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Monthly Commentary on Key Themes – October 2024
China Electric Vehicle and Battery
Industry Update
- Strong September EV Sales; NEV penetration exceeded 50%: Major EV brands delivered record September Sales. BYD reported September NEV PV sales of 417k units, +46% YoY, with PHEV continuing to record strong growth. Overseas sales grew by 5% MoM to 33k. 1 Li Auto delivered record 54k units in September, +49% YoY. Nio (+35% YoY) and Xpeng (+33% YoY) also recorded strong sales momentum in September. Xiaomi SU7 delivery exceeded 10k units in September. Xiaomi is continuously raising its effective capacity and aims to deliver 20k EV units in October. Based on insurance registration, new energy vehicle (NEV) penetration was 50% in the last week of September.2
- Over 1.1mn applications for Auto trade-in program: The trade-in stimulus has been doubled to Rmb20k (from Rmb10k) per NEV, and Rmb15k (from Rmb7k) per eligible ICEV, 3 following central government’s indication that long-term government bonds could be used to fund consumer goods trade-in.4 As of 25 Sep, auto trade-in program received over 1.1mn applications.
- Retreat of foreign JVs: Different foreign JVs, including GAC-Honda, Dongfeng-Honda, SAIC-VW etc, are reportedly reducing capacity in China amid the slowdown in ICE demand.5 Domestic brands could further take share from JV brands.
- Tariff: European Commission announced a new draft decision on final countervailing duties on BEV imports from China, which are marginally lower than those disclosed in early July. Notably, tariff on China-made Tesla would be cut to 9% from previously planned 20.8% (on top of the 10% existing tariff). In addition, Canada says it will impose a 100% tariff on imports of China-made EVs.6
- Battery material costs could have bottomed: China’s spot lithium carbonate price declined by another 18% MoM to around RMB 73 k/t at early September. 7 After CATL cut lithium production in Jiangxi, lithium price could have bottomed at Rmb70k/t (UBS estimates). Battery materials prices have decreased by over 80% from its peak in 2022, supporting the continued cost optimization for battery makers and EV manufacturers.
Stock Comments
Li Auto recorded 30% share price gain in September. On the back of a strong EV sales momentum in China, Li Auto delivered record high 53.7k vehicles in September, as driven by steady increase in order intake for Li L series and Li MEGA. Li Auto also launched new autonomous driving architecture, which integrates an end-to-end (E2E) model and a vision-language model (VLM), to ~10k test users during the month. 8 As we enter into car sales peak season, outlook for Li Auto remains positive due to solid 3Q guidance, improving market pricing environment, and undemanding valuations.
Tianqi Lithium stock price was up +34% in September. At early September, Lithium price declined to a low level of Rmb72.5k/t, the expected cost support level. In addition, CATL is said to have decided to suspend its lithium lepidolite operation in Jiangxi, which could lead to 8% LCE production cut of China monthly Li2CO3 production.9 The decline in capacity, decrease in inventory and solid demand should help rebalance supply-demand dynamics.
Preview
We remain positive on the long term growth potential for EV and battery value chain, along with the upward EV penetration trajectory. Domestic old car replacement demand, as stimulated by scaled-up auto trade-in program, together with export sales, should support China’s resilient auto momentum and benefit leading domestic brands. We expect the China auto market to stay competitive in 2024 with strong new product line-up and technology innovations from leading EV and battery brands, and new entrants such as Xiaomi. Geopolitical tensions remain the key risks, but China EV models will still remain competitive under new tariff landscape thanks to its cost advantages. Localized production will be the longer term solution for Chinese brands.
