Investment Advisors, JL Warren Capital

Junheng Li

Investment Advisors

JL Warren Capital

JL Warren Capital LLC is a leading independent equity research firm focused on Chinese companies and listed multinationals in China. We employ a bottom-up research approach that takes great care to avoid the acquisition of material non-public information. Through investigative due diligence including channel surveys and interviews, our research helps clients to pinpoint the dislocations in the market.

Equity Bottom-Up

In Q1, 12,747 <a href="https://www.smartkarma.com/entities/20279" target="_blank" data-smartkarma-citation="entities:20279:1">Tesla Motors (TSLA US)</a> cars were imported and 10,742 registered in China.  Average selling price for imported batched landed at the Customs in Q1 was $54,696 USD, down 39% year-over-year, reflecting the mix shift from S/X to Model 3 (Exhibit 1).   According to the insurance registration data, ~72% of total delivery were Model 3, representing 15% of M3 global delivery (Exhibit 2).

In Q1, 12,747 Tesla Motors (TSLA US) cars were imported and 10,742 registered in China.  Average selling price for imported batched landed at the Customs in Q1 was $54,696 USD, down 39% year-over-year, reflecting the mix shift from S/X to Model 3 (Exhibit 1).   According to the insurance registration data, ~72% of total delivery were Model 3, representing 15% of M3 global delivery (Exhibit 2).  

TSLA China Update: Q1 Import and Registration Data

Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

March 2019 had one less selling day than March 2018, and 5 more selling days than February 2019.  Hence, while auto unit sales fell by 5.1% YoY in March, in seasonally adjusted terms March SAAR hit 28.4m units (+30.5% MoM, -0.4% YoY), so from a SAAR perspective the YoY drop in March was not as bad as what media headlines have suggested (see <a href="https://www.nytimes.com/aponline/2019/04/12/world/asia/ap-as-china-auto-sales.html" target="_blank">https://www.nytimes.com/aponline/2019/04/12/world/asia/ap-as-china-auto-sales.html</a>, for instance).  According our observations March SAAR represented a significant move towards recovery to normal 1Q selling rate levels, but the SAAR weakness in January and February has led to 1Q19 average SAAR coming in at 25.0m units.  This 1Q run rate of 25.0m units, however, represents a 10.6% YoY demand contraction from 27.9m unit industry demand in 2018.1Q19 EV sales reached 191k units, double the 90k units achieved in 1Q18. However, the vast majority of China's EV sales are still in the A-C segments, with NIO's ES8 sales in the premium EV segments, for instance, amounting to just 3,989 units (just slightly above company guidance of 3.5-3.9k units).Overall retail inventory situation improved on a sequential basis, with CADA's Vehicle Inventory Alert Index falling to 55.3% in March from 63.6% in February, which was expected given the strong selling rate in March.  However, VIA Index readings above 50% still represents CADA's warning line on retail inventory.  While the government has talked about introducing policy measures to boost demand recently (see <a href="https://www.smartkarma.com/profiles/780" target="_blank" data-smartkarma-citation="accounts:780">Victoria Li</a> , <a href="https://www.smartkarma.com/insights/china-auto-new-incentives-bring-new-demand" target="_blank" data-smartkarma-citation="insights:29102">China Auto: New Incentives Bring New Demand</a> ), no concrete measures were introduced in March that could have positively affected demand.  At this point, however, given the magnitude of 1Q19's SAAR weakness we believe any stimulus introduced by the government will likely achieve something close to flat YoY demand growth at best in 2019. We believe that purely from a product exposure standpoint it is the compact mass segment EV OEMs that stand to benefit the most in the growth of China's EV market, but any equity valuation merits must stem from factors other than current operating fundamentals of EVs given their high costs.  As with Tesla, valuation merits of EV makers can only be argued from a capital raising/distant future profitability angle without regard for current company fundamentals, and for this the equity markets must see continued inflow in our view. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/048/original/Screen%20Shot%202019-04-15%20at%207.03.13%20PM.png?1555384986" class="editor-image img-responsive" data-smartkarma-image-id="85048"></figure><div class="content-caption">Source: CEIC, Author's Estimates using known seasonal factors</div>

