Cabot Explorer Issue: April 20, 2023

Foreign Automakers Losing Market Share in China

Foreign automakers, including electric vehicle (EV) makers, are losing market share in China as the country doubles down on the EV supply chain.

China makes almost all of EV electric motors and refines most of the chemicals used for lithium batteries. China even leads in developing what could be the next generation of technology, sodium batteries.

More than 80% of the electric cars sold in China last year were made by domestic automakers. Last autumn, they overtook multinational companies in the total number of gasoline-powered or electric cars sold each month. This EV preference has been supercharged while sales of gasoline-powered cars have plunged as a purchase tax on them has been restored after a suspension during the pandemic.

With a couple of exceptions like Tesla, which China welcomed in 2018 for its technology, Beijing has compelled foreign companies to operate through joint ventures with Chinese automakers.

The numbers backing up this trend are stark. Electric cars were almost a quarter of China’s auto market last year, compared with less than 6% in the United States, and are expected to be over a third by the end of this year.

Ford Motor sold one million cars and light trucks in China in 2016 and in 2017 but barely 400,000 last year. Hyundai Motor, the South Korean giant, sold 1.8 million cars in China in 2016 and only 385,000 last year.

According to a recent study, EV owners can save up to $10,000 on fuel costs over the life of an EV car. You can add in another $10,000 in savings on lower maintenance costs and zero oil changes. In addition, up to $7,500 in tax breaks when you buy an EV.

In America, the southeastern region is gaining the most traction in terms of new investments and projects, as you can see from the below graphic.

New Recommendation: Solid Power (SLDP)

Solid Power is a Colorado-based developer of all-solid-state battery and sulfide-based electrolyte technology.

Solid Power replaces the flammable liquid electrolyte in a conventional lithium-ion battery with a proprietary sulfide-based solid electrolyte.

Solid Power’s all-solid-state battery cells are expected to be safer and across a broader temperature range, offer an increase in energy density compared to the best available rechargeable battery cells, and enable less expensive, more energy-dense battery pack designs. In addition, the technology is compatible with traditional lithium-ion manufacturing processes.

Summing up, the advantages to solid state batteries include higher energy density, longer battery life, greater safety, and long-term cost savings.

The technology the company is using to develop and realize these advantages is based on solid sulfide electrolytes, a new battery design that will allow for higher charging rates at lower temperatures, while avoiding the volatility and pricing risk of the lithium used in current battery systems.

Another plus is that these solid-state batteries do not require nickel or cobalt.

There are four factors driving today’s recommendation of Solid Power (SLDP).

The first is the share price, which is about 75% off its May 2021 IPO.

The second is its partnership with BMW and Ford.

The third is the January 2023 $5.6 MM U.S. Department of Energy (DOE) award to continue its development of nickel- and cobalt-free solid-state battery cells.

The fourth is its capital-light licensing model for its battery technology, while also developing a sulfide-based electrolyte that can be a raw material input for any OEM or battery manufacturer looking to develop its own solid-state batteries.

The BMW Group has agreed to pay Solid Power $20 million through June 2024, subject to achieving certain milestones. The “Joint Development Agreement” includes sharing of proprietary all-solid-state electrode and cell manufacturing know-how but does not include a license to intellectual property related to Solid Power’s electrolyte material, which remains its core asset and business.

When BMW Group installs its prototype production line, Solid Power expects to supply its electrolyte material to the BMW Group for prototype cell production.

Solid Power stated that it remains on track to open its electrolyte production facility, a key milestone in achieving full production, during the first half of 2023. The company began production of EV cells in the final quarter of 2022 and anticipates starting deliveries to partners this year.

Solid Power saw total revenues last year of $11.8 million, a year-over-year increase of 29% from the $9.1 million top line reported in 2021. While the company ran a net loss for the year of $9.6 million, it did report cash holdings of $50.1 million as of December 31, 2022.

This is an aggressive idea that comes with both risk and high upside potential. BUY A HALF

Weekly Explorer Stock News

Below is a brief update on each Explorer stock. Any changes in ratings will be highlighted. This section is all you need to read each week and will be followed by a new recommendation every other week.

Portfolio Changes: Kraken Robotics (KRKNF) Moves From Buy to Sell

Butterfly Network (BFLY) shares are up about 25% during the last month and finished the week at 2.5. Not much news this week and I’m leaving this at hold. Hold a Half.

BYD (BYDDY) shares jumped from 56 to 59 this week as the company made a big splash at the Shanghai auto show. BYD is building an EV assembly plant in Thailand and Brazil. It is also planning at least one EV plant in Europe and expected to announce plans for another EV plant in Asia in the next few months. Buy a Half.

ChargePoint (CHPT) shares were up marginally this week. The price of the stock is about a quarter of where it peaked about two years ago. Minimizing risk is that at the end of the January quarter, its balance was $369 million in cash, which puts it in a very different position than some other EV charging companies.

The last quarterly results released, Q4 of fiscal year 2023 reported earlier this month, showed a 93% year-over-year revenue gain. Buy a Half.

Corteva (CTVA) shares had another steady week, but the stock’s performance has been unimpressive overall. The company does offer a steady dividend and will report its next quarterly earnings on May 3. Hold a Half.

Kimberly-Clark de México (KCDMY) shares were unchanged this week. Founded in 1925, this is the Mexican subsidiary of Kimberly Clark (KMB), founded as a paper company in Neenah, Wisconsin in 1872. The stock is in a nice uptrend but with little week-to-week information. Buy a Half.

