Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Our positive outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains intact and we believe a “buy the dip” strategy is warranted. We recommend taking advantage of recent weakness -- where applicable -- by adding exposure to cyclical Sectors. Today’s recommendations focus on autos, auto parts, and machinery which span the Consumer Discretionary and Manufacturing Sectors.

Our positive outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains intact and we believe a “buy the dip” strategy is warranted. We recommend taking advantage of recent weakness -- where applicable -- by adding exposure to cyclical Sectors. Today’s recommendations focus on autos, auto parts, and machinery which span the Consumer Discretionary and Manufacturing Sectors. 

Global Equity Strategy: Overweight Cyclicals

Materials Analyst/Strategist, Janus Analysis

Gaius King

Materials Analyst/Strategist

Accelerating Tomorrow’s Independent Research

Boost Research

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Thematic (Sector/Industry)

<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)

Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Event-Driven

Contemporary Amperex Technology (CATL) / Event-Driven

<a href="https://www.smartkarma.com/entities/24404" target="_blank" data-smartkarma-citation="entities:24404:1">CATL (A) (300750 CH)</a> announced on Monday that it has signed a deal with <a href="https://www.smartkarma.com/entities/154" target="_blank" data-smartkarma-citation="entities:154:1">Honda Motor (7267 JP)</a> 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 <a href="https://www.smartkarma.com/entities/72" target="_blank" data-smartkarma-citation="entities:72:1">Nissan Motor (7201 JP)</a>, <a href="https://www.smartkarma.com/entities/21602" target="_blank" data-smartkarma-citation="entities:21602:1">Daimler AG (DAI GR)</a>, and <a href="https://www.smartkarma.com/entities/21591" target="_blank" data-smartkarma-citation="entities:21591:1">Bayerische Motoren Werke Ag (BMW GR)</a>. It seems that the Chinese battery leader is now targeting leading Japanese automakers alongside their focus on luxury automakers in Europe ( <a href="https://www.smartkarma.com/insights/bmw-to-invest-in-catl-chinese-battery-maker-to-gain-exposure-in-europe" target="_blank" data-smartkarma-citation="insights:22389">BMW to Invest in CATL: Chinese Battery Maker to Gain Exposure in Europe?</a>).  Following <a href="https://www.smartkarma.com/entities/222" target="_blank" data-smartkarma-citation="entities:222:1">Panasonic Corp (6752 JP)</a>’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.

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.

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

Broad global indexes (MSCI ACWI, ACWI ex-U.S., and EAFE) are showing signs of bottoming due to positive short-term price inflections topside their respective downtrends. Additionally, cyclical Sectors Technology, Consumer Discretionary, and Manufacturing exhibit early signs of price and RS bottoms throughout Europe, Japan, and EM.  In today’s report we highlight attractive and actionable opportunities within these cyclical Sectors, and provide a technical appraisal of major global indexes.

Broad global indexes (MSCI ACWI, ACWI ex-U.S., and EAFE) are showing signs of bottoming due to positive short-term price inflections topside their respective downtrends. Additionally, cyclical Sectors Technology, Consumer Discretionary, and Manufacturing exhibit early signs of price and RS bottoms throughout Europe, Japan, and EM.  In today’s report we highlight attractive and actionable opportunities within these cyclical Sectors, and provide a technical appraisal of major global indexes.

Global Equity Strategy: Global Outlook Improving

Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

Global Automotive Stocks/EV Focus/Event Driven

Over 22 years covering Japanese equities on both the sell side and the buy side. 

