asia: automobiles — charging the future: asia leads … · september 27, 2016 asia: automobiles...

September 27, 2016

Asia: Automobiles

Charging the future: Asia leads drive to

next-generation EV battery market Equity Research

Pushing the limits of lithium-ion batteries and investing in all-solid-state batteries

Battery market to grow 6X by 2025E

We believe the rapid adoption of electric vehicles

and hybrids over the next decade will spur an

enormous increase in the market for EV batteries

and heightened demand for advances in battery

technology. We forecast a six-fold increase in the

market for EV batteries to US$24 billion by 2025,

fueled by increases in energy density to lower

prices. In this report, we outline where we see

Asian companies leading this growth and

pioneering efforts to find the next-generation

battery technology to replace lithium-ion.

Powering the transition to EVs

Our battery market forecasts rest on our

expectations for a 30% CAGR in sales of electric

vehicles (EVs) to 2025, along with a 36% CAGR in

sales of plug-in hybrid electric vehicles (PHEVs) to

reduce CO2 emissions. We expect that over that

span, the gravimetric energy density of EV

batteries will climb to over 500 Wh/kg from 200

Wh/kg in 2015, likely requiring transition to a

post-lithium technology.

Investing with eye to lithium’s limits

Our approach is to look for companies that will

benefit from expansion and innovation in the

lithium-ion battery (LIB) market, as well as those

invested in the development of potential

successor technologies. We believe the post-

lithium transition could start from 2020. Among a

range of alternatives we focus on all-solid-state

batteries that would do away with the liquid

electrolyte found in most lithium-ion batteries and

offer advantages in size and cost.

Asian at heart of battery ecosystem

LG Chem (CL-Buy), Korea’s leading battery

manufacturer, has supply contracts with multiple

automakers, and in our view has an edge over

rivals from both a technical and cost perspective

BYD (Buy), China’s leading EV manufacturer, is

mass-producing its own inexpensive batteries. In

addition, we highly value Toyota’s long-term

strategy to focus on all-solid-state batteries, but

remain Neutral due to US auto slowdown

concerns in the near term.

Kota Yuzawa

+81(3)6437-9863 [email protected] Goldman Sachs Japan Co., Ltd.

Yipeng Yang

+86(10)6627-3189 [email protected] Beijing Gao Hua Securities Company Limited

Nikhil Bhandari

+65-6889-2867 [email protected] Goldman Sachs (Singapore) Pte

Masaru Sugiyama


Shuhei Nakamura


Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research

September 27, 2016 Asia: Automobiles

Goldman Sachs Global Investment Research 2

Table of contents Our thesis in four charts: Battery market to grow 6X by 2025E

Executive summary: Battery race starting to rev up in Asia

10 Asian beneficiaries of LIB growth, development of post-lithium technology

Key industry themes

Battery race accelerating with energy density likely to double, market up 6X by 2025E

Up the technology curve: Next-generation LIBs, then all-solid-state batteries

EV and PHEV penetration set to accelerate through 2025E

Stocks in focus

LG Chem: Strong and diversified EV battery client base; reiterate CL-Buy

BYD: To benefit from China’s fast-growing NEV market, valuation attractive; reiterate Buy

Panasonic Corp: Leading LIB supplier globally, but Neutral on tough market outlook

Toyota: Leading all-solid-state battery development, but Neutral on stiff competition

Toray: No. 2 supplier of LiB separators globally, further expansion underway; Neutral

Samsung SDI: Shifting focus from mobile to EV, but challenges ahead; Neutral

Other beneficiaries

Appendix

Disclosure Appendix

Prices are as of September 21 close for Japanese companies and September 22 close for non-Japanese companies. The Future in

numbers

The drive for better EV batteries sits at the nexus of multiple trends. See our theme pages for related work on Cars 2025, The Low Carbon Economy and The Great Battery Race.