March 2019 had one less selling day than March 2018, and 5 more selling days than February 2019.  Hence, while auto unit sales fell by 5.1% YoY in March, in seasonally adjusted terms March SAAR hit 28.4m units (+30.5% MoM, -0.4% YoY), so from a SAAR perspective the YoY drop in March was not as bad as what media headlines have suggested (see https://www.nytimes.com/aponline/2019/04/12/world/asia/ap-as-china-auto-sales.html, for instance).  According our observations March SAAR represented a significant move towards recovery to normal 1Q selling rate levels, but the SAAR weakness in January and February has led to 1Q19 average SAAR coming in at 25.0m units.  This 1Q run rate of 25.0m units, however, represents a 10.6% YoY demand contraction from 27.9m unit industry demand in 2018.1Q19 EV sales reached 191k units, double the 90k units achieved in 1Q18. However, the vast majority of China's EV sales are still in the A-C segments, with NIO's ES8 sales in the premium EV segments, for instance, amounting to just 3,989 units (just slightly above company guidance of 3.5-3.9k units).Overall retail inventory situation improved on a sequential basis, with CADA's Vehicle Inventory Alert Index falling to 55.3% in March from 63.6% in February, which was expected given the strong selling rate in March.  However, VIA Index readings above 50% still represents CADA's warning line on retail inventory.  While the government has talked about introducing policy measures to boost demand recently (see Victoria Li , China Auto: New Incentives Bring New Demand ), no concrete measures were introduced in March that could have positively affected demand.  At this point, however, given the magnitude of 1Q19's SAAR weakness we believe any stimulus introduced by the government will likely achieve something close to flat YoY demand growth at best in 2019. We believe that purely from a product exposure standpoint it is the compact mass segment EV OEMs that stand to benefit the most in the growth of China's EV market, but any equity valuation merits must stem from factors other than current operating fundamentals of EVs given their high costs.  As with Tesla, valuation merits of EV makers can only be argued from a capital raising/distant future profitability angle without regard for current company fundamentals, and for this the equity markets must see continued inflow in our view. Source: CEIC, Author's Estimates using known seasonal factors

A Few Thoughts on China's March Auto Demand: SAAR Was Not as Bad as What News Headlines Suggested

Materials Analyst/Strategist, Janus Analysis

Gaius King

Materials Analyst/Strategist

Accelerating Tomorrow’s Independent Research

Boost Research

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<ul>
<li>Transportation industries Kodak Moment embracing Hybrids, modest near-term EV growth</li>
<li>Widespread adoption of Hydrogen considered unlikely</li>
<li>41% of Platinum &amp; 84% of Palladium reliant on autocatalyst demand</li>
<li>Hybrids in Europe up 107% in three years at 1:7 to diesel counterparts, without subsidies</li>
<li>Hybrid premium ~ 8% like-for-like over a combustion vehicle </li>
<li>Carpooling/ride-share platforms have hallmarks of being a macro-trend</li>
<li>W. Asian carpool CAGR of 77.6% over past 11 years</li>
<li>Est. by close 2019 &gt;62m people globally will utilise trans. platforms, forgoing car ownership
</li>
<li>Adverse impact on vehicle growth, models, drive-trains, R&amp;D, insurance &amp; finance </li>
<li>Logistics industry diesel transitioning will affect LT PGM demand, in particular platinum</li>
<li>Primary platinum-surplus to grow in time, downward pressure on price</li>
</ul>
Auto-catalysts make up the majority of platinums (41%) and in particular, palladium (84%) end use demand.  To determine the future demand profile for PGMs, therefore, we examined the types and likelihood of future drivetrains, as well as technologies affecting unit demand.
Hydrogen's key attraction is its potential green credentials, and if it was to ever became a reality, resultant PGM catalyst demand would outstrip all existing suppliers.  To achieve that noble aim, however, gargantuan energy resources would be needed to conduct electrolysis of water, thermodynamically, a very energy intensive process.  Our analysis concludes that hydrogen will remain a boutique industry, confined to economies with abundant hydrocarbon production, with conversion relying on steam reformation.  Overall impact of hydrogen on PGM demand, will be marginal at best.
Presently, EVs have substantial range and recharge hurdles to overcome before they could ever be a primary mode of transport for many; with global demand primarily driven by Chinese directives, not by the Western consumer.  In the short to medium-term, we do not expect EVs to impact PGM demand significantly.  However, we preface that statement by our belief that in the longer-term, the largest adopter of EVs will be within the commercial logistics sector, currently dominated by diesel power plants, which rely on a substantial amount of platinum within its auto-catalysts.  Widespread adoption of EVs and robotic drones and the replacement of traditional diesel drivetrains will only exacerbate current over-supply in platinum, in time, we forecast its price to fall substantially.
Hybrid sales are up 107% in Europe over the past three years without any state subsidies.  It is reasonable to assume that potential demand of PGMs have, and will continue to be, stymied by hybrid advances.  But we expect overall (even modest) growth in car volume sales should maintain current market dynamics, in the short to medium term.
Carpooling and a host of other transactional transport options are now a realistic, flexible and affordable life-style choice, that contradict the necessity of car ownership.  Especially among the inner-city urbanites, with Asia averaging a CAGR of 77.6% over the past decade.  Car manufacturers are already experiencing significant sales headwinds.  On average it has been found that members/fleet ratio (i.e. No. of cars divided by No. of members) range between 61 – 76, a fraction of unit demand when compared with an average Western family of three or four members, often owning two vehicles.  Using decade average regional CAGRs, projecting three years in advance, the potential number of decreased car sales globally could reach 62m by the close of 2019.  To put that into context, Volkswagen and Toyota produce between 10 to 11m  units each pa.  This raises the question of whether recent sluggish global car sales is somehow related to the almost exponential growth in carpooling/ride-share platforms?


