● Investment ideas based on Tesla and Hyundai Motor’s earnings announcement
[The implications of Tesla’s earnings announcement]
- Industry-leading operating margin targets removed -> Price Competition suggests
- Investment increases, profit margins fall as costs rise -> Tesla’s direction of investment matters
- Securing Supply Chain To Improve Costs -> Tesla Supply Contracts Likely
- Energy sector margins rise to record levels -> ESS, LFP
- Confidence in transforming your business structure: S/W, Energy
- Emphasis on self-driving & robo-taxi
- Entering the Era of Smart Cars 2.0, Time to Realize Self-Driving
- FSD Technology Integration Like Charging Method (NACS) -> Evolved into a Platform Company
- Build self-driving systems for OEMs and shorten mass production time
- Cybertruck & 4680 Battery
- Importance of Mega Casting Method, Dry Process
- Application of New Material: Silicone cathode material, CNT conductive material
I summarized the implications of Tesla’s earnings announcement in three ways: suggesting price competition, emphasizing self-driving and robo-taxi, and mentioning Cybertruck and 4680 batteries.
First, Tesla removed its industry-leading operating margin target from its earnings announcement, suggesting price competition. In the second quarter, the auto division’s gross profit margin was 17.5%, down 8.2 percentage points from the previous year. The average price of the Model Y, which accounts for 66 percent of vehicle sales, fell 23.2 percent. The reason for the decline in operating margin can be explained by the increase in investment costs, which Tesla is expanding into various industries such as robots, AI, autonomous driving, and space industries. Last year, R&D expenses amounted to $3.07 billion, spending about 3.9 trillion won on R&D. R&D expenses are expected to expand to nearly $5 billion in 2025. Although the ratio of R&D expenses to sales once exceeded 10 percent, it is expected to continue to decline to 3.5 percent this year and 2.9 percent in 2025 due to the rapid growth of sales. Tesla’s investment direction is expected to determine the leading sector in the stock market as well, and we believe that investment opportunities will expand in sectors such as the charging business and autonomous driving, which are expected to be the fastest profitable.
Master Plan 3, which Tesla unveiled on March 1 as a way to improve costs, mentioned improving the process of the Model Y and improving production efficiency through the next-generation platform. Tesla’s upcoming compact vehicle is expected to feature a 53 KWh LFP battery, which will be an important model for achieving Tesla’s goal of selling 20 million electric vehicles in 2030. Representative secondary battery materials in Korea that can benefit from this include electrolytes. LFP contains twice as much electrolyte as NCM batteries. In Korea, Nchem is known to be discussing supply contracts with Tesla. It is also very important for Tesla to secure supply chains as a way to improve costs. In the second half of the year, domestic secondary battery material companies that will discuss supply contracts with Tesla are expected to draw attention because they will be connected to Cybertruck and 4680 batteries. Companies currently under discussion include L&F, SKIE Technology, SKC, and Nchem.
One characteristic of the earnings call is that the energy division’s gross margin (GIF) was 18.4%, exceeding the auto division’s 17.5%. Tesla’s energy division has solar and ESS businesses, which can be divided into megapacks for large power plants and power walls for homes. Megapacks are recording strong growth, production capacity is expected to double in 2024, and profit margins are expected to rise further as a number of projects, including the U.S. and Australia, are nearing completion. Powerwall expects demand for installations, which has recently slowed down due to revenue starting to accrue to consumers participating in the virtual power plant VPP, to rise again quickly.
If you think about why Tesla might suggest price competition, you have confidence in cost reduction, and on the other hand, profitability is rising rapidly outside of the automobile business. Connecting the fact that NACS is becoming a charging standard with the rising profitability of the energy division, Tesla expects to be more profitable in the future by building it as a platform for energy-related production through solar power generation, storage through ESS, and utilization through charging infrastructure, which will also play a positive role in increasing demand for car purchases. For Tesla’s supercharger, the market predicts that Tesla will secure more than $5 billion in charging sales from its partners, such as Ford and GM, by 2032. Investment ideas related to charging electric vehicles are also expected to expand.