Asia Semiconductor
Industry Update
- XMC, Sister Company of YMTC, Has STAR Market IPO Application Accepted
Wuhan Xinxin Semiconductor Manufacturing Co. (XMC) has had its IPO application for the STAR Market officially accepted, marking the official start of its listing process. The company currently offers 12-inch NOR Flash, CIS, and Logic wafer foundry services, with process nodes of 40nm and above. (Trendforce) - TSMC’s 2nm Wafers Reportedly Set to Double in Price
As TSMC has reportedly begun trial production of 2nm chips in its Baoshan Plant in Hsinchu, northern Taiwan, the schedule of mass producing 2nm in 2025 remains on track. A report by Commercial Times reveals that the price of 2nm wafers is expected to double compared to 4/5nm, which may exceed USD 30,000 per wafer. (Trendforce)
Stock Comments
SMIC recorded +24.36% return. Domestic foundry utilization continues to recover on restocking orders. Market turn more positive on China semiconductor demand after the government announced stimulus package. SMIC has projected a 13-15% Q/Q revenue growth for 3Q24. 3Q gross margin guidance of 18-20% exceeds expectations, due to rising ASP, given a higher 12-inch wafer shipment mix.
Montage recorded +27.08% return. Montage is the proxy for DDR5 chips in Greater China, and now leads the interface for DDR5 Gen 3. Inventory digestion completed and the traditional server market is expected to grow in 2H24.
Preview
Increasing AI adoption in the data centre and increasing penetration of AI at the edge and on-device will be the key enabler of next upcycle semiconductor as AI-enabled devices have much higher semi-content. Currently we are still in the process of cycle recovery as both stocks and earnings are below previous peak. We expect volume growth in end devices to drive broad-based semiconductor cycle recovery in 2024. (Mirae 2024)
China Clean Energy
Industry Update
China solar installation ended at -22%MoM and +3%YoY to 16.5GW in August, decelerating mainly due to power grid digestion constraint. 2024 demand are now expected at 450GW globally and 230-250GW in China. On the supply side, it remains on the way of more supply exits and consolidation. The Commerce Department of the USA released its preliminary determination in the CVD investigation for cells imported from four SEA countries (Cambodia, Malaysia, Thailand and Vietnam) on October 1st. The results of tariff are generally lower than expected, while AD is the next that may come more punitive vs CVD.
China wind installation ended at 3.7GW in August, -9.8%MoM and +42%YoY. China’s grid infrastructure investment in 8M24 was 140GW, +23.7%YoY. Power grid capex is strong as expected to better utilize the renewables generation in the near future.
Monthly China solar product production
Source: CLSA, October 2024
Stock Comments
Sungrow Power Supply: The company delivered strong Q2 results with energy storage sales much better than feared. Sungrow is a global leader in solar inverter and ESS integration business with great exposure to exporting.
LONGi Green Energy: The leading solar wafer makers slightly increased wafer selling prices recently, implying positive signals on wafer S/D balance. Additionally, China’s recent stimulus policies on stock market also helps with high beta play like Longi.
Preview
We remain constructive on the global clean energy growth and the trend of energy transition. However, we also must admit the near-term broad mismatch between supply and demand along solar/wind supply chains, which led to poor earnings for a couple of months or maybe even longer. It takes more time than expected for the small players to exit and demand to catch up, especially when China solar value chain are faced with geopolitical pushback from the United States. On the bright side, we have seen strong demand from some emerging markets like ASEAN, Middle East regions, Africa and South America, but it still needs more time.
China Robotics and AI
Industry Update
China factory automation demand remained soft, attributed to consumer electronics’ seasonally slow demand, rising uncertainties from trade policy changes that impact negatively on investment in export sectors, and weakening capex for the new energy sector, particularly solar industry. Channel feedback suggests pricing competition has eased off though pricing dropped sequentially in 3Q24. Domestic players are keen with market share gains, trying to expand into new fields and resulting in overlaps of addressable markets. Destocking by international players including Yaskawa, Fanuc, ABB and Siemens are close to the end. Key players implied limited appetite for further price cuts, helped by resilient auto vertical demand for industrial robot and normalized FA parts inventory. Given Q4 in the last year is a low base, we expect sector bottom soon later from here, coupled with China’s recent stimulus policies.
Inovance’s automation product(left) & Estun’s humanoid robot in China International Industry Fair
Source: JPM, October 2024
Stock Comments
Zhongji Innolight : The company delivered solid Q2 results actually, with revenue up by 175%yoy and net profits up by 271%yoy. Management reiterated a strong demand outlook for 2H24, as they will continue to expand capacity to meet the downstream demand.
Shenzhen Inovance Technology: New order inflow for Inovance remains soft recently. Yet, the company benefits from China’s recent stimulus policies as a high beta play, given the valuation is very low.