Transportation industries Kodak Moment embracing Hybrids, modest near-term EV growth
Widespread adoption of Hydrogen considered unlikely
41% of Platinum &amp; 84% of Palladium reliant on autocatalyst demand
Hybrids in Europe up 107% in three years at 1:7 to diesel counterparts, without subsidies
Hybrid premium ~ 8% like-for-like over a combustion vehicle 
Carpooling/ride-share platforms have hallmarks of being a macro-trend
W. Asian carpool CAGR of 77.6% over past 11 years
Est. by close 2019 &gt;62m people globally will utilise trans. platforms, forgoing car ownership

Adverse impact on vehicle growth, models, drive-trains, R&amp;D, insurance &amp; finance 
Logistics industry diesel transitioning will affect LT PGM demand, in particular platinum
Primary platinum-surplus to grow in time, downward pressure on price

Auto-catalysts make up the majority of platinums (41%) and in particular, palladium (84%) end use demand.  To determine the future demand profile for PGMs, therefore, we examined the types and likelihood of future drivetrains, as well as technologies affecting unit demand.
Hydrogen's key attraction is its potential green credentials, and if it was to ever became a reality, resultant PGM catalyst demand would outstrip all existing suppliers.  To achieve that noble aim, however, gargantuan energy resources would be needed to conduct electrolysis of water, thermodynamically, a very energy intensive process.  Our analysis concludes that hydrogen will remain a boutique industry, confined to economies with abundant hydrocarbon production, with conversion relying on steam reformation.  Overall impact of hydrogen on PGM demand, will be marginal at best.
Presently, EVs have substantial range and recharge hurdles to overcome before they could ever be a primary mode of transport for many; with global demand primarily driven by Chinese directives, not by the Western consumer.  In the short to medium-term, we do not expect EVs to impact PGM demand significantly.  However, we preface that statement by our belief that in the longer-term, the largest adopter of EVs will be within the commercial logistics sector, currently dominated by diesel power plants, which rely on a substantial amount of platinum within its auto-catalysts.  Widespread adoption of EVs and robotic drones and the replacement of traditional diesel drivetrains will only exacerbate current over-supply in platinum, in time, we forecast its price to fall substantially.
Hybrid sales are up 107% in Europe over the past three years without any state subsidies.  It is reasonable to assume that potential demand of PGMs have, and will continue to be, stymied by hybrid advances.  But we expect overall (even modest) growth in car volume sales should maintain current market dynamics, in the short to medium term.
Carpooling and a host of other transactional transport options are now a realistic, flexible and affordable life-style choice, that contradict the necessity of car ownership.  Especially among the inner-city urbanites, with Asia averaging a CAGR of 77.6% over the past decade.  Car manufacturers are already experiencing significant sales headwinds.  On average it has been found that members/fleet ratio (i.e. No. of cars divided by No. of members) range between 61 – 76, a fraction of unit demand when compared with an average Western family of three or four members, often owning two vehicles.  Using decade average regional CAGRs, projecting three years in advance, the potential number of decreased car sales globally could reach 62m by the close of 2019.  To put that into context, Volkswagen and Toyota produce between 10 to 11m  units each pa.  This raises the question of whether recent sluggish global car sales is somehow related to the almost exponential growth in carpooling/ride-share platforms?

PGMs: Facing Technological Obsolescence? (P. 2)

<a href="https://www.smartkarma.com/entities/20279" target="_blank" data-smartkarma-citation="entities:20279:1">Tesla Motors (TSLA US)</a> Model 3s to buyer’s homes (3 am delivery was observed), and shortening tutorial from typically 1 hour to ~15 mins (per videos posted on social media).  This weekend we closely monitored delivery activities at all 7 of Tesla’s China delivery centers in China (Beijing, Shanghai, Shenzhen, Guangzhou, Hangzhou, Chengdu, Nanjing).  (Note Tesla only has 7 delivery centers in China).  The first batch of M3s arriving in China were released by the Customs on approximately March 14, and as such the first volume deliveries of the month of M3s took place the week of March 18th.

Tesla Motors (TSLA US) Model 3s to buyer’s homes (3 am delivery was observed), and shortening tutorial from typically 1 hour to ~15 mins (per videos posted on social media).  This weekend we closely monitored delivery activities at all 7 of Tesla’s China delivery centers in China (Beijing, Shanghai, Shenzhen, Guangzhou, Hangzhou, Chengdu, Nanjing).  (Note Tesla only has 7 delivery centers in China).  The first batch of M3s arriving in China were released by the Customs on approximately March 14, and as such the first volume deliveries of the month of M3s took place the week of March 18th.

China Specialist, Auto and Industrial Specialist

Victoria Li

2019 NEV subsidy policy announced on March 26th, which cut subsidies deeper than expected. However, as the new policy will take effect only on June 25th, its negative impact on OEM's FY2019 earnings would be less than our estimates. Amongst the start-ups, we estimate Yudo would be hurt the most, as its lower ASP makes its sales more sensitive to the subsidy reduction.Among traditional OEMs, BYD would be hurt the most by having its FY2019 net profit drop by nearly 14% yoy based on our estimates. BYD Yuan would be the biggest loser among BYD's existing NEV models.

2019 NEV subsidy policy announced on March 26th, which cut subsidies deeper than expected. However, as the new policy will take effect only on June 25th, its negative impact on OEM's FY2019 earnings would be less than our estimates. Amongst the start-ups, we estimate Yudo would be hurt the most, as its lower ASP makes its sales more sensitive to the subsidy reduction.Among traditional OEMs, BYD would be hurt the most by having its FY2019 net profit drop by nearly 14% yoy based on our estimates. BYD Yuan would be the biggest loser among BYD's existing NEV models.

China NEV: Subsidy Cut Deeper than Expected, Avoid BYD

China

NIO Inc. manufactures and sells automobiles. The Company offers electric vehicles and parts, as well as provides battery charging services. NIO serves customers worldwide.

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NIO (NIO US)

TSLA China Update: Q1 Import and Registration Data

In Q1, 12,747 Tesla Motors (TSLA US) cars were imported and 10,742 registered in China. Average selling price for imported batched landed at the...

JL Warren Capital

A Few Thoughts on China's March Auto Demand: SAAR Was Not as Bad as What News Headlines Suggested

March 2019 had one less selling day than March 2018, and 5 more selling days than February 2019. Hence, while auto unit sales fell by 5.1% YoY in...

Henry Kwon

PGMs: Facing Technological Obsolescence? (P. 2)

Transportation industries Kodak Moment embracing Hybrids, modest near-term EV growth Widespread adoption of Hydrogen considered unlikely 41% of...

Boost Research

Tesla China Q1 Delivery Revision

Tesla Motors (TSLA US) Model 3s to buyer’s homes (3 am delivery was observed), and shortening tutorial from typically 1 hour to ~15 mins (per...

JL Warren Capital

China NEV: Subsidy Cut Deeper than Expected, Avoid BYD

2019 NEV subsidy policy announced on March 26th, which cut subsidies deeper than expected. However, as the new policy will take effect only on June...

Victoria Li

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