Bottom-up Japan Equities Research

Equity Bottom-Up

Profit Warning for Q4 2018 and Q1 2019: Two Fridays ago, Elon Musk warned that Q4 profits came in lower than Q3's, despite an 8% QoQ rise in vehicle sales during Q4. He also announced a 7% cut in Tesla's workforce, as Tesla is now facing "a tiny profit" in Q1 that will be achieved with "great difficulty, effort and some luck". These are extremely bearish comments from a perennial optimist like Musk. If true, however, it kills the growth story at Tesla. And with the average 15% price cut of the Model 3 in the US and 17% in China, it also shows that Tesla may have misread the demand environment for its high-priced electric sedan. Model 3 Demand in the US has Clearly Been Exhausted: September 2018 saw peak monthly sales of 22,250 units in the US, which fell to an average monthly rate of 18,039 units in Q4. There are no more wait lists for the Model 3 at current prices: Tesla's website says delivery can be made in under 2 weeks. In the January 18th profit warning, Musk admitted that Tesla must now sell its lowest-end version for $35,000 from May, or see production fall. At this price, Tesla's Model 3 probably just breaks even, by our estimates. Weak Model 3 Launch in Europe: It was hoped that the Model 3's European launch this March would make up for waning demand in the US. But since opening up configurations for reservation holders on December 7th, Tesla only received 13,773 orders, which is a whopping 24% lower than recent monthly sales in the US. Musk was forced to open up configurations to non-reservation holders, but this led to only 2,436 extra orders over the following 2 weeks.  In the US, Tesla opened up the Model 3 floodgates to non-reservation holders 12 months after launching the car. In Europe, it took less than 4 weeks.  No Hopes for Tesla in China Either in 2019: Tesla's registrations in China for October and November 2018, combined, fell by 72% YoY and overall auto demand is weakening there. Musk proclaimed that Tesla would start production of the Model 3 in Shanghai by 2019-end.  The factory site is a barren plot of land (see Figure-5). It took VW 23 months to build its latest factory in China and Toyota's new Alabama plant will require 28 months. Why should we believe that Tesla only needs 11 months?    Watch the Competition for Tesla in 2019: Tesla will face true competition this year for its first time as 4 new European EVs hit the market. During Q4 of 2018, Jaguar's new I-Pace outsold Tesla's Models S and X, combined, in the Netherlands--Tesla's number two market after the US.  Audi's e-Tron SUV--due out next month--had over 20,000 orders as of December 7th last year. Porsche's new Taycan--a powerful rival for Tesla's Model S--has sold out its first year of production, with most orders coming from Tesla owners. The Models S/X provided 50% of automotive gross profit in the 2H of 2018, by our estimates. A fall in volume will heavily impact profits. Spending Will Spike in 2019 and Lead to Negative FCF: Tesla was able to squeeze out a profit during the 2H of 2018 largely because of suppressed spending on R&amp;D and infrastructure. In order to roll out the new Shanghai plant and bring the new Model Y to market, both capex and R&amp;D must rise significantly in 2019. Our list of "spending needs" (see Figure-1) shows that capex should nearly double to $4.5bn in 2019. Including debt obligations and payables, Tesla's total cash needs in 2019 come to $9.3bn, which is over twice its equity.  A highly dilutive public share offering appears inevitable. Why 2019 Could Be the End of Tesla: Tesla proved in 2018 that, even with higher sales volumes and lofty pricing for the Model 3, it could only attain an estimated 2H operating margin of 1.7%, excluding environmental credits, one-offs, and stock-based compensation. 2019 will be incredibly harder as 1) Tesla faces stiff competition for the first time since its inception; 2) a lower-priced Model 3 will not generate enough profit to cover falling profitability of the Models S/X; and 3) most significantly, a steep rise in capex and R&amp;D will lead to higher losses and negative FCF. Tesla may need a bailout by a deep-pocketed suitor this year. But this could only occur at a much lower share price.

