Two portfolio holdings left the portfolio as of Friday close: Avanza Bank and Highpower International.
The stock has performed very well lately, breaking the 400 SEK level which was something of a target for me in the medium term. The return in SEK has been 23% since April last year. Unfortunately the SEK has been very weak, so the return in USD +13%, still a good return but this shows the currency risk running a global USD denominated portfolio. I still think the company has a bright future in stealing market share from the big Nordic banks, but right now valuation has run a bit ahead of itself. I also believe that the retail speculation has reached a peak, especially in Sweden where small/micro cap stocks have been in mania mode for quite some time already. All the signs of a very late stage bull market is visible in my view and that is not the best time to own Avanza, although in a 10 year perspective I think the stock is still a strong buy. I take the bet I will be able to get in cheaper in the next few years.
This has been in the portfolio since the beginning, although I cut the weight significantly a month later (happened to be same time as I bought Avanza Link). After reading sell side research I have understood that the ramp up in production of batteries, mainly in China, but also from Tesla’s Gigafactory will create a situation of serious supply surplus at least in the short term. Although I don’t fully agree with the analysts estimates of demand, they will probably be right for the short-term (1-3 years out). For the longer term I think the analysts underestimate the power of the S-curve demand, where consumers will move to EVs much faster than most people right now could imagine. But the over-supply situation could be deadly for small companies like Highpower and therefor I don’t deem the risk/reward favorable any longer. A part of the explanation for the S-curve move into EVs will also be thanks to this oversupply created, this will bring down prices of batteries rapidly and make EVs even more cost competitive.
This article is fairly good to balance my bullish view on the future: Morgan Stanley Batteries
It has been a wild ride stock price wise in Highpower, but finally it is now sold at a minor loss.
How about my other battery companies?
If I have changed my view on battery companies, how about my holdings in Coslight Technology, LG Chem and BYD then? I have become more cautious and might reduce my holdings somewhat. The general answer is that I believe these companies are in a good position to be competitive for different reasons, also valuation wise especially Coslight is not expensive even if margins fall somewhat.
Some thoughts about Coslight/BYD
Both companies are still eligible for government incentives. Coslight will just about qualify, which is a big positive.
BYD EV sales is performing well and as important it’s sales of electric buses is still strong. The company continues to innovate and is now moving into the mono-rail market.
Coslight has some very good companies it’s supplying batteries to: HP which has launched one of the worlds slimmest laptops with a Coslight battery in it. HP recently has issues with battery recalls from a supplier in China, but as far as I have been able to find, that was not related to Coslight. Coslight is also a supplier to car maker BAIC, which has during the last 6 months performed very well in sales of its EU260 car in China. It has launched another model which also started strong sales.
This is also backed from sell side research discussion with management (Coslight research) where it is stated:
” Despite concerns about slower industry growth of EV in 2016 due to investigations into possible cheating related to government subsidies, management reiterated that EV battery production was fully booked, given strong downstream demand. Coslight’s major customers for EV batteries in 1H 2016 were BAIC and XINDAYANG.
Management guided that shipment volume of EV batteries would surge (both YoY and HoH) in 2H 2016. Given the current run rate, the output value of the Company’s EV battery capacity should exceed previous guidance of RMB2bn in 2016. Management targets doubling EV battery capacity to 3GWH by 2018 with a total investment of RMB700m”
Looking at the sales figures comparing May 2016 with full year figures we can see BAIC sales climbing in second half of 2016 (as well as BYD being the king of EV sales) (source Ev Sales):
This is my very long term holding, it is the industry leader and the producer of the very impressive Chevy Bolt. I expect LG chem being the number one battery producer to compete with Tesla’s Gigafactory and the future supplier to all the big car makers worldwide. Short term if the batteries are loss making is not of such importance since this company is mostly a Chemicals company with a smaller part of sales from batteries. This will change the day 50% of all new cars sold are EVs, then LG chem will rotate into becoming a huge battery producer.