How to in­vest in the elec­tric ve­hi­cle rev­o­lu­tion

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The elec­tric ve­hi­cle (EV) rev­o­lu­tion has moved up a gear over the past few months as Bri­tain and France con­firm plans to phase out the sale of diesel and petrol cars by 2040.

Car man­u­fac­tur­ers such as Volvo and Jaguar Land Rover are de­vel­op­ing elec­tric or hy­brid ve­hi­cles as fast as they can; and even non-car com­pa­nies in­clud­ing vac­uum cleaner spe­cial­ist Dyson are mov­ing into the elec­tric ve­hi­cle space. Fur­ther­more, air­line EasyJet (EZJ) now says it could be fly­ing elec­tric planes within a decade.

This rapid ac­cel­er­a­tion of ac­tiv­ity presents an op­por­tu­nity for in­vestors to hitch a ride on one of the big­gest in­dus­trial and tech­no­log­i­cal devel­op­ments in the world for a long time.

In this ar­ti­cle we dis­cuss the likely win­ners and losers on the UK stock mar­ket from the elec­tric ve­hi­cle rev­o­lu­tion, as well as look­ing at ways to play the space through in­vest­ment trusts.

We will look at a wide range of in­dus­tries, from car part sup­pli­ers and ser­vice com­pa­nies to min­ers hop­ing to dig up the raw ma­te­ri­als needed to power elec­tric ve­hi­cle bat­ter­ies.

WHY IS THE WORLD MOV­ING TO ELEC­TRIC VE­HI­CLES?

There are sev­eral rea­sons why the world is shift­ing from com­bus­tion en­gines to elec­tric ve­hi­cles.

First, it has been proven that elec­tric ve­hi­cles can per­form as well as their petrol equiv­a­lents. Lithi­u­mion bat­tery costs are fall­ing, and this has prompted the car in­dus­try to be­lieve that elec­tric ve­hi­cles can even­tu­ally be­come af­ford­able to the mass mar­ket.

Sec­ond, anti-pol­lu­tion leg­is­la­tion in many parts of the world is forc­ing the au­to­mo­tive in­dus­try to change. Europe is in­tro­duc­ing stricter lim­its on car­bon diox­ide emis­sions from 2021, for ex­am­ple.

‘Air qual­ity con­cerns have been a big driver from a leg­isla­tive point of view,’ says Mar­cus Ste­wart, head of en­ergy in­sights at Na­tional Grid (NG.). ‘Govern­ments have jumped on the band­wagon. Tech­nol­ogy was tak­ing us there any­way.’

Like any sig­nif­i­cant de­vel­op­ment, there are a few neg­a­tive is­sues to over­come. You have to think about how elec­tric­ity is gen­er­ated in or­der to power elec­tric ve­hi­cles. Parts of the world are heav­ily re­liant on coal-fired power sta­tions to pro­duce elec­tric­ity, so us­ing that source to power elec­tric ve­hi­cles is clearly coun­ter­in­tu­itive from an en­vi­ron­men­tal per­spec­tive.

You then have to think about how ve­hi­cles will be charged. At present there are very few charg­ing sta­tions for elec­tric ve­hi­cles in ma­jor cities, let alone ru­ral ar­eas. For ex­am­ple, China has some charg­ing sta­tions in car parks but only in a small frac­tion of its over­all park­ing fa­cil­i­ties.

In the UK you’re more likely to see charg­ing points on some­one’s house than in city cen­tres. More on the charg­ing de­bate later in this ar­ti­cle. For now, let’s dis­cuss how com­pa­nies on the UK stock mar­ket fit into the equa­tion.

VE­HI­CLE MAN­U­FAC­TUR­ERS There are no ve­hi­cle man­u­fac­tur­ers on the UK stock mar­ket. UK in­vestors will need to buy shares in over­seas-listed stocks in or­der to have elec­tric ve­hi­cle man­u­fac­tur­ers in their port­fo­lio. The al­ter­na­tive is to buy an in­vest­ment trust or fund which has stakes in some of the play­ers, al­though you would have to con­sider the man­u­fac­turer(s) may only be a small pro­por­tion of the fund. Our top pick in this sit­u­a­tion is to buy Scot­tish

Mort­gage In­vest­ment Trust (SMT). Its sec­ond largest hold­ing is Tesla, the Amer­i­can com­pany which is con­sid­ered to be one of the pi­o­neers of the elec­tric ve­hi­cle in­dus­try.

