Brief Hong Kong: Battery Technology- The Key To An Electric Vehicle Future and more

In this briefing:

1. Battery Technology- The Key To An Electric Vehicle Future
2. Guangzhou Rural: All the Shakespearoes?
3. Singapore REIT – The Draft Master Plan 2019 Boost and Q1 Scorecard
4. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
5. Hong Kong FX

1. Battery Technology- The Key To An Electric Vehicle Future

The Insight is structured as follows:

• A. Key  Conclusions
• B. Report Highlights
• C.History of Electric Vehicles
• E. History of Rechargeable Battery Technologies And An In-Depth Analysis on Li-ion Batteries
• F. Batteries Beyond Li-ion
• G. Supply Constraints for Key Raw Materials
• H. The Competitive Landscape

A. Key  Conclusions

Global sales of EV’s reached 2m units in 2018. As a base case scenario, we expect a combination of improving EV battery cost-effectiveness, increasingly challenging emissions standards and ongoing incentives by various governments to propel unit sales to 8m units annually by 2025. Against this, we consider battery material price increases, a reduction of EV incentives in the US and China and political and environmental risks from the mining of metals used in batteries as downside risks which could delay the growth of the EV market.

Surprisingly, the EV battery technology that will drive us towards that 8m unit goal is still very much a work in progress. While Lithium Ion is the by far the dominant technology, there are striking differences between variants of the technology, battery pack design, battery management systems and manufacturing scale between the leading contenders. Furthermore, while there’s nothing on the horizon to completely displace Lithium Ion within the next decade, it remains unclear whether the technology will be the one to achieve the $100/kWh price target that would make the EV cost-neutral compared to its internal combustion predecessors. 

Quite apart from the technology,  the EV battery segment faces other significant challenges including increasing costs for core materials such as Cobalt, increasing safety concerns as the mix of that very same cobalt is reduced in the cathode, the growing risk of litigation amidst a fiercely competitive environment and last but not least, the appetite of various governments to maintain a favourable subsidy framework. 

2. Guangzhou Rural: All the Shakespearoes?

I am partial to a bit of Confucius. Or to such thinking. Now and again. The chairman of Guangzhou Rural Commercial Bank (1551 HK) has a Confucian message (scholars will no doubt berate me) at the beginning of the report and accounts: “A single spark can start a prairie fire while a crack can lead to ice breaking”. From what I can glean, the chairman is alluding to the forty year process of China’s emergence. No satanic conflagration intended or any portends of global warming. For some reason, a tune by the 1970s new-wave group, The Stranglers, passed through my mind: “He got an ice pick that made his ears burn” and “They watched their Rome burn”. Cultural differences perhaps.

Guangzhou Rural Commercial Bank (1551 HK) shares many of the issues that affect Chinese lenders today.  (The “Big four” are much less susceptible to deep stresses in this environment). Unsurprisingly, Asset Quality issues weigh on these results and earnings quality is subpar with trading gains and other assorted non-operating or “other items” playing a big part in the composition of Pre-Tax Profit. The latter flatters the “improving” headline Cost-Income ratio which is not really an indicator of greater efficiency here. In fact underlying “jaws” are highly negative. It is thus surprising that the wage bill should shoot up 30% YoY in such austere times. Given the aforementioned Asset Quality issues, such as booming substandard loans, ballooning credit costs, and high charge-offs, the “improving” NPL ratio is flattered by an exuberant denominator. Asset Quality does look volatile. The Liquidity Coverage Ratio and LDR duly eroded.

Where the bank does better, in contrast to many other Chinese lenders, is on Net Interest Income.  Guangzhou seems to have reduced its funding costs markedly. The bank managed to lower its corporate time deposit rates especially. The result is that Interest Expenses on Deposits rose by just 6.4% YoY. Liability management seems to be behind a reduction in Debt/Equity from 2.79x to 1.62x, thus decreasing Debt funding costs by 24% YoY. Spurred by corporate credit growth of 38% YoY, Interest Income on Loans climbed by 31% YoY. However, the bank does share an issue with some other lenders – a collapse in Interest Income on non-credit earning assets. This is, in part, due to a shrinkage of its FI holdings by some CN89.5bn. This means that despite the credit spurt, Interest Income in its totality edged up by barely 1% YoY. A disappointing performance on fee income (custody, wealth management, advisory) reduced Total underlying Income growth to 6% YoY. That 6% is all about rampant corporate credit supply and lower corporate deposit and debt interest costs.

Trends are thus decidedly mixed given the underlying picture behind the positive headline fundamental change in Efficiency, Asset Quality and ROAA. Liquidity deteriorated. It must be said that Provisioning was enhanced, Capitalisation moved in the right direction, while NIM and Interest Spread both improved.

3. Singapore REIT – The Draft Master Plan 2019 Boost and Q1 Scorecard

Singapore REITs (S-REITs) are up about 13% year-to-date in 2019 on a total returns basis against the Straits Times Index’s (STI) 8.3%. S-REITs is expected to continue its outperformance on the back of a pause in the US interest rate hike cycle, falling Singapore government bond yields, and improving demand and supply dynamics in the underlying sub-markets. Valuations of many S-REITs, however, may be appearing stretched as S-REITs’ yields have compressed significantly in the last six months, leaving the yield spread over the 10-year Singapore government bond yield at about 350 basis points, which is lower than the historical average spread of about 370 basis points.

Contrary to the popular belief that retail malls are no longer relevant, we view the outlook of the retail space market as positive due to the limited new supply from 2020 and new trend towards omnichannel retailing.  Our preference remains on selected retail REITs with exposure to suburban malls such as Frasers Centrepoint Trust (FCT SP) .

Office REITs are given more legs to run with the new CBD incentive scheme in the URA Draft Master Plan 2019. The sustained office upcycle may also spill over to the business parks and hi-specs industrial space, benefiting some of the business parks/industrial REITs.

We prefer selected industrial REITs with a diversified geographical exposure such as Mapletree Logistics Trust (MLT SP) and those with greater exposure to business parks and high-specs industrial space.

Referring to our earlier report Singapore REIT – Preferred Picks 2019 , two of our preferred picks, Mapletree Logistics Trust and Mapletree Greater China Commercial Trust (MAGIC SP) (now known as Mapletree North Asia Commercial Trust), were among the top five S-REITs performers year-to-date, having achieved the same total return of 17.6%. Manulife Us Reit (MUST SP) and Frasers Centrepoint Trust (FCT SP), also did well, beating the STI with total returns of 10.4% and 9.5%, respectively.

4. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG

The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.

Both Tellurian Inc (TELL US) and NextDecade Corp (NEXT US) signed high-profile deals, respectively with Total Sa (FP FP) and Royal Dutch Shell (RDSA LN), that could significantly de-risk their proposed LNG projects and increase the probability to reach FID in 2019. In Russia, LNG newcomer Novatek PJSC (NVTK LI) agreed two long-term offtake deals with Repsol SA (REP SM) and Vitol thereby moving a step closer to FID its Arctic LNG 2 project.

5. Hong Kong FX

We will be the first to admit some of our best ideas for reports come from subscribers. That is the story of today’s report on Hong Kong FX. Regular readers know we write extensively on China FX, but rarely touch on Hong Kong. To that end we got a request to look into FX currency and to a less extent rates in Hong Kong. At this point in history, while the HKD is tied directly to the USD, it more accurately reflects the CNY leaving the whole thing in a bit of a bind.