Profit Warning for Q4 2018 and Q1 2019: Two Fridays ago, Elon Musk warned that Q4 profits came in lower than Q3's, despite an 8% QoQ rise in vehicle sales during Q4. He also announced a 7% cut in Tesla's workforce, as Tesla is now facing "a tiny profit" in Q1 that will be achieved with "great difficulty, effort and some luck". These are extremely bearish comments from a perennial optimist like Musk. If true, however, it kills the growth story at Tesla. And with the average 15% price cut of the Model 3 in the US and 17% in China, it also shows that Tesla may have misread the demand environment for its high-priced electric sedan. Model 3 Demand in the US has Clearly Been Exhausted: September 2018 saw peak monthly sales of 22,250 units in the US, which fell to an average monthly rate of 18,039 units in Q4. There are no more wait lists for the Model 3 at current prices: Tesla's website says delivery can be made in under 2 weeks. In the January 18th profit warning, Musk admitted that Tesla must now sell its lowest-end version for $35,000 from May, or see production fall. At this price, Tesla's Model 3 probably just breaks even, by our estimates. Weak Model 3 Launch in Europe: It was hoped that the Model 3's European launch this March would make up for waning demand in the US. But since opening up configurations for reservation holders on December 7th, Tesla only received 13,773 orders, which is a whopping 24% lower than recent monthly sales in the US. Musk was forced to open up configurations to non-reservation holders, but this led to only 2,436 extra orders over the following 2 weeks.  In the US, Tesla opened up the Model 3 floodgates to non-reservation holders 12 months after launching the car. In Europe, it took less than 4 weeks.  No Hopes for Tesla in China Either in 2019: Tesla's registrations in China for October and November 2018, combined, fell by 72% YoY and overall auto demand is weakening there. Musk proclaimed that Tesla would start production of the Model 3 in Shanghai by 2019-end.  The factory site is a barren plot of land (see Figure-5). It took VW 23 months to build its latest factory in China and Toyota's new Alabama plant will require 28 months. Why should we believe that Tesla only needs 11 months?    Watch the Competition for Tesla in 2019: Tesla will face true competition this year for its first time as 4 new European EVs hit the market. During Q4 of 2018, Jaguar's new I-Pace outsold Tesla's Models S and X, combined, in the Netherlands--Tesla's number two market after the US.  Audi's e-Tron SUV--due out next month--had over 20,000 orders as of December 7th last year. Porsche's new Taycan--a powerful rival for Tesla's Model S--has sold out its first year of production, with most orders coming from Tesla owners. The Models S/X provided 50% of automotive gross profit in the 2H of 2018, by our estimates. A fall in volume will heavily impact profits. Spending Will Spike in 2019 and Lead to Negative FCF: Tesla was able to squeeze out a profit during the 2H of 2018 largely because of suppressed spending on R&amp;D and infrastructure. In order to roll out the new Shanghai plant and bring the new Model Y to market, both capex and R&amp;D must rise significantly in 2019. Our list of "spending needs" (see Figure-1) shows that capex should nearly double to $4.5bn in 2019. Including debt obligations and payables, Tesla's total cash needs in 2019 come to $9.3bn, which is over twice its equity.  A highly dilutive public share offering appears inevitable. Why 2019 Could Be the End of Tesla: Tesla proved in 2018 that, even with higher sales volumes and lofty pricing for the Model 3, it could only attain an estimated 2H operating margin of 1.7%, excluding environmental credits, one-offs, and stock-based compensation. 2019 will be incredibly harder as 1) Tesla faces stiff competition for the first time since its inception; 2) a lower-priced Model 3 will not generate enough profit to cover falling profitability of the Models S/X; and 3) most significantly, a steep rise in capex and R&amp;D will lead to higher losses and negative FCF. Tesla may need a bailout by a deep-pocketed suitor this year. But this could only occur at a much lower share price. 

Tesla--The Struggle to Stay Afloat in 2019

Germany

Mercedes-Benz Group AG operates as an automobile company. The Company designs, manufactures, distributes, and sells a wide range of automotive products such as passenger cars, trucks, vans, and buses. Mercedes-Benz Group also provides financial and other services relating to its automotive businesses.

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Mercedes-Benz Group (MBG GR)

Global Equity Strategy: Overweight Cyclicals

Our positive outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains intact and we believe a “buy the dip” strategy is warranted. We...

Vermilion Research

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

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...

Aqila Ali

Global Equity Strategy: Global Outlook Improving

Broad global indexes (MSCI ACWI, ACWI ex-U.S., and EAFE) are showing signs of bottoming due to positive short-term price inflections topside their...

Vermilion Research

Tesla--The Struggle to Stay Afloat in 2019

Profit Warning for Q4 2018 and Q1 2019: Two Fridays ago, Elon Musk warned that Q4 profits came in lower than Q3's, despite an 8% QoQ rise in...

SC Capital

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