Tesla hopes its Model 3 car will push EVs into the main­stream. Model 3 is al­ready out in the US (on a small scale) and is ex­pected to be sold in the UK from 2019. Later this month Tesla will un­veil an elec­tric heavy-duty haulage truck called Semi. VE­HI­CLE PARTS AND AS­SO­CI­ATED SER­VICES Elec­tric ve­hi­cles are far less com­plex me­chan­i­cally than com­bus­tion en­gine ve­hi­cles, al­though elec­tronic com­plex­ity is higher. In a nut­shell, there are far fewer bits to drive an elec­tric ve­hi­cle. For ex­am­ple, in­vest­ment bank UBS claims there are 24 mov­ing parts in elec­tric ve­hi­cle Chevy Bolt’s pow­er­train ver­sus 149 in the VW Golf.

UBS also be­lieves an elec­tric ve­hi­cle like the Chevy Bolt could al­most be main­te­nance-free. ‘Not only do fewer parts need to be re­placed over the car’s life, it also does not re­quire a reg­u­lar change of flu­ids, such as en­gine oil.’

That’s very im­por­tant. It im­plies a sig­nif­i­cant re­duc­tion in rev­enue for com­pa­nies which pro­vide spare parts or main­te­nance ser­vices. For ex­am­ple, car deal­er­ships typ­i­cally gen­er­ate more than 40% of their gross profit in ser­vice and main­te­nance.

Clearly such an im­pact is not go­ing to be felt in the next few years, but we be­lieve the mar­ket will even­tu­ally start to price in a tougher fu­ture for non­ve­hi­cle sales in­come for car deal­er­ships.

THE ENGI­NEERS

Two stocks al­ready be­ing scru­ti­nised by in­vestors for how they will adapt in an EV world are au­to­mo­bile engi­neers GKN (GKN) and Ri­cardo

(RCDO). The former sup­plies driv­e­lines to car man­u­fac­tur­ers, en­abling power to be de­liv­ered from the en­gine to the wheels. Ri­cardo un­der­takes a wide range of work in­clud­ing emis­sions test­ing for cars and en­gine de­sign and test­ing, as well as work in the rail and wa­ter sec­tors.

Shares in Ri­cardo went through a lengthy weak pe­riod ear­lier this year as in­vestors started to ques­tion if EV posed a longer-term struc­tural threat to its busi­ness, given heavy ex­po­sure to the com­bus­tion en­gine.

Ri­cardo be­lieves that full scale elec­tri­fi­ca­tion will not hap­pen but it isn’t sit­ting on its hands. ‘There is a lot of in­vested cap­i­tal in en­gines around the world,’ says Ri­cardo. ‘Car man­u­fac­tur­ers still need to pro­duce ex­cel­lent en­gines with low emis­sions. But in a worst case sce­nario we would just do EV and hy­brid work which rep­re­sented 17% of our or­der in­take in the last fi­nan­cial year.

‘We’ve done EV work since 2000 and have grow­ing ex­per­tise,’ adds the com­pany. ‘On the hy­dro­gen side, we are work­ing with Toy­ota on a hy­dro­gen truck and we also de­sign bat­tery packs.’

Ri­cardo says it has been talk­ing to un­named par­ties about po­ten­tially be­com­ing an elec­tric ve­hi­cle bat­tery man­u­fac­turer.

IN­VEST­MENT BANK UBS BE­LIEVES AN ELEC­TRIC VE­HI­CLE COULD AL­MOST BE MAIN­TE­NANCE-FREE. NOT ONLY DO FEWER PARTS NEED TO BE RE­PLACED OVER THE CAR’S LIFE, IT ALSO DOES NOT RE­QUIRE A REG­U­LAR CHANGE OF FLU­IDS, SUCH AS EN­GINE OIL

SHOULD YOU BUY SHARES IN RI­CARDO?

In­vest­ment bank Beren­berg rates Ri­cardo as a ‘sell’ and says there is a lot wrong with the busi­ness be­yond the EV mar­ket threat in­clud­ing de­te­ri­o­rat­ing cash gen­er­a­tion. In con­trast, in­vest­ment bank Liberum takes a dif­fer­ent view, say­ing ‘auto evo­lu­tion is more op­por­tu­nity than threat’ for Ri­cardo and that its shares are worth buy­ing.

‘Pro­jec­tions sug­gest that 30% of all new pas­sen­ger cars will have elec­tric pow­er­trains by 2025 (hy­brids and EVs),’ says Liberum an­a­lyst Ben Bourne. ‘Ri­cardo has se­cured a di­ver­si­fied range of pro­grammes in ve­hi­cle sys­tems, hy­brid and elec­tric sys­tems, ad­vanced driveline, and in the core pow­er­train ar­eas, fo­cused on both new and ex­ist­ing prod­uct up­grades to help lower CO2 and NO2 emis­sions.’