Lighter, Faster, Cheaper, Apr 7, 2016

Disruption in China’s new car market, Feb 29, 2016

BYD (1211.HK) Buy: Electrifying the world’s largest new car market; reinstate at Buy, Aug 31, 2016

The Low Carbon Economy, Nov 30, 2015

Electric Vehicles – customer acceptance & continued scaling; check, Apr 7, 2016

The Great Battery Race, Oct 18, 2015

China Energy Storage: Charged up and ready to grow, Jun 8, 2016

LG Chem (051910.KS) Buy: Right chemistry and charged batteries; initiate at Buy (on CL), Jan 22, 2016

Get a 2-minute audio summary from author Kota Yuzawa. Listen here

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Charging The Future in numbersSATISFYING THIRST FOR RANGEBATTERY BOOM ON THE WAY

GREATER DEMAND, GREATER DENSITYCOST TO COME DOWN

THE LARGEST MARKET - CHINAASIA TAKING THE LEAD

Increase in lithium-ion battery (LiB) demand expected between 2015 and 2025, rising from 58 GWh to 387 GWh. Demand for automotive batteries is slated to rise from 15 GWhto 279 GWh during the same period. (p. 12)

6x

2x Increase in energy density expected between 2015 and 2025, from 200 Wh/kg to 550 Wh/kg. (p. 10)

60 kWhBattery capacity needed to achieve a driving distance comparable with that of a gasoline-powered vehicle (around 300 km/200 miles). (p. 11)

US$272 to US$100 per kWhCost for auto batteries from 2015 to 2025E. Improvement in energy density should help drive this decline. (p. 10)

300,000 New Energy Vehicle sales (excluding hybrids) in China (2015). (p. 29)Percentage of global output from Asian battery makers. (p. 6) 50%+

3,000+ Patents for all-solid-state batteries filed in 2002-2011, far higher than other post-LiB technologies. 71% of these applications were filed by Japan, Korea and China. (p. 19)

The All-Solid-State Batteries Future

What is an all-solid-state battery?An orthodox LiB has a separator and liquid electrolyte between the cathode and the anode. An all-solid-state battery, on the other hand, has only a solid electrolyte between the cathode and the anode, and contains no liquid. There is no need for a separator, as the solid electrolyte also takes on that function. These batteries are known as all-solid-state batteries as they contain absolutely no liquid.

Why are all-solid-state batteries needed?All-solid-state batteries have advantages in terms of safety, and they also offer stable performance through a wide range of temperatures, which is why they are being developed for automotive applications. As they eliminate the need for liquid electrolytes and separators, all-solid-state batteries could in theory have much higher energy density. Competition to develop solid electrolytes will be the key.

Is the production method different?A mass production technique for all-solid-state batteries has yet to be established. However, in many cases the production of relatively large-capacity all-solid-state batteries for automotive applications involves a pressurized process, which means that facilities will differ from those used to make conventional LiBs. Solid electrolytes are generally less conductive than liquid electrolytes, but a number of companies, including Toyota, are vying with each other to develop solid electrolytes that have ionic conductivity on a par with, or even exceeding, that of liquid electrolytes.

Negative current collector Positive current collector

Separator

Li+

Li-

Li-

Li-

Li-

Li-

Li+

Li+Li+

Li+

Li+

Anode CathodeLiquid


Li+

Li-

Li-

Li-

Li-

Li-

Li+

Li+Li+

Li+

Li+

Anode CathodeSolid

Lithium-ion battery All-solid-state battery

Source: Goldman Sachs Global Investment Research.



Our thesis in four charts: Battery market to grow 6X by 2025E

Exhibit 1: Bullish on demand outlook for EVs, PHEVs Outlook for EV/PHEV sales, 2015-2025E CAGR

Exhibit 2: Forecast rapid increase in energy density, battery costs halving Outlook for energy density, battery costs

Note: Excluding low speed EV in China.

Source: IHS, Goldman Sachs Global Investment Research.


Exhibit 3: At battery cost of US$100 per kWh, EVs could represent cheapest

solution for reducing CO2 Additional cost to reduce CO2 by 1g

Exhibit 4: We project six-fold growth in automotive battery market LIB market outlook, by application



(Thous.) 2015 2020E 2025E CAGR

PHEV 397 1,272 2,787 22%

China 60 518 1,339 36%

Non-China 337 753 1,448 16%

EV 251 1,322 4,014 32%

China 140 864 1,890 30%

Non-China 111 458 2,123 34%

PHEV+EV 648 2,594 6,801 27%

Global auto demand 88,384 101,730 111,494 2%

683

272

197

100150

200

300

500

0

100

200

300

400

500

600

700

0

100

200

300

400

500

600

700

Cost(USD/Wh, RHS)

Energy density(Wh/kg, LHS)

Current LIB

Next generation LIB

Post LIB(All-solid-state battery)