Preview
Sector rallied a lot after China’s stimulus policies. We are cautious about the key drag of solar industry despite low base in 4Q23, and how much the new policies on demand recovery has been priced in in a short period of time. We remain positive on the long-term trend of China industrial automation market growth. Domestic manufacturers continue gaining market share on the back of customized products across emerging industries, fast delivery and advanced post-sale services, while foreign brands keep losing market share in China.
India Select Market
Market Update
The MSCI India Index was up 2.15% (in USD terms) over the September reporting period. While some of high frequency data showed a moderating growth trend, we believe overall growth trajectory largely remains on track. GST collections for September steadily grew at 6.5%yoy to Rs 1.73tn. Manufacturing PMI softened to 56.5 (vs. 57.5 in Aug) and Services PMI moderated to 57.7 (vs. 60.9 in Aug) but both remained in expansionary zone in September. Passenger vehicle sales turned positive on a yoy basis and two wheelers grew at a faster pace along with rural consumption recovery. Consumer sentiment continued to improve sequentially. Headline CPI inched up to 3.65%yoy in August while core CPI (ex food, fuel) remained steady at 3.4%yoy in August. High frequency food prices for September showed sequential decline across all categories and the favourable trend in monsoon is likely to help prevent unprecedented increase in food prices and support mass consumption recovery. Overall, we still believe a broad-based recovery is on track with rural consumption gaining traction as well as private capex picking up.
Tracking Economic Activity
Source: CEIC, Ministry of Power, Haver, CMIE, Morgan Stanley, October 2024
Note: The Economic Activity Tracker is computed using CMIE unemployment, power, real GST collections, service and manufacturing PMI, real credit, and two wheelers and passenger vehicle sales. The data is indexed to Feb-20 = 100
Stock Comments
Bharti Airtel (BHARTI IN) was the major contributor in September thanks to its strong growth outlook post tariff hike. The company reported steady 1QFY25 results with revenues up 3%yoy and EBITDA up 1%yoy. India revenues grew 10%yoy while international revenues were down 15%yoy. Strong net adds of subscribers (2.3mn) and ARPU of Rs 211 (+5%yoy) as well as strong additions in postpaid (+0.8mn) and data subs (6.3mn) supported strong growth in India. The street also started to build in multiple tariff hikes considering competitive landscape and raised ARPU estimates for FY26/27. Moderating CAPEX with rising EBITDA will lead to strong FCF generation, and enable the company to deleverage its balance sheet and support shareholder returns in the next few years.
Tata Consultancy Services (TCS IN) was the major detractor in September due to concerns demand recovery trend with deal momentum slowing into US elections. TCS commented that demand in the UK was getting incrementally weak and led to weak employee utilization. Also, demand in BFSI also turned incrementally weak in 2QFY25 compared to 1QFY25. That said, manufacturing, healthcare, and regional markets is expected to show sequential growth. In addition, Accenture FY24 results showed an improving revenue trend thus we will have to watch out for Indian IT companies upcoming earnings results and more importantly the managements’ commentary on demand outlook.
Preview
This confluence of strong GDP growth, moderate inflation, and recovery in consumption suggests a buoyant outlook for the Indian equity markets, and we believe these conditions will be conducive to capitalizing on potential growth opportunities during this fiscal year in India. We remain constructive on India market.
Global AI & Innovative Technology
Industry Update
Microsoft gives Copilot a voice and vision in its biggest redesign yet
Microsoft is unveiling a big overhaul of its Copilot experience, adding voice and vision capabilities to transform it into a more personalized AI assistant. Copilot is being redesigned across mobile, web, and the dedicated Windows app into a user experience that’s more card-based and looks very similar to the work Inflection AI has done with its Pi personalized AI assistant. (The Verge)
OpenAI raised $6.6 billion from investors, which could value the company at $157 billion
The funding has attracted returning venture capital investors including Thrive Capital and Khosla Ventures, as well as OpenAI's biggest corporate backer Microsoft, opens new tab, and new participation from Nvidia. The company is on pace to generate $3.6 billion in revenue this year on mounting losses of over $5 billion. It projects major revenue jump next year to $11.6 billion, according to sources familiar with the figures. (Reuters)
Stock Comments
Tencent recorded + 15.42% return. Tencent continue to dominate China’s online consumer market in terms of revenue size and traffic volume. Most of its services rank in the top three by user base. Tencent delivered much strong than peers ads growth of +20% YoY in 2Q, driven by Wechat verticals – VA, OA and mini programs.