[Cybertruck and 4680 battery]
He did not mention the specific timeline for the Cybertruck’s sales but noted that it would begin delivering the Cybertruck within this year and mass production next year. He recently announced the start of Cybertruck production on Twitter on July 15, and he expressed confidence that preparations for the Cybertruck production were going well in this earnings report, especially noting that the yield of the 4680 batteries has improved. He also mentioned for the first time that the production of the 4680 batteries was up 80% quarter-on-quarter and that more than 10 million units were produced cumulatively. It predicted that the batteries to be loaded in the Cybertruck will be more than 10% more energy-dense than the current products, and that battery cost will improve and stabilize over the next year.
Regarding the 4680 battery, the key will be the dry process and the silicon cathode material. I explained the dry process in the last broadcast that explained the silicon cathode material and the CNT conductive material. For the dry process, cooperation between mixing companies, material companies, and process companies is important. Switching from wet process to dry process can drastically reduce the cost. Recently, companies such as Samsung SDI and CS have started the national task of dry process equipment for LFP. It is a four-year national project period, but it is expected to shorten it by the end of next year and focus on developing dry process equipment for all-solid-state battery development. Since the dry process is currently the most technical difficulty in Tesla’s 4680 battery, if CSI can produce results in the development of dry process equipment, cooperation with Tesla is also possible, which will enable a reversal of stock price, which was sluggish compared to PNT.
Regarding silicon cathode materials, a British company called Nexeon recently signed a contract with Panasonic to supply silicon cathode materials, and Panasonic’s batteries will be supplied to Tesla. Yesterday, OCI signed a long-term supply contract with Nexeon for monosilane, a special material for silicon cathode materials. This completes the value chain that connects OCI (Monosilane) – Nexeon (Silicon cathode material) – Panasonic (battery) – Tesla. With this supply contract, OCI will increase its value as a material company specializing in semiconductors and secondary batteries, and Tesla Hyang supply reference will also play an important role for OCI and Nexeon to expand other customers. Nexeon is a company that SKC invested in, and SKC secured business rights through Nexeon’s equity investment. SKC is expected to lead the establishment of Nexeon’s facilities, and SKC’s relationship between OCI and SKC is also drawing attention in the future, as it is expected that SKC’s silicon cathode materials business will also speed up. Compared to SiOx, which was led by major electronics materials, there has been no SiC type mass production or supply contract news, but we believe OCI and SKC will receive positive momentum for silicon cathode materials through the news of this supply contract.
[Hyundai Motor Company’s earnings announcement]
- Sales growth increased from 10.5% to 11.5% to a new 14% to 15% increase
- Operating margin increased from 6.5% to 7.5% to new 8% to 9%
- Operating profit margin of 10.0% in the second quarter and 9.5% in the first quarter (expected to fall to 8% in the third and fourth quarters)
- Operating profit increase of 1.26 trillion won = volume increase +501 billion won, mix improvement +2010 billion won, exchange rate effect +682 billion won, financial sector profitability decline -184 billion won
Hyundai Motor raised its full-year guidance with the announcement of its second-quarter earnings. When it issued its guidance at the beginning of the year, it was concerned about a contraction in demand, but it was because demand was stronger than expected. In the case of GM, which announced the previous day, it also raised its full-year guidance citing good demand, so car sales in the second half of the year are likely to be stronger than expected. Attention is focusing on whether auto parts makers will be able to quell peak-out concerns even after reporting good second-quarter results.
The operating margin in the second quarter was 10%, up from the first quarter. The full-year guidance was also raised to 8-9%, but the consensus is that the operating margin will fall to 8% in the second half of the year, so how to maintain profitability will be key to the stock price. Hyundai’s incentive per unit is estimated to have risen by $800 compared to the beginning of the year. It’s about 1 million won per unit. The ASP in the second quarter rose by 1.9 million won compared to the first quarter, allowing operating profit per unit to rise even considering the increase in incentives.
In the second half of the year, the key will be to what extent incentives can be defended while increasing the ASP, as there are concerns about intensifying competition and price competition due to the normalization of production by global automakers.
On top of that, as the exchange rate effect disappears in the second half of the year, concerns about peak-out of operating profit may continue to be raised. In the second quarter, KRW 682 billion in operating profit is equivalent to 1.6%p in operating profit. Assuming that all exchange rate effects disappear and incentives recover to pre-COVID normal levels, operating profit returns to the 6% level.
Hyundai’s electrification speed is faster than competing global OEMs, so the key will be whether it can gain a competitive advantage in the future transition to electrification and SDV. Global legacy OEMs have declared 2025 as the first year of the Software Defined Vehicle (SDV) and are making investments to upgrade their platforms.