Needtechnologicalbreakthrough

Li-ion battery All-solid-state battery

2010 2015 2020E 2025-2030E

10 9 7 215 1517

9 113

86

302710 17

4

279

49

0

50

100

150

200

250

300

Mobile phone PC Tablet Machine tool Automotive Others

2015 2020 2025

(GWh)

2015$ 4bn

2025$ 24bn

Automotivebattery market (USD)



Executive summary: Battery race starting to rev up in Asia

PHEV, EV penetration set to pick up pace; EVs key to CO2 reduction Almost two decades have passed since Toyota launched the world’s first mass-produced hybrid vehicle (HV) in 1997. By 2015, the

hybrid vehicle market had grown to 2 mn units, making an enormous contribution to CO2 reduction. Over the coming 10 years, we

think electric vehicles (EVs) and plug-in hybrid vehicles (PHEVs) will demonstrate remarkable growth. In recent years, environmental

regulations have been strengthened and tightened, forcing automakers to review their powertrain strategies. In addition, we see

significant support for EV growth from stepped-up new energy vehicle (NEV) subsidies in China. Moreover, advances in lithium-ion

battery (LIB) technology (huge leaps in energy density) could result in an increase in battery capacity per vehicle. We see the EV

market expanding from 250,000 units in 2015 to 4.01 mn units in 2025 (CAGR of 30%) and look for PHEV sales to rise from 400,000

units to 2.78 mn units (CAGR of 36%). Over the same period, we expect the HV market to grow from 2.16 mn units to 13.94 mn units

(CAGR of 20%).

The lower the cost for batteries, the more sense it will make to adopt an EV-based business model. We calculate that in PHEVs, the

additional cost to lower CO2 by 1 gram is US$139. Based on a battery cost of US$272 per kWh in 2015, we calculate that in EVs, the

additional cost to lower CO2 by 1 gram would be US$124, similar to that for PHEVs. That cost would shrink to US$31, though, in the

case of a battery cost as low as US$100 per kWh. This would make EVs an inexpensive solution for reducing CO2 emissions, on a

par with vehicle light weighting and downsizing turbo engines. From the automakers’ perspective, we see grounds to continue

investing heavily in EVs through 2030.

Turning point ahead for batteries; six-fold growth in automotive battery market by 2025E We look for the automotive battery market to expand considerably, in tandem with growth in the EV and PHEV markets. We expect a

roughly six-fold increase in LIB demand between 2015 and 2025, from 58 GWh to 387 GWh, with demand for automotive batteries

rising from 15 GWh to 279 GWh over the same period. Thus far, mobile phones and PCs have been the main source of demand for

LIBs, but over the next decade we think rapid growth in automotive applications will bring battery operations to a major turning

point. Even allowing for an average annual decrease of about 5% in battery prices—to encourage greater uptake—we think the

market for automotive LIBs could grow sharply in size between 2015 and 2025, from US$4 bn to a massive US$24 bn. For further

details on LIB demand, see our October 18, 2015 report Global: Clean Energy: The Great Battery Race.

Rapid improvement in energy density; focus on all-solid-state batteries The history of automotive LIBs is one of unstinting efforts to improve energy density (gravimetric or volumetric). In 2007–08, Nissan

announced plans for large-scale investment in pouch-type batteries with manganese spinel as the cathode material, going on to

launch the Leaf EV. At the time, we estimate that gravimetric energy density was 100-150 Wh/kg, but by 2015, batteries with ternary

cathode materials were achieving gravimetric energy density of over 200 Wh/kg. Looking ahead, further technical advances will

likely lift this figure to 300 Wh/kg by 2020, and over 500 Wh/kg in 2025 and beyond. Similarly, the aim is to boost volumetric energy

density from 500 Wh/l in 2015 to 700 Wh/l in 2020 and 1,100 Wh/l in 2025 and beyond. We note this will likely require a transition to

so-called “post-lithium ion” technology. Among the many next-generation battery technologies, we focus on all-solid-state batteries.



10 Asian beneficiaries of LIB growth, development of post-lithium technology

While innovation in battery technologies is proceeding at a rapid pace worldwide, battery development is booming in Asia in

particular. Asian battery makers currently have around 50 GWh of production capacity, equivalent to 50% or more of global output

(consumer electronics/automotive battery capacity combined), and have monopolistic shares of 50%-80% of core component

materials, such as cathode materials and separators. Asian producers have also taken the lead in the development of next-

generation batteries. Japan accounted for 53% of patent applications filed in 2002-2011, followed by the US at 13%, Europe at 12%,

Korea at 10% and China at 8%. We reiterate our Buy ratings on LG Chem (CL) and BYD on the back of rapid LIB business expansion.

