Brief Equities Bottom-Up: CATL: Tesla Effect Priced In, Sector Headwinds Getting Stronger and more

In this briefing:

  1. CATL: Tesla Effect Priced In, Sector Headwinds Getting Stronger
  2. KUKA – Midea’s Key to Automation and an Integral Part of Its Long-Term Strategy

1. CATL: Tesla Effect Priced In, Sector Headwinds Getting Stronger

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The market has been excited on CATL joining the Tesla’s supply chain, and CATL’s share price surged by 22% since 3rd February.  We believe current share price has fully priced in the positive effect. We estimate Tesla’s orders might increase CATL’s net profit by no more than 25% in 20201E.

What is not in the stock price is the negative outlook for China’s NEV demand in 2020-2021E. We estimate China’s NEV PV sales will by decrease by 10% yoy in 2020E, due to full year effect of low government subsidy and negative impact from coronavirus.  NEV PV sales might decline further in 2021E as China would stop government subsidies on NEVs.

As the largest NEV battery supplier, CATL’s sales would be impacted. Even if Tesla Shanghai starts purchasing half of its requirement for batteries from CATL from July 2020, CATL’s earnings growth 2020E might be limited to single digit percentage, in our view. In 2021E, we estimate CATL’s earnings increase by another 20% yoy due to full year order demand from Tesla Shanghai.

Currently, the stock trades at 49x P/E 2021E (based on the estimated high end EPS), which is not attractive. Valuation de-rating might be triggered by weak NEV sales data, CATL’s weaker than expected market share gain, and less than expected Tesla orders.

2. KUKA – Midea’s Key to Automation and an Integral Part of Its Long-Term Strategy

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This is the THIRD of a series of reports on Midea Corp. where we will be focusing on the company’s Robotics and Automation Systems segment. Midea has entered into the industrial robots and automation market in 2016 through the acquisition of Kuka, a German-based company offering automation and robotic systems. The Robotics & Automation systems segment of Midea generated about 11% of the revenue in 2018 and we expect the segment’s revenue to grow at a CAGR of 10% over the next 4-years driven by growth in demand for robots and automation systems globally.

China is the world’s largest market for industrial robots which accounted for about 36% of total installations in 2018. Despite China accounting for the highest share of the global industrial robot market, the manufacturing robot density in China is still considerably lower compared to countries such as Japan, South Korea, Taiwan and Singapore. The Chinese government has implemented several policy measures to increase factory automation and robotics usage in the country due to increasing wage rates and growing ageing population in China. While the demand for industrial robots is expected to grow globally, we expect China to continue to account for majority of this growth over the next couple of years given its lower robot penetration and the government of China’s initiatives towards promoting automation.

Kuka currently has limited exposure in the Asian market where it generates a majority of its revenue in Europe followed by North America. We expect the company’s revenue share from China to grow over the forecast period.

Midea is the only domestic player in China who has exposure to high-end industrial robotics market. The Chinese industrial robot market is dominated by foreign players like Fanuc, Yaskawa and ABB, whereas Kuka is ranked fourth in China. According to Statista, Kuka was ranked the fifth largest player globally in 2017. The company previously had limited exposure into the Chinese market and with Midea acquiring the Kuka, the company has been expanding extensively in China using Midea’s existing network of clients.

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