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How to get in on electric vehicle action

Glenn Freeman  |  13 Jul 2017Text size  Decrease  Increase  |  

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With the first Tesla Model 3 rolling off production lines earlier this week, here's how investors can find exposure to the anticipated boom in electric vehicles.

 

Tesla's first mass-market all-electric vehicle--with a base price of US$35,000--is due to arrive in Australia in 2018, though the Model S and Model X have been available locally since 2014 and 2016, respectively.

While the company fronted by Elon Musk grabs most of the headlines around electric and "new energy" vehicles, there are several other major players in the space, including Chinese manufacturer BYD. Around 350,000 electric vehicles were sold in China last year, out of an estimated 1.5 million global sales.

Large traditional auto manufacturers BMW and General Motors are also making inroads within the electric vehicle (EV) and plug-in hybrid electric vehicle (PHEV) categories. The former sold 23,600 electrified powertrain vehicles in the first half of 2016.

The Chevrolet Volt is General Motors' flagship within the PHEV category, a model it is also planning to roll out in China through a joint venture. GM's fully electric model, the Chevrolet Bolt, launched in the US earlier this year--though there are no plans to bring this to Australia.

Driven by lithium

Morningstar takes a particularly bullish view on electric vehicle adoption, anticipating global demand for lithium--a central component in the batteries that power EVs--to increase by 16 per cent annually.

It expects global lithium demand of around 775,000 tonnes by 2025, up from 175,000 tonnes in 2015.

 

We expect EV sales to increase 42% annually over the next decade
Global EV sales (million units)


chart

Source: International Energy Agency, Morningstar

 

"We expect EV penetration to surge from less than 1 per cent of global auto sales in 2015 to 10 per cent in 2025, well ahead of the market view for only 4 per cent to 6 per cent penetration by 2025," says Seth Goldstein, a US-based Morningstar equity analyst.

He believes EV-driven lithium demand will account for just under half of this (355,000 tonnes) by 2025, followed by PHEVs (135,000 tonnes)--up from 2015 demand levels of 9,000 tonnes and 5,000 tonnes, respectively.

"Our top picks to play higher EV adoption are Albemarle, BMW, BorgWarner, and General Motors. Tesla and SQM also have high exposure to EV adoption, but we view these as riskier ideas," Goldstein says.

Of these, Morningstar regards narrow-moat Albemarle, the world's largest lithium producer, as the most attractive investment opportunity. It is trading at a significant discount to fair value, 11 per cent below Morningstar's US$130 fair value estimate as of 13 July 2017.

While these are listed on the New York Securities Exchange, with the exception of Germany's BMW, there are others listed in Australia--the largest global producer of lithium. More than 40 per cent of the world's lithium is produced here, followed by Chile (35 per cent) and Argentina (11 per cent), according to 2016 figures from Australia's Department of Industry, Innovation, and Science.

 

Higher EV and hybrid adoption drive 16% annual lithium demand growth
Lithium carbonate equivalent demand by end market (thousand tonnes LCE)


chart

Source: Albemarle, Orocobre, Morningstar

 

Galaxy Resources (ASX: GXY), with a market cap of $810 million, is Australia's largest lithium producer, with fully-owned facilities in Australia, Argentina, and Canada.

Orocobre (ASX: ORE), a $770-million business with lithium carbonate production facilities in Argentina, is the second-largest locally-listed lithium producer. Its company headquarters are in Queensland.

"We have a bullish view on lithium ... we think that the market underestimates the growth potential for electric vehicle adoption," former Morningstar equity analyst David Wang told Morningstar.com.au in April.

"With lithium the primary beneficiary of the higher adoption rate, we think that higher-cost sources of lithium will need to come online in order to balance the market longer term and this should drive pricing upwards."

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Glenn Freeman is a Morningstar senior editor.

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