We remain Neutral on Toyota over short-term US auto market slowdown concerns, but highly value its long term strategy to focus

on all-solid-state batteries. We also spotlight seven other battery and related product makers from among the many Asian names in

this space.

• LG Chem (battery manufacturer, Korea, CL-Buy): A major battery manufacturer with total production capacity of 13 GWh

(our estimate, consumer electronics/automotive battery capacity combined), for a 13% share of the global market. It has well-

established automotive battery supply agreements with Hyundai, General Motors, Ford, and other major automakers. LG Chem

also has an edge in terms of technological development, having successfully developed ternary (nickel, cobalt, manganese

composite) batteries with energy density of more than 200 Wh/kg.

• BYD (automaker, China, Buy): Sales have been growing rapidly on the back of China’s NEV policies. BYD currently mass

produces batteries using lithium ferrophosphate as a cathode material, but also plans to develop batteries with improved

energy density, mainly through the use of ternary (nickel, cobalt, manganese composite) technologies. We see advantages in

terms of cost competitiveness for automakers producing batteries in-house under a vertically integrated business model.

• Toyota (automaker, Japan, Neutral): Toyota is the world’s largest producer of nickel-metal hydride batteries for hybrid

vehicles, but has made no major investments in LIBs. We believe the company considers all-solid-state batteries essential to

growth in EV uptake. We see appeal in Toyota’s accumulating expertise in the field of all-solid-state batteries, including the

development of (solid) electrolytes with high ionic conductivity, but think any real-world applications are unlikely to become a

reality before 2020.

• Panasonic (battery manufacturer, Japan, Neutral): A major battery manufacturer with total production capacity of 10 GWh

(our estimate, consumer electronics/automotive battery capacity combined), for a 10% share of the global market. Sales of

automotive batteries in FY3/16 stood at around ¥150 bn, but we expect this figure to rise sharply to ¥350 bn by FY3/19.

Panasonic is also responsible for supplying nickel cobalt aluminum batteries to Tesla, and has decided to invest around ¥150-

¥200 bn in the US automaker’s Gigafactory project.

• Toray Industries (separator maker, Japan, Neutral): A hybrid chemical maker that makes wet separators, with a 20% market

share in separators, second to Asahi Kasei, which has a 45% share (including its Celgard acquisition). Despite the fact that the

separator business accounts for only 1.2% of sales, the company is planning aggressive capacity additions in coming years.

• Samsung SDI (battery manufacturer, Korea, Neutral): SDI has built a solid track record with increasing market shares in

consumer/mobile battery business. However, we do not expect SDI’s success in mobile battery will directly translate into EV

battery industry given diverging industry dynamics and customer base. We foresee three major challenges for SDI’s EV battery

business including limited customer base, slower cost reduction, and regulation risks in China.



• Asahi Kasei (separator maker, Japan, Not Covered): The only maker of both dry and wet separators, the company has a

dominant, 45% separator market share (Asahi Kasei acquired rival Celgard, which makes dry separators, in 2015). The

separator business accounts for 6% of sales. According to Asahi Kasei, the business is expected to make ¥2.5 bn in operating

losses in 2016 due to goodwill amortization from the Celgard acquisition.

• Tanaka Chemical (cathode materials maker, Japan, Not Covered): A pure play that mainly makes positive electrode

precursors. On August 31, 2016, Tanaka Chemical announced plans to raise capital by issuing new shares via a private

placement to Sumitomo Chemical. This would take Sumitomo Chemical’s stake in Tanaka Chemical to 50.1%. The two have

been collaborating already on development of next-generation nickel-cobalt-manganese (NCM) cathode materials with a nickel

weighting as high as 90%, which should contribute to further increasing batteries’ energy density.

• W-Scope (separator maker, Japan, Not Covered): A wet separator pure play, with a 5% separator market share. It currently

has a 65% consumer electronics separator weighting and a 35% automotive separator weighting, but is targeting market share

growth in automotive separators with the shift from wet to dry separators. Its head offices are in Japan, and it is listed in Japan,

but all of its production bases are in Korea.