As for GKN, UBS es­ti­mates that 15% to 20% of its prof­its to­day could be at risk in an all-hy­brid/elec­tric world. GKN is adapt­ing, none­the­less, in­clud­ing the re­cent launch of an ad­vanced elec­tric driveline which it claims will de­liver ‘un­ri­valled ca­pa­bil­i­ties’ for the next gen­er­a­tion of elec­tric ve­hi­cles.

GOOD NEWS FOR AB DY­NAM­ICS

One lesser known en­gi­neer al­ready ben­e­fit­ing from the ad­vent of elec­tric ve­hi­cle de­vel­op­ment is

AB Dy­nam­ics (ABDP:AIM) which un­der­takes track tri­als for ve­hi­cle steer­ing and sus­pen­sion, as well as pro­vid­ing driv­ing robot sys­tems to test ve­hi­cles in crash sce­nar­ios. Switch­ing to elec­tric ve­hi­cles doesn’t change how its ro­bots work as they sit on the steer­ing wheel, not the en­gine.

‘A lot of car com­pa­nies are try­ing to adapt their ar­chi­tec­ture to ac­cel­er­ate elec­tric ve­hi­cle de­vel­op­ment,’ says chief ex­ec­u­tive Tim Rogers. ‘They are do­ing a lot of chas­sis de­vel­op­ment which drives in part what we do.

‘We are see­ing more vir­tual sim­u­lated de­vel­op­ment and less pro­to­typ­ing,’ adds Rogers. That shouldn’t be a prob­lem for AB Dy­nam­ics be­cause it has re­cently de­vel­oped ad­vanced driv­ing sim­u­la­tors pro­duced in part­ner­ship with Wil­liams F1. These en­able au­to­mo­tive cus­tomers to un­der­take ve­hi­cle dy­nam­ics mod­el­ling and eval­u­a­tion of ADAS (driver as­sis­tance) tech­nol­ogy.

Both AB Dy­nam­ics and Ri­cardo make the point that car man­u­fac­tur­ers are still spend­ing a lot of money on com­bus­tion en­gine ve­hi­cles and that part of the in­dus­try is not go­ing to dis­ap­pear overnight.

RI­CARDO HAS SE­CURED A DI­VER­SI­FIED RANGE OF PRO­GRAMMES IN VE­HI­CLE SYS­TEMS, HY­BRID AND ELEC­TRIC SYS­TEMS, AD­VANCED DRIVELINE, AND IN THE CORE POW­ER­TRAIN AR­EAS, FO­CUSED ON BOTH NEW AND EX­IST­ING PROD­UCT UP­GRADES TO HELP LOWER CO2 AND NO2 EMIS­SIONS.

THE CHEM­I­CAL COM­PANY

FTSE 100 chem­i­cals gi­ant John­son Matthey

(JMAT) saw its share price jump back to life last month after ex­plain­ing how it hopes to crack the EV mar­ket. We think it is an es­sen­tial stock to own for the EV rev­o­lu­tion.

In­vestors had pre­vi­ously wor­ried about the com­pany’s po­si­tion given it has his­tor­i­cally gen­er­ated a lot of money from mak­ing cat­alytic con­vert­ers to con­trol harm­ful pol­lu­tant emis­sions from diesel ve­hi­cles which is now a mar­ket un­der threat.

That’s why the com­pany has been try­ing to ex­pand into bat­tery tech­nol­ogy. John­son Matthey has now un­veiled its eLNO (en­hanced lithium nickel ox­ide) cath­ode ma­te­rial which it claims to of­fer higher en­ergy den­sity and re­quire less cobalt rel­a­tive to cur­rent mar­ket lead­ing cath­ode ma­te­ri­als.

The re­duc­tion in cobalt could be one of the most im­por­tant fac­tors. As we dis­cuss later in this ar­ti­cle, cobalt is one of the com­modi­ties ex­pected to shoot up in price as de­mand is ex­pected to sig­nif­i­cantly out­weigh sup­ply. So bat­tery tech­nol­ogy that re­quires less cobalt is a plus fac­tor for car com­pa­nies.

‘We ex­pect that near term, in­vestors will be fo­cused on the mer­its of JM’s new cath­ode ma­te­rial in terms of (1) what value should be as­cribed, and (2) how large the mar­ket op­por­tu­nity could be should this new tech­nol­ogy prove to de­liver a step change,’ says in­vest­ment bank Mor­gan Stan­ley.

