04-Sep-2022
Welcome to the weekend’s Wall StreetUnderground update,
Disclaimer: This is a research letter with myown views, and opinions and do not constitute in any financial advice or investmentadvice. Utilisation of purely sentiment-based data with some bland economists’ opinions and wall street and non-wall street institutional chatter for some added spice.
Kindly read and enjoy it, just have somefun!!!
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So, good afternoon to all from a cloudy Sydneyafternoon,
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The key topic of focus: The Electric Hum
The tipping point in passenger EV adoptionoccurred in the second half of 2020 when EV sales and penetration acceleratedin major markets despite the economic crisis caused by the pandemic. Europespearheaded this development, where EV adoption reached 8 % due to policymandates such as stricter emissions targets for OEMs and generous subsidies forconsumers.
In 2021, the discussions centred on the enddate for internal combustion engine (ICE) vehicle sales. New regulatory targetsin the European Union and the United States now aim for an EV share of at least50 % by 2030, and several countries have announced accelerated timelinesfor ICE sales bans in 2030 or 2035. However, we all know that thecontinued acceleration of electrification is putting significant pressure on OEMs,their supply chains, and the broader EV ecosystem to meet these targets.
And in comes Politics and now we see the“Inflation Reduction Act”. And it's BIG… nearly $370 billion to tackling climatechange. It has many parts, including changes to the current electric vehicle tax credit. All EVs assembled in America will be eligible for a $7,500 federal tax credit if they are put in service after December 31, 2022. The amount of the credit depends on where its parts are sourced and its final assembly point.
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Additionally, used EVs that are at least twoyears old are also eligible for a tax credit up to $4,000 or 30% of thepurchase price, whichever is less. There are some caveats with the Inflation Reduction Act to income limits on who can claim the credit. There are also price caps as well, since vans, pickup trucks, and SUVs with a price tag over $80,000 aren’t eligible. A vehicle has to have an MSRP below $55,000 to qualify and a used EV has to cost less than $25,000 to qualify. Lastly, the Act requires the final assembly of the EVs to take place in North America and that its components are sourced here as well. This unfortunately means several EVs from automakers—like Volkswagen, Kia, and Toyota will be ineligible for the incentives and this limits the broader adoption of electric cars through inequitable incentivization.
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Will the new electric hum cause a major shiftin the entire automotive supply chain? Yes, absolutely !!! The transformationof the automotive industry toward electrification will disrupt the entiresupply chain and create a significant shift in market size for automotivecomponents. Critical components for electrification such as batteries and electric drives and for autonomous driving like light detection and ranging (LiDAR) sensors and radar sensors will likely make up about 52 % of the total market size by 2030. Components only used in ICE vehicles such as conventional transmissions, engines, and fuel injection systems would see a significant decline to around 11 % by 2030—about half the size of 2019 levels. Such a drastic shift will force traditional component players to adapt quickly to offset decreasing revenue streams. Checking out the “Ifo” Institute of Economic Research in Munich, more than 100,000 jobs will change in the German automotive industry by 2030. That is roughly 5 to 10 times the scale of jobs compared with the phaseout of coal power that Germany announced for 2038.
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Based on the announced EU build-up plans, thereis an expectation that a 20-fold increase in battery production capacity in Europeto be around 965 GWh by 2030. Assuming the full capacity is built by 2030,Europe could meet the expected demand of 874 GWh. BEV passenger cars and commercialvehicles will drive 90 % of this battery demand. While on paper announcedcapacities seem to follow and match demand, in reality, temporary implementationrisks will most likely occur given giga-factory production issues, typicallyslow yield ramp-ups, fragmentation of the supply chain, and large inflexibleOEM contracts. In the next ten years, that geopolitical and supply chain crisesto pop up periodically, leading to price spikes in commodities like nickel andlithium.
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So what does this mean? OEM’s Vehicle Value Creation Inhouse
Battery cell production is starting to move physicallycloser to vehicle assembly plants. While 10 years ago almost all cells were importedfrom Asia. In addition to incumbent battery cell players from Asia setting up locations in Europe, some entirely new companies are entering the space. One key development in battery sourcing involves the backward integration of OEMs from packs and modules up to cell production, mostly in the form of joint ventures with cell manufacturers. OEM backward integration plans result from their growing battery cell demand, the desire for control and certainty of supply, and the ambition to keep a significant part of vehicle value creation in-house. OEMs are also seeking areas for differentiation, with battery technology, durability, and performance seen as key evaluation criteria for BEVs.
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Institutional view:
There is a large Institutional dinner takingplace next week and it will be fun and interesting going to it. Many discussions regarding the global financial climate added into it some political uncertainty like the US providing $$$ to Taiwan stirring things up. China and its domestic issues. What it will be thinking about Biden’s inflation bill. Will be interesting to catch up and discuss what are the Institutions main concerns. This obviously affects their client investment strategy going forward.
