Stocks to Buy for China's Domination of the EV Landscape: UBS

As Tesla enters the S&P 500 index next week with a market capitalization of around $600 billion, investors are starting to speculate on which firm will be the next big winner in the electric vehicle revolution.

Since the announcement of Tesla joining the index on November 16, the share price has risen around 50%.

Electric vehicle stocks have surged in recent months. American truck company Nikola went public in June through a special acquisition company (SPAC). The stock price tripled within a few days, but most recently dropped 50% below IPO price following a short seller's allegations and a number of controversies. Nio, a Chinese electric vehicle company, stock surged over 1000% as investors searched for the next top electric vehicle startup.

Technology and innovation has helped electric vehicles enter the mainstream. Electric cars are now seen as viable alternatives to internal combustion engine vehicles. Governments are helping accelerate innovation.

In Europe, the European Union is aiming to get 30 million electric cars on the roads by 2030, according to Bloomberg. And this will require the auto industry to accelerate its electrification process.

US President-Elect Joe Biden's $2 trillion climate plan aims to make investments in the auto industry, including the creation of major electric vehicle infrastructure, as well as in furthering battery research and development. The plan references converting 500,000 buses in the US to American-made zero-emission vehicles

With government subsidies and climate-focused policies, electric vehicle development and adoption is set to increase in the west.

But what about in Asia?

A new report released on December 11 from UBS evidence lab takes a deep dive into China's relationship with electric vehicles, as investors look to the country for hot new electric vehicle startups.

China is the world's largest car market. But when it comes to vehicle manufacturing, it can sometimes be overlooked. The country is not well known for internal combustion engine cars. In fact, very few Chinese automakers have a footprint abroad and more than 60% of cars sold in China are foreign brands, UBS equity analyst Paul Gong said.

But in the electric vehicle market, China is becoming increasingly competitive.

UBS found that Chinese companies have between 30- 40% of global electric vehicle market share compared to that of the 10% in internal combustion engine vehicles, Gong said.

China's competitiveness in the market stems from the government's encouragement. The Chinese government set a target for the country to have 5 million electric vehicles on the road by 2020, while also requiring that each Chinese vehicle manufacturer, or importer, either make or import at least 12% electric vehicles this year.

China has also provided subsidies on new electric vehicles. This scheme was supposed to end this year, but has now been extended, although the amount of the subsidy has been reduced, according to Reuters.

"As Chinese carmakers continue to roll out competitive EV models and develop a diverse ecosystem, we believe it is heading towards disrupting the current global auto industry landscape," Gong said.

To highlight China's competitiveness, UBS evidence lab breaks down the numbers:

"Compared with its 10% of global combustion cars, [China's] 30-40% in EVs suggests it could potentially become a disruptive force in the EV revolution," Gong said. "While several Chinese companies should become strategically important, global auto companies would further rely on China supply chain and R&D, in our view."

China has one the most comprehensive electric vehicle supply chains, Gong said. With the capability to essentially build out an electric vehicle from start to finish. UBS evidence lab estimates China has 70% of global EV battery capacity and 80% of battery materials capacity, based on company data.

Government support has enabled China to become increasingly competitive in areas such as driving range, powertrain efficiency, battery energy density, cost and intelligence features, the report said.

The fast-moving pace of innovation and adoption of electric vehicles in China means that the survivors in the market will likely evolve faster in China than anywhere else in the world, Gong said.

To understand China's EV outlook, UBS evidence lab presented four different scenarios for the domestic market by 2030 based on two key factors, competitiveness and exports. The scenarios were dominance, division, follower and cooperation.

Ultimately the end scenario is likely to be a mixture of all four, Gong said. But he highlights the analysts do not rule out the possibility that Chinese brands could enter western markets, and take some decent share in the mass market.

"But even with different beneficiaries in different scenarios, the current development trend seems skewed towards dominance," Gong said. "In our base case, we estimate China EV sales grow from 1.1 million in 2020 to 14 million in 2030, indicating a 30% CAGR."

The United States appears to have the most advantage globally in terms of technological advancements, predominantly due to Tesla's achievements in the space. However that doesn't mean China isn't able to compete.

"We believe China is close behind [the US], while also having favorable overall policies, infrastructure, and social attitudes towards EV, creating a positive environment for EV development," Gong said. "China outperforms other markets on an aggregate level on our scorecard. We expect China to make further progress in technology, reducing costs and pushing EV penetration"

The main factors driving progress are:

China's ability to be competitive on the technology front means it's also competitive on cost.

"Currently, EV models with similar specs before deducting subsidies, or adding taxes are 20-60% cheaper to purchase in China than Europe, even though we believe the gap might narrow once European capacity ramps up," Gong said.

Gong believes Tesla lowered its purchase price more than 30% by producing at a new Shanghai factory.

Ultimately, Gong and the team at UBS evidence lab believe China has the most supportive overall environment in the EV sector. Though industry subsidies are trending downwards in China, the government has designed criteria to provide subsidies in a more balanced manner, Gong said.

The country has also identified a more unified charger standard, has 5G network deployment and has about 60% of charging stations worldwide, Gong said. Electric vehicles are also much more widely accepted in society with ride-on-demand services thriving, Gong said.

China is seeing encouraging technology breakthroughs by EV startups and a shift from local incumbents toward electrification.

With all these points considered, the electric vehicle market looks set for Chinese domination. Taking this into consideration and the four 2030 scenarios, UBS examined individual sectors and highlighted the list of stocks most likely to benefit from China's rise in the EV market.