Kraken Robotics (KRKNF) announced a $4 million follow-on order from a NATO Navy client but this stock is just not moving despite the company expecting to post a profit in the coming year. Part of the problem is that management puts a low priority on investor relations and communications. Let’s step aside. Move from Buy a Half to Sell.

Novo Nordisk (NVO) shares breached 170 and then settled unchanged at 165 this week. The company announced a share repurchase program as well as increased guidance for 2023. The company now expects sales to grow by 24-30% (earlier estimate – 13-19%), while operating profit is now expected to register 28-34% growth as compared with the earlier forecast of 13-19%. Its popular drug Ozempic is approved for type 2 diabetes, but people have been taking the drug to lose weight because of its effectiveness. Hold a Half.

Polestar (PSNY) shares lost a little ground this week though company deliveries in the first quarter of 2023 were up nearly 26% year-on-year. At $48,400, the Polestar 2 is knocking on the edge of the luxury segment, though its current price is about the average price for a new car in the U.S. Buy a Half.

Explorer ETF/Fund Positions

WisdomTree Emerging Markets High Dividend Fund (DEM) offers a high dividend yield and some of the highest quality emerging market stocks. Buy a Half.

WisdomTree China ex-State-Owned Enterprises Fund (CXSE) is a smart ETF play and way to gain China exposure without any state-owned enterprises (SOEs). Buy a Half.

Model Portfolio

Explorer Stocks Summary

Brief company overviews that will not change week to week.

Butterfly Network (BFLY) Butterfly’s breakthrough software can be tied into a medical network to provide instantaneous images and improve both the speed and quality of healthcare. This is so much better than scheduling a test in a week and then having the patient come back and must pay for another appointment.

However, if your doctor has the Butterfly iQ+ in their pocket, he (or she) just connects it to an iPhone, it scans your body and has a digital image right in front of him. Plus, while an MRI machine can cost more than a million bucks, the Butterfly iQ+ costs a little over $2,000. Since it also requires a subscription service, it’s a steady source of recurring revenue for the company. The top 100 hospitals in the country already use Butterfly iQ devices.

BYD (BYDDY) In 2022, China auto giant BYD (for Build Your Dreams) switched to producing only all-electric battery vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs). BYD sold more than 1.85 million electric cars in 2022, including hybrids. In both 2021 and 2022, BYD more than tripled sales from the previous year. Most of BYD’s sales are still in China but it has a big international expansion underway, including the U.S., Europe, and Asia markets.

The company also manufactures and supplies EV batteries, including to Tesla, and makes its own chips. This is vertical integration that would make Henry Ford proud. BYD is in a strong position to be one of, if not the leader of the EV revolution in terms of size, scale, and growth.

Chargepoint (CHPT)
ChargePoint is an industry leader in electric vehicle charging. ChargePoint operates in both North America and Europe, with more than 225,000 charging points on its networks. ChargePoint has more than 5,000 fleet and commercial customers worldwide. The company has a 70% market share in the level 2 charging market in North America, giving it a powerful advantage over even its closest competitor.

ChargePoint has posted seven quarters in a row of increasing revenue with full-year revenue for fiscal ’23 showing a year-over-year gain of 94%. We need to accept the company’s heavy investments in growth; profits will appear as the company monetizes and leverages its charging network.

Corteva (CTVA) uses emerging technology to help farmers improve crop yields and boost output. Stocks like Corteva are recession-resistant and outperforming the market on a relative basis. In terms of partnerships, a year ago it signed a $5.2 billion collaboration with French drug giant Sanofi (SNY). It has expanded a Bristol-Myers Squibb (BMY) collaboration to include drug targets in both immunology and oncology. This is on top of a design partnership with the French drug giant, Germany’s Bayer, and Japan’s Sumitomo Dainippon.

Kimberly-Clark de México (KCDMY) was founded in 1925 and is based in Mexico City, Mexico. Its parent, Kimberly Clark (KMB) was founded in as a paper company in Neenah, Wisconsin in 1872. According to consultant Alix Partners, Mexico has surpassed China as the lowest cost country in the world for companies looking to manufacture products for North American markets. Mexico’s wages are now about 25% lower than in China and coupled with lower taxes and tariffs, this all adds up to a competitive edge.

Novo Nordisk (NVO) specializes in treatments for diabetes, hemophilia, and obesity. The company supplies half of the world’s insulin, and its diabetes care products are used by over 34 million people today. Novo highlights that more than 750 million people are currently living with obesity and that this is up a multiple of 3X since 1975. In summary, based on sizable and growing demand for this weight-loss drug, this well managed, highly profitable company with an excellent growth profile and potential to develop new products has limited risk.

Polestar (PSNY) is a Swedish premium electric vehicle manufacturer. Founded by Volvo and Zhejiang Geely Holding Group in 2017, Polestar enjoys technological and engineering synergies with Volvo. By the end of this year, the company plans for its cars to be available in 30 markets. Polestar cars are currently manufactured in China, with 2024 manufacturing planned in America. Polestar has an edge on much of the competition for two reasons. It has an “asset light” strategy through access to world class owner/partner Volvo’s factories. For 2023, Polestar anticipates global volumes to increase by nearly 60% to approximately 80,000 cars.

Explorer ETF/Fund Positions

WisdomTree Emerging Markets High Dividend Fund (DEM) offers a high dividend yield and some of the highest quality emerging market stocks. This ETF gives broad exposure with an emphasis on income and value.

WisdomTree China ex-State-Owned Enterprises Fund (CXSE) is a smart ETF play and way to gain China exposure without any state-owned enterprises (SOEs).

The next Cabot Explorer issue will be published on May 4, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld