Brief China: Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance and more

In this briefing:

1. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance
2. Dali Foods (3799:HK): Short on Expected Cost Increases (Summary Note)

1. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance

CATL (A) (300750 CH) announced on Monday that it has signed a deal with Honda Motor (7267 JP) for jointly developing Li-ion batteries. This news comes to us as no surprise, given CATL’s effort in expanding market share globally by tying with leading automakers such as Nissan Motor (7201 JP), Daimler AG (DAI GR), and Bayerische Motoren Werke Ag (BMW GR). It seems that the Chinese battery leader is now targeting leading Japanese automakers alongside their focus on luxury automakers in Europe ( BMW to Invest in CATL: Chinese Battery Maker to Gain Exposure in Europe?).  Following Panasonic Corp (6752 JP)’s news about forming a Joint Venture with Toyota, we were under the impression that Panasonic would hit a deal with Honda as well. However, it seems that CATL has emerged as a first mover and secured a steady business by partnering with Honda, one of the leading automakers in Japan. Although Panasonic and Honda joined hands for developing a swappable battery system in Indonesia, the team hasn’t really gone ahead in developing Li-ion batteries. Honda’s battery sales are now for CATL, while Panasonic has lost a steady business deal unless the latter makes plans with Honda to develop new battery technologies such as solid-state batteries. In our opinion, Honda and CATL, being leaders in their respective industries, when joined together via this agreement should capture a strong position in the auto sector which is striding towards electrification. The effect of this news on CATL share price cannot be really seen as the markets are closed for ongoing holidays in China. Panasonic, however, opened -5.1% low on February 5th, mainly due to its disappointing 3QFY03/19 earnings and could be partly due to this news.

2. Dali Foods (3799:HK): Short on Expected Cost Increases (Summary Note)

Chinese snack food and non-alcoholic beverage maker Dali Foods Group (3799 HK) is well-loved by sell-side analysts. Fully 18 of twenty analysts (including all four of the ‘bulge bracket’ investment banks who cover it) rate the stock ‘Buy’ or ‘Overweight’, and only one analyst gives the shares an ‘Underweight’ rating.

The ‘bull’ case for Dali Foods includes continued strong revenue growth and further margin expansion over the next few years. In contrast, we believe revenue growth is already moderating and that core margins will soon come under pressure due to rising raw materials costs. As a result, our forward earnings estimates are substantially below consensus expectations.

Based on 13.5 times our 2019 EPS estimate, our target price for Dali Foods is HK$4.18, about 23% below its HK$5.41 closing price on February 1st. We suggest investors Short Dali Foods; current holders should consider exiting their positions, in our view.

A longer note that includes company and industry background, plus financial statements and forecasts for Dali Foods, can be found elsewhere here on Smartkarma using the company’s ticker.