Despite the recent selloff in electric-vehicle stocks like Tesla TSLA, -5.54% and Nio NIO, -7.16%, there is still intense investor interest in the sector, with demand for electric vehicles expected to climb dramatically over the next decades.
Analysts at Swiss bank UBS UBS, +0.88% are now predicting a steeper adoption curve than previously expected, with electric vehicles penetrating 100% of the automobile market by 2040.
The battle to be the most dominant car maker is worth hundreds of billions of dollars, according to UBS, but if you can peel your eyes away from the flashy auto manufacturers, there is plenty of room for investment in companies linked to the EV boom.
One area ripe for investment is electric-vehicle battery makers, highlighted by a group of UBS analysts led by Tim Bush, in a note published on Mar. 3.
The UBS analysts concluded that batteries are the main cost down driver for electric vehicles. They predicted that the required battery cell supply to meet the increased demand estimates will result in “regional tightness this year and global shortages by 2025.”
In order for EV market penetration to reach 20% in 2025 and 50% in 2030, as projected, battery cell supplies need to increase 70% more than previously forecast over the next decade, according to UBS. A supply shortage is imminent, the analysts said.
In this fast moving space, the UBS analysts say that incumbent battery cell makers are at a significant cost advantage, and predict that there will be a consolidated structure with three top players controlling two-thirds of the market.
The UBS analysts are bullish on three electric-vehicle battery stocks, and warn investors to stay away from one in particular.
The leading stock pick highlighted by the analysts is LG Chemical 051910, +4.51%, a Korean manufacturing giant and a leader in EV batteries. UBS has set a target price for the stock at 1,370,000 South Korean won ($1,210), a 65% premium to the 831,000 won price on Mar. 2 and still more than 50% higher than the price on Mar. 5.
Another dominant battery manufacturer, China’s Contemporary Amperex Technology Co. Limited 300750, -1.71%, or CATL, is also a UBS favorite. The analysts set a target price of 475 yuan ($73) for CATL stock, a 38% premium to the 344.60 yuan price on Mar. 2. With the stock sliding slightly since the UBS analysis, that target price represents a 48% premium to the price of the shares on Friday.
The UBS analysts also like China’s Yunnan Energy New Material 002812, +0.20%, or Yunnan Enjie, which is on the materials side of the sector. Yunnan Enjie manufactures separators, which are critical battery components. With a UBS target price of 176 yuan, the shares have the potential to climb 62% higher from the current price.
But stay away from European battery cathode maker Umicore UMI, -0.74%, UBS analysts said, because the company “faces threats from product and technology substitutions, delays to the increase of cathode material capacity and a slower penetration of EVs than UBS is currently forecasts.” Metal price fluctuations are another risk the company faces, the analysts said. The UBS target price for the stock is €33 ($39), 33% lower than the share price on Friday.