Here is the full list:

Ticker: GELYF

Rating: Buy

Sector: Passenger-vehicle OEMs

Analyst commentary: "Geely has launched a dedicated EV platform, SEA, the fruit of four years of development and an Rmb18bn investment covering A-E segment smart EV. We believe it has strengths in this space, including energy efficiency, operating system, and safety."

Source: UBS

Ticker: HKG:2333

Rating: Buy

Sector: Passenger-vehicle OEMs

Analyst commentary: "GWM launched its coffee, lemon and Tank platforms with intelligence improvements and faster EV model development. It is also in its product upcycle."

Source: UBS

Ticker: Li

Rating: Buy

Sector: Passenger-vehicle OEMs

Analyst commentary: "A pragmatic approach to electrification and first to achieve purchase price parity versus ICE cars on large SUVs."

Source: UBS

Ticker: ETR:VOW3

Rating: Buy

Sector: Auto OEMs

Analyst commentary: "Global #1 incumbent OEM in EVs; leading market position in EU and China."

Source: UBS

Ticker: GM

Rating: Buy

Sector: Auto OEMs

Analyst commentary: "Fastest-moving US OEM in EVs; likely to unlock SOTP value in EV and AV."

Source: UBS

Ticker: TSLA

Rating: Neutral

Sector: Auto OEMs

Analyst commentary: "Undisputed EV/AV technology leader, strong internal battery know-how."

Source: UBS

Ticker: HKG:0425

Rating: Buy

Sector: Auto parts

Analyst commentary: "Battery housing is likely a structural growth opportunity and traditional business recovering steadily."

Source: UBS

Ticker: SHA:600660

Rating: Buy

Sector: Auto parts

Analyst commentary: "Industry leader to benefit from auto glass volume and ASP gains ahead of rising adoption of all-glass roofs and HUDs."

Source: UBS

Ticker: SHA:601799

Rating: Buy

Sector: Auto parts

Analyst commentary: "FAW-VW full LED strategy and customer profile upgrade to support ASP and GPM hikes."

Source: UBS

Ticker: APTV

Rating: Buy

Sector: Auto parts

Analyst commentary: "Stands out among suppliers; delivers positive profitability (and higher margin) selling EV products."

Source: UBS

Ticker: EPA:FR

Rating: Buy

Sector: Auto parts

Analyst commentary: "Additional kicker to earnings: the Siemens JV moving from 2019 loss to breakeven (around 2022E)."

Source: UBS

Ticker: HLE

Rating: Buy

Sector: Auto parts

Analyst commentary: "Medium-term growth is underestimated in our view, given Hella's exposure to pure BEV-related content."

Source: UBS

Ticker: HKG:3669

Rating: Buy

Sector: Dealers

Analyst commentary: "Strong BMW sales momentum; more than 80% of stores located in first-and second-tier cities."

Source: UBS

Ticker: HKG:3808

Rating: Buy

Sector: Commercial vehicles

Analyst commentary: "Sinotruk has enhanced its truck competence in China VI era."

Source: UBS

Ticker: SZ:000800

Rating: Buy

Sector: Commercial vehicles

Analyst commentary: "Better product mix and increasing in-house engine supply."

Source: UBS

Ticker: SHE:000338

Rating: Buy

Sector: Commercial vehicles

Analyst commentary: "Well prepared for the EV era with partnership with Ballard in fuel cells."

Source: UBS

Ticker: SHE:300450

Rating: Buy

Sector: Equipment makers

Analyst commentary: "We expect Wuxi Lead to benefit from the faster EV penetration, though it faces a potential threat from battery technology evolution."

Source: UBS

Ticker: SHE:002812

Rating: Key call buy

Sector: EV battery materials

Analyst commentary: "Expanding leadership and aggressive global market share gains."

Source: UBS

Ticker: SHA:603659

Rating: Buy

Sector: EV battery materials

Analyst commentary: "Stabilizing margin and expanding global market share."

Source: UBS

Ticker: ETR:WCH

Rating: Buy

Sector: EV battery materials

Analyst commentary: "Silicon anodes are being been tested by several battery companies, with the first applications expected to be in consumer products."

Source: UBS

Ticker: SHE:300750

Rating: Buy

Sector: EV battery makers

Analyst commentary: "We like CATL for its technology and cost competitiveness after NCM811 ramp up, its new order intake in the European market, and the China EV market recovery."

Source: UBS

Ticker: KRX:051910

Rating: Buy

Sector: EV battery makers

Analyst commentary: "We like LG Chem for its cost competitiveness, as shown in our teardown results, this could create medium-term margin upside. The company's rapid capacity expansion plan should lead to market share gain in the near future."

Source: UBS

Ticker: SHE:300014

Rating: Buy

Sector: EV battery makers

Analyst commentary: "We like EVE Energy for its fast growth of NEV battery business. It is now an important battery supplier for Daimler, Kia, BMW and Xpeng"

Source: UBS

Ticker: ETF:IFX

Rating: Buy

Sector: Semiconductors

Analyst commentary: "Global leader in IGBT supply, strong position with Chinese OEMS."

Source: UBS

Ticker: TYO:6963

Rating: Buy

Sector: Semiconductors

Analyst commentary: "Power semi supplier with strong position in next-gen SiC technology."

Source: UBS

Ticker: STM

Rating: Buy

Sector: Semiconductors

Analyst commentary: "Key supplier to Tesla and broadening out with SiC technology."

Source: UBS