• Hitachi Zosen (all-solid-state battery maker, Japan, Not Covered): A machinery maker engaged in the ship engine and

environmental plant businesses that is devoting energy to the development of all-solid-state batteries that make use of

machine stamping technology. With all-solid-state batteries, the process of applying pressure is important in order to boost

electrolyte and positive/negative electrode conductivity, and Hitachi Zosen’s press technology is used for this. The company

has already succeeded in 200 Wh/kg aluminum laminate trial production.



Exhibit 5: Stock selection premised on rapid increase in demand for automotive batteries Valuations for related stocks

Note: NC=Not Covered. All target prices are on a 12-month timeframe. Shares shown above in terms of sales (based on FY2015 company data).

Source: Datastream, Goldman Sachs Global Investment Research.

Mkt cap Price TP Return(mn USD) (local) (local) Potential FY17 FY16E FY17E FY17 FY16E FY17E FY17 FY16E FY17E

OEMsToyota 203,469 Neutral ¥ 6,144 6,400 4% 12.0 11.0 10.1 1.1 1.0 0.9 8.8% 9.0% 9.1%BYD (H) 6,370 Buy HK$ 54.00 61.93 15% 24.9 18.5 14.4 2.9 2.7 2.4 11.8% 14.5% 16.6%Battery makersLG Chem 14,326 Buy CL ₩ 238,500 335,000 40% 11.1 10.3 9.8 1.2 1.1 1.0 11.1% 11.1% 10.6%Panasonic 25,603 Neutral ¥ 1,052 1,100 5% 18.1 13.0 11.5 1.4 1.3 1.2 7.5% 9.7% 10.2%Toray 15,961 Neutral ¥ 986 1,000 1% 16.2 14.9 14.1 1.5 1.4 1.3 9.5% 9.6% 9.4%Samsung SDI 6,202 Neutral ₩ 99,500 105,000 6% 19.7 24.3 15.3 0.6 0.6 0.6 3.2% 2.6% 3.9%Asahi Kasei 11,377 NC ¥ 818 - - 13.0 11.9 11.1 1.0 1.0 0.9 8.0% 8.2% 8.3%Tanaka Chemical 171 NC ¥ 1,161 - - - - - - - - - - -W-Scope 667 NC ¥ 2,154 - - 22.6 17.1 13.0 3.6 3.0 2.4 16.0% 17.4% 18.4%Hitachi Zosen 888 NC ¥ 526 - - 11.8 9.8 8.8 0.7 0.6 0.6 6.3% 6.6% 6.5%

(Valuation) ROERating P/E P/BCurrency

EV battery, 7%

Consumer

battery, 37%

Non-Battery, 56%

Samsung SDI

EV battery,

2%

Consumer

battery, 1%

Non-Battery,

97%

PanasonicBattery, ＜1%

Non-Battery,

99%

ToyotaBattery,

1%

Non-Battery,

99%

Toray

Battery, 16%

Non-Battery, 84%

LG ChemBattery, 7%

Non-Battery, 93%

BYD

EV battery,

32%

Consumer battery,

50%

Non-Battery,

18%

Tanaka ChemicalBattery, 6%

Non-Battery, 94%

Asahi Kasei

EV battery,

35%

Consumer battery,

65%

W-scopeBattery, ＜1%

Non-Battery,

99%

Hitachi Zosen



Key industry themes

Key industry themes



Battery race accelerating with energy density likely to double, market up 6X by 2025E

Battery history one of tackling energy density

The history of automotive LIBs is one of unstinting efforts to improve energy density (by gravimetric or volumetric). In 2007–08,

Nissan announced plans for large-scale investment in pouch-type batteries with manganese spinel as the cathode material, going

on to launch the Leaf EV. At the time, we estimate that gravimetric energy density was 100-150 Wh/kg, but by 2015, batteries with

ternary cathode materials were achieving gravimetric energy density of over 200 Wh/kg. Looking ahead, further technical advances

likely will lift this figure to 300 Wh/kg by 2020, and over 500 Wh/kg in 2025 and beyond. Similarly, the aim is to boost volumetric

energy density from 500 Wh/l in 2015 to 700 Wh/l in 2020 and 1,100 Wh/l in 2025 and beyond.

Improvement in energy density to reduce battery cost

Improving energy density on per unit gravimetric /volumetric basis is expected to contribute significantly to the reduction in battery

costs. We estimate the cost of automotive batteries was around US$272 per kWh in 2015, and we forecast it will decline to US$197

per kWh by 2020 and US$100 per kWh by 2025. This is because the improvement in energy density should not only reduce materials

costs but also increase economies of scale through greater automotive battery penetration. We note, though, that achieving a

twofold increase in gravimetric/volumetric energy density by 2025 likely will require a transition to so-called “post-lithium ion”

technology. Among the many next-generation battery technologies, we focus in particular on all-solid-state batteries.

