308)
Morningstar rating: 2
Economic Moat (Moat Trend): Narrow (Stable)
Motor controllers, propulsion components and charging stations are in demand to make a battery-propelled car. Taiwan’s Delta Electronics will play a major role in fulfilling global demand. Currently, automakers worldwide, such as PSA Group, Ford (F) and Stellantis (STLA) source propulsion components from Delta. Its charging systems are sold to a wide range of customers including governments and private charging facility providers.
Morningstar projects Delta’s EV-related revenue to exceed 5% in 2021 and 10% by 2025, with a segment CAGR of over 30%. Lee notes that the current stock price level for Delta may reflect an expectation of over 30% revenue CAGR through 2030 from the market. Thus, investors will have to keep their optimism in check when they decide to trade Delta at the current valuation multiples.
Samsung SDI under Samsung Electronics (005930)
Morningstar rating: 3
Economic Moat (Moat Trend): Narrow (Stable)
According to SNE research, in 2020, there were six battery suppliers with more than 5% market share, and five were either Korean or Chinese companies. While all major EV battery suppliers come from Asia, our analysts trust that Samsung SDI (006400) will be better off.
The company is a unit under the empire of Samsung Electronics (005930). The South Korean background would make it easier to further expand in the U.S., where companies look to reduce dependence on Chinese suppliers. The U.S. market appears to be a sweet spot for Samsung SDI to explore an ambitious expansion.
Growth avenues for Samsung SDI can be widened in two ways – entering partnership with automakers (like what other Korean battery makers are doing) and expanding capacity. Our analysts anticipate that Samsung SDI will build new plants that will start operation within the next few years. If the construction of plants materializes in the end, this will be an upward catalyst for the shares.
Yageo (2327)
Morningstar rating: 4
Economic Moat (Moat Trend): None (Stable)
Multilayer ceramic capacitors (MLCC), used to regulate the current's flow in a battery cell circuit, are used in all kinds of electronic devices. Safety regulations have prompted automakers to use more MLCCs per car over the past decade.
In fact, conventional vehicles incorporate MLCCs but the amount is only one-third that of the EVs. Due to more advanced and complex systems that assist driver in piloting, in each high-end EV, as many as 10,000 MLCCs are used. Based on our view that the EV adoption rate will reach 30% by 2030, over the next decade we forecast an annual percentage unit growth rate in the high teens.
Yageo is the top pick in this field because of its ability to improve the product mix by increasing sales to the auto industry, according to Lee. Currently, one-fifth of Yageo’s sales came from the auto industry, up from 6% five years ago. Moreover, Yageo underwent a merger last year that could help it establish the business with U.S. automakers, which is another reason to believe Yageo will be a beneficiary of the executive order.
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