Business, ValueWalk Premium

Samsung SDI A Play On The Electric Vehicles Battery Market

Samsung SDI could gain as the Electric Vehicles Battery Market grows, says one value investor.

According to research from Goldman Sachs, the lithium-ion battery market will be worth an estimated $40 billion by 2025 as demand for electric vehicles skyrockets. Chinese policymakers expect 5 million electric vehicles to be on the country’s roads by 2020. In 2016 507,000 battery electric and plug-in hybrid vehicles were sold in China, an increase of 50% year-on-year.

Chinese companies are scrambling to meet this demand targeting capacity of 21 GWh of batteries by 2020, according to Bloomberg New Energy Finance. That compares with a target of 35 GWh for Tesla’s gigafactory. Such a massive influx of supply will likely see the market consolidate as the largest players look to improve margins. China’s top industry executives believe the country’s top three battery producers could control 60% of the market within a decade. It’s not just China where the electric trend is taking off. In Norway, electric vehicles already account for 29% of the market and other countries are significantly increasing incentives for customers to trade in older polluting vehicles for more economic electric versions. At present, electric vehicles only have a 1% market share globally so it’s clear how much potential there is here.

To profit from this trend, Ben Preston of Orbis Investments likes Samsung SDI. Ben pitched his idea at last month’s London Value Investor Conference attended by ValueWalk.

Samsung SDI A Play On The Electric Vehicles Battery Market

 

Samsung SDI A Play On The Electric Vehicles Battery Market

Samsung SDI is currently one of the few companies globally that can make good quality electric car batteries at reasonable volume. However, unlike other battery producers, shares in Samsung SDI are currently trading at a extremely cheap valuation.

Ben’s sum of the parts valuation for Samsung SDI gives an intrinsic value of between $8 billion and $14 billion. This valuation includes the group’s cash, financial investments, chemical business, Samsung display unit and battery unit. Obviously there are a lot of variables here but because Samsung SDI’s market capitalisation is around $8 billion today, Orbis’ trade has a great risk/reward skew. If Samsung’s battery business is overtaken by a larger Chinese player, the downside is minimal. On the other hand, if the company manages to hold its own and grows with the rest of the lithium-ion battery market, then the position could be a big winner with an upside of 100% or more.