With many key investors talking about the whitegold “Lithium”, Institutions are eyeing up valuations and key predictions on thekey 4: nickel, cobalt, lithium and graphite. In Europe, there is a time lag and issues with local sourcing so companies must therefore compete globally to secure required volumes and do it sustainably in line with environmental, social and governance (ESG) criteria. And we have not even discussed the US demands in this research letter. Many Institutions recommend ‘HOLD’ in the Mining sector space. Hmmm, hold? Definitely means ‘Accumulate’ in my view. The Tiered Price targets have been worked out for new entrants into the ASX 200 along with Sayona, possibly something to discuss over the Institutional dinner.
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Now SYA:
What does that mean to be announced into theASX 200 club? If you think volatility existed in the ASX 300 welcome to the Big Boys Institutional “volatility” club. Most Lithium companies have seen their fair share of love and reality checks in this new club. But most importantly keep in mind the Global Macro Trend. Interest rates, panic knee-jerk reactions and overreactions. Manipulators can’t help but take advantage. A bigger ocean brings bigger sharks but also to be positive brings even bigger waves. In a street fight, you have to put up your hands and fight, if you get knocked down, you must get up and fight again and again and again. Bullies have always been around in such clubs and being smashed to the asphalt produces incredibly courageous comebacks too!
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But the Institutions watch for the quiet onesand pick on them. There is already talk amongst the Institutions that various companies will be quiet in terms of activities and news and that causes initial vulnerability but in the short term. If the company has a good strong fundamental strategy, it will eventually shine in due course but in the short term the stings will come.
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Talking from the depth of Institutionalthinking and dealings, the Sayona management needs to definitely adapt quickly. It's not only about keeping SP based on institutional sentiment and TA but regular communications (direct and indirect). Understand the overall Stakeholder cloud, potential clients, suppliers, communities, institutional relationships, shareholders, and the board. Relationships matter and, in this game, perception is sometimes more than what really is. If perception is followed by reality and regular activities with up-to-date communications, this is a recipe for street cred !!! This is when the bullies think twice as they can also expect some stings back. And such stings back hurt the Institutional PROFIT margin, Profit margin hurts Portfolio executives, and then the trickle-down effect to the Fund Managers so they will think twice most definitely !!!
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Sayona management:
Sayona management could definitely have donebetter in the past but the learnings have to be applied quickly now asSayona will be inaugurated into the ASX 200. The overall company strategy seems to be there along with an overall timeline. But additional strategies must be included or updated:
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An Internal and External Stakeholder managementstrategy will help: This will help identify who will be added as a stakeholder, how we interact with these stakeholders, what motivates them, why have they invested and potential time period investment hold, and the risk of losing them and alternative investment stakeholders.
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A Communications strategy: How communications are to be managed, frequency, regularity, not being ambiguous but being on the ball. Updates to the Website and various communications channels, inward feedback loops. The success, the news, and the upcoming milestones, all create enthusiasm, readership, involmentship, and realistic FOMO with sound analytical data.
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A Client management strategy; potential clients,strategy in acquiring future clients, how, when, aims and objectives. There needs to be considerate weight given to key markets, future growth offerings, key trend analysis, key merger/ JV analysis, long-term investor acquisitions analysis; how we acquire them, how we entice them, how we grow soundly.
A public relations strategy: influencethrough direct and indirect marketing channels, leadership attributes. Start acting like leaders in the industry, then achieving milestones in turn making Sayona leaders. Sayona is in a unique location, position and major asset portfolio. All of these and more can be utilised for optimising its position in the Market !!!
Market strategy: market penetration, commodity analysis, alternative or substitution analysis
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I have seen so many conferences/conventions but one never thinks about creativity. Why would you visit stall A vs stall B? What catches the customer's eye? This is where one has to adopt the corporate polish, the shine. Creativity can be applied to all aspects of a business journey. Understandably in the mining sector, there is not a huge amount of ‘shine’ but originality in how one markets and communicates with future and current investors can still be applied. There is no excuse, not to apply originality because one is in the mining industry.
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Actually, if Sayona proceeds with the above-mentionedStrategies and starts taking steps to the What, Who, How, When hypothesismultiple avenues and further gains will most definitely come clear, hencecreating a path which can be communicated well and steps towards each achievement. Shareholders, Institutional and Non-Institutional, Clients and potential clients will come along the journey, with a sense of true partnership. “This is obviously keeping in line and achieving their mining schedule and key milestones commitments”.
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Wherever focus goes, energy flows and reputationis the mother of Skill !!! The hunger in the leader needs to exist, and then his/hervision and determination to keep striving for the company’s success has to turnup every single day.
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I hope you all have a great Sunday afternoon and look forward to an interesting next week.
Regards
OrdFin
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