Exhibit 6: Energy density likely to take off over the next 10 years Energy efficiency per unit weight and volume forecasts

Exhibit 7: Battery costs could halve kWh cost forecasts (US$)

Source: Company data, Goldman Sachs Global Investment Research.


500

800

1,100

200

350

550

0

200

400

600

800

1,000

1,200

2010 2015 2020E 2025E 2030-E

Current Wh/L

Future(All solid) Wh/L

Current Wh/kg

Future(All solid) Wh/kg

LiB All Solid Battery etc.

683

272

197

100

0

100

200

300

400

500

600

700

2010 2015 2020E 2025E 2030-E

Current LiB

Future LiB

Post-LiB

LiB All Solid Battery etc.



Why does energy density need to double?

The launch of the Nissan Leaf heralded the first EV boom around 2010. However, factors like limited driving distances and high

prices prevented consumers from really embracing the EV. Recent technological advances have increased the possibility of the

launch of more convenient EVs. Tesla’s Model 3 and BYD’s e5 appear likely to ignite a second EV boom. Battery performance is

hugely important in determining the competitiveness of EVs as a product. We believe our “ideal” EV is likely to appear on the

market in 2020-2030. That is, an EV that has no drawbacks for consumers vis-a-vis a gasoline-powered vehicle apart from the battery

charging time. We estimate a battery capacity of 60 kWh will be essential to achieve a driving distance comparable with that of a

gasoline-powered vehicle (around 300 km or 200 miles). If by 2020 batteries with an energy density of 300 Wh/kg and 700 Wh/l and a

cost of US$150 per kWh are realized, the cost per battery could be around US$9,000. Also, a volume of 86 L would eliminate the

battery as a constraint on cabin and luggage space. It seems possible that by 2030 a 60-L battery will be available at a cost of

US$6,000. This could allow automakers to offer consumers EVs that have almost the same performance as gasoline-powered cars.

Exhibit 8: Driving distance of 100-150 km is the norm at present

Driving distance and battery capacity

Exhibit 9: 60 kWh battery capacity needed for mass-market EV

Driving distance and battery capacity forecasts



ModelS

Model3

Leaf

i-MiEV

Zoe

Spark EV

e-up!

i3

Soul

Fit EVB-class E

Bolt EV

y = 2.6965x + 64.308R² = 0.848

0

50

100

150

200

250

300

350

0 10 20 30 40 50 60 70 80 90

(Range, mile)

(Battery capacity, kWh)

(Battery quality) Energy density (L) 500 Wh/L → 700 Wh/L → 1000 Wh/LEnergy density (kg) 200 Wh/kg → 300 Wh/kg → 500 Wh/kgkWh cost 270 $/kWh → 150 $/kWh → 100 $/kWh(Battery system)Capacity 60,000 Wh → 60,000 Wh → 60,000 WhSize 120 L → 86 L → 60 LWeight 300 kg → 200 kg → 120 kg Cost 16,200 $ → 9,000 $ → 6,000 $

Range 200-300/60kWh capacity

2020E2015 2030E

0

100

200

300

400

0

5,000

10,000

15,000

20,000

2015 2025E 2030E

Battery cost

Battery size

Battery weight



Improving energy efficiency to expand the EV and PHEV markets over next decade

Almost two decades have passed since Toyota launched the world’s first mass-produced HV in 1997. The market for HVs had grown

to 2 mn units by 2015 and contributed significantly to improved fuel economy. Over the coming 10 years, we think EVs and PHEVs

also will demonstrate remarkable growth. We think advances in LIB technology (huge leaps in energy density) could result in an

increase in battery capacity per vehicle. We see the EV market expanding from 250,000 units in 2015 to 4.01 mn units in 2025 (CAGR

of 30%) and look for PHEV sales to rise from 400,000 units to 2.78 mn units (CAGR of 36%). Over the same period, we expect the HV

market to grow from 2.16 mn units to 13.94 mn units (CAGR of 20%).

EV market growth could lead to a six-fold increase in the automotive battery market to US$24 bn

We look for the automotive battery market to expand considerably, in tandem with growth in the EV