‘How­ever, it is im­por­tant to ac­knowl­edge there is still fur­ther progress to be made to se­cure cus­tomer con­tracts, and then scale up the nec­es­sary ca­pac­ity. One thing is clear, per­cep­tion is chang­ing in re­gards to JM’s abil­ity to carve out a mar­ket po­si­tion in the high growth EV sup­ply chain as the pow­er­train evolves.’

POWER TRANS­MIS­SION AND CHARG­ING

One of the key chal­lenges to in­creas­ing elec­tric ve­hi­cle adop­tion is hav­ing ad­e­quate charg­ing in­fra­struc­ture. Con­vert­ing petrol sta­tions may not be the so­lu­tion as you can’t charge a car at the same speed in which you fill up the petrol tank.

While Royal Dutch Shell (RDSB) is work­ing on sys­tems to pro­vide fast-charg­ing for EVs at its petrol sta­tions, we doubt it would be able to charge an elec­tric ve­hi­cle in two min­utes.

Speak­ing at a re­cent con­fer­ence held by the Nat­u­ral Re­sources Fo­rum, chief ex­ec­u­tive Erik Fair­bairn of elec­tric charge point sup­plier POD Point pre­dicted the fu­ture would be 60% of charg­ing done at home, 30% at work, 7% at des­ti­na­tion and 3% en-route.

Na­tional Grid’s Mar­cus Ste­wart says an elec­tric ve­hi­cle is just a ‘bat­tery on wheels’. As such, it could be used to pro­vide en­ergy as well as con­sume it. ‘We are tak­ing to man­u­fac­tur­ers, look­ing at how your car could pro­vide en­ergy back to the grid, such as when you aren’t us­ing it.’

In­vest­ing in a com­pany in­volved in set­ting up the charg­ing in­fra­struc­ture would be an ob­vi­ous way to play the elec­tric car theme. We can’t see any ob­vi­ous con­tenders on the UK mar­ket at the mo­ment, al­though there are two stocks which have rel­e­vant in­ter­ests on a small scale.

AN ELEC­TRIC VE­HI­CLE IS A JUST A ‘BAT­TERY ON WHEELS’

En­gi­neer­ing ser­vices group Nexus In­fra­struc­ture

(NEXS:AIM) makes most of its money from hook­ing up new-build prop­er­ties to elec­tric­ity, wa­ter and drainage ser­vices as well as build­ing re­in­forced con­crete frames and roads. It is also try­ing to de­velop ser­vices around elec­tric ve­hi­cle charg­ing points.

AIM-quoted ven­ture cap­i­tal firm Draper Esprit

(GROW:AIM) has a stake in POD Point, al­though it is only a small part of its over­all in­vest­ment port­fo­lio. POD Point has made and sold more than 27,000 charg­ing points since be­ing founded in 2009, ac­cord­ing to Draper.

BAT­TERY RAW MA­TE­RI­ALS

Lithium is of­ten touted as the magic com­mod­ity to play the elec­tric ve­hi­cle rev­o­lu­tion given its role as a key bat­tery com­po­nent. In re­al­ity, nickel might be the bet­ter com­mod­ity to seek when look­ing at min­ing stocks linked to the EV rev­o­lu­tion.

There is plenty of lithium in the world and ex­perts be­lieve there will be suf­fi­cient new projects to meet in­creased de­mand.

In con­trast, there is ex­pected to be a short­fall in cobalt and nickel in the fu­ture, claims pri­vate eq­uity firm Pala In­vest­ments. That sit­u­a­tion im­plies higher fu­ture sell­ing prices.

Cobalt is gen­er­ally pro­duced as a by-prod­uct of nickel. It is the fourth largest com­mod­ity by rev­enue for FTSE 100 miner Glen­core (GLEN).

Car and bat­tery man­u­fac­tur­ers are ex­pected to strike deals over the com­ing years in or­der to se­cure fu­ture cobalt sup­ply, even if it means stock­pil­ing the com­mod­ity for a while. For ex­am­ple,

Volk­swa­gen is ru­moured to have asked pro­duc­ers to sub­mit pro­pos­als on sup­ply­ing cobalt for up to 10 years from 2019.

In­creased us­age of nickel scrap could help to meet sup­ply re­quire­ments on the nickel side, yet it is un­likely to fill the mar­ket gap en­tirely.

UK-listed min­ers with nickel ex­po­sure in­clude

Glen­core among the large caps and Hor­i­zonte Min­er­als (HZM:AIM) among the small caps.