China tech sector rallied on stimulus package from the government. Including a combination of monetary policy, sector specific policy and likely followed by fiscal policy. The market turns more positive on the China tech sector, where valuation was significantly below historical average due to demand slow down concerns.
Global Electric Vehicle and Battery
Industry Update
China’s policymakers announced a series of stimulus policies in the last three weeks to boost domestic housing, consumption and equity markets. Feedback from channels showed strong auto consumption acceleration before and during Golden Week Holidays in both auto sales volume and single ticket size, maybe driven by the wealth effect and people having more confidence on economy going forward after stock market rally. Some brands shared in the preliminary holiday sales results that auto sales jumped up on the single day of October 1st 2024 that was equal to almost the whole-week sales early before.
CPCA announced China’s August EV wholesales of 1.05mn units, +32%yoy and +11%mom, sending 8M24 wholesales to 6.6mn units, +30%yoy. August BEV sales is 591k units and PHEV 460k units. During 8M24, BEV sales reached 3.83mn units, +7%yoy, while PHEV 2.78mn units, +85%yoy. August xEV penetration rate reached 48.7%. China’s August battery production recorded at 101.3GWh, +37%yoy and +10.4%mom, and xEV battery installation 47.2GWh, +35%yoy and +13.5%mom, respectively. Industry has been accelerating production and installation in September driven by restocking for traditional peak season, coupled with ongoing xEV trade-in and stimulus policies.
Lithium carbonate prices have come down to below Rmb80,000 per ton, which is much close to most lithium producers’ production cost. We have seen some high-cost production suspended recently in China and spodumene mine tendering slowdown/prices decline in Australia. EV/battery production cost cutting from lithium-related raw materials would be limited from here.
Global EV, battery and battery materials sales volume as of August 2024
Source: ICCSINO, UBS, September 2024
Stock Comments
Key Contributors:
Ganfeng Lithium: CATL suspended their high-cost lithium production in China, implying positive signals on lithium supply. Additionally, we saw lithium carbonates prices rebound after China’s stimulus polices.
BYD: The company delivered strong Q2 results with double-digits growth in top line and bottom line. BYD is gaining market share in and outside China, with price-competitive xEV models. They also guided up their auto sales to 5 million units in 2025.
Preview
We didn’t change our long-term view that global EV transition is a visible decade growth story in most of the major economies such as Europe, China, ASEAN, South America and the Middle East regions. Some of Chinese leading EV makers have shown the early signs of competitiveness in global competition and continuously gained market share from legacy automakers in China and outside China. As one of the key beneficiaries, the worst time is behind for battery sector, though it takes time for bottom-out. We expect more M&As and capacities exit in battery and battery materials industries. Auto semiconductor industry would be another key beneficiary in spite of slowdown in the near term. Leading companies’ technology competitiveness remain solid in the foreseeable future. Yet, we have also seen some early signals of new entrants’ catch-up. China’s recent stimulus policies are definitely positive to the whole value chain globally. However, we will be more cautious on individual stocks going forward after stocks rallied too much in a short period of time. It takes time for fundamentals to match the valuation expansion.
1 Morgan Stanley, October 2024
2 Goldman Sachs, October 2024
3 NDRC, July 2024
4 Morgan Stanley, July 2024
5 UBS, September 2024
6 BBC, August 2024
7 UBS, August 2024
8 Morgan Stanley, October 2024
9 UBS, September 2024
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Authors: Ahn Sol, Chan Tsz Wang Edward, (Licensed by the Securities and Futures Commission for Types 4 and 9 regulated activities under the Securities and Futures Ordinance). And Zijun Liu (Licensed by the Securities and Futures Commission for Types 1 and 4 regulated activities under the Securities and Futures Ordinance) The authors and their associate(s) do not hold the securities/fund mentioned in the article.