WHAT ABOUT OTHER MIN­ERS?

Vedanta Re­sources (VED) is look­ing at ways to pro­duce cobalt for bat­ter­ies rather its cur­rent out­put of cop­per-cobalt al­loy. It al­ready pro­duces alu­minium which is an­other com­mod­ity in in­creas­ing de­mand for elec­tric cars. Any­one con­sid­er­ing an in­vest­ment in Vedanta should note le­gal ac­tion in con­nec­tion with pol­lu­tion al­le­ga­tions in Zam­bia.

BHP Bil­li­ton (BLT) is fo­cus­ing on cop­per as the ‘metal of the fu­ture’ in terms of the feed­ing the elec­tric ve­hi­cle rev­o­lu­tion. Talk­ing to Reuters last month, it says elec­tric ve­hi­cles re­quire four times as much cop­per as cars which run on com­bus­tion en­gines.

There are risks that cobalt might play a smaller role in the fu­ture than peo­ple cur­rently think. For ex­am­ple, we’ve al­ready talked about John­son Matthey find­ing a way to de­velop bat­tery tech­nol­ogy with lower lev­els of cobalt. In­vest­ment bank Beren­berg goes as far as say­ing that cobalt could even be phased out of lithium-ion bat­ter­ies over the next five to 10 years. It pre­dicts no de­mand in­crease for the metal dur­ing this pe­riod.

‘In our view, EVs will not sig­nif­i­cantly ben­e­fit cop­per and cobalt min­ers such as Glen­core and BHP,’ it says.

Beren­berg be­lieves a shift to ul­tra-nickel-rich bat­ter­ies could oc­cur faster than ex­pected due to John­son Matthey’s afore­men­tioned break­through. ‘Nickel is be­com­ing cru­cial as its con­tent in a bat­tery de­ter­mines the range of EVs. We es­ti­mate that 20m EV sales by 2026 will trans­late into 0.7m tonnes of high qual­ity nickel sul­phide de­mand which is 85% of 2016 pro­duc­tion lev­els,’ it com­ments.

HOW DO YOU PLAY THE LITHIUM GAME?

As for pick­ing lithium-re­lated stocks, we think min­ers with a de­cent as­set stand a chance of mak­ing a profit once in pro­duc­tion – but we don’t share many peo­ple’s en­thu­si­asm that you will make a lot of money from in­vest­ing any miner with a lithium ex­plo­ration pro­ject. Most of the lithium plays on the UK mar­ket are many, many years away from gen­er­at­ing rev­enue.

If you like the lithium story, the only stock we’d sug­gest you ex­am­ine is Ba­canora Min­er­als

(BCN:AIM), which is close to re­leas­ing the fi­nal fea­si­bil­ity study on its Sonora pro­ject and should be in a po­si­tion to raise fi­nance in early 2018 and then start an 18-month mine con­struc­tion phase.

‘Lithium hy­drox­ide rather than lithium car­bon­ate will be the pre­ferred ma­te­rial for cre­at­ing high nickel cath­ode ma­te­ri­als,’ says Beren­berg.

Un­for­tu­nately for Ba­canora, it is no longer pur­su­ing the hy­drox­ide route. The com­pany did have an agree­ment a few years ago to sup­ply Tesla in the US with lithium hy­drox­ide. That deal has now lapsed and the miner is fo­cused on the Asian and Ger­man mar­kets (the lat­ter is via a less ad­vanced sec­ond pro­ject) with lithium car­bon­ate.

Ba­canora is still ap­peal­ing from an in­vest­ment per­spec­tive, none­the­less. It has al­ready agreed to sell lithium to Ja­panese bat­tery chem­i­cals trader Hanwa in the fu­ture and this part­ner has taken a 9.35% stake in the miner which shows com­mit­ment. An­a­lyst 12 month price tar­gets for Ba­canora are in the range of 120p, im­ply­ing about 50% up­side from the 78.4p trad­ing price at the time of writ­ing. (DC) DIS­CLAIMER

The au­thor Daniel Coatsworth has a per­sonal in­vest­ment in Scot­tish Mort­gage men­tioned in this ar­ti­cle

DO YOU THINK OF SLOW MOV­ING MILK FLOATS AND GOLF BUG­GIES WHEN SOME­ONE SAYS THE TERM ‘ELEC­TRIC VE­HI­CLE’? THINK AGAIN. TESLA’S MODEL S ELEC­TRIC VE­HI­CLE CAN DO 0 TO 60 MILES PER HOUR IN JUST 2.28 SEC­ONDS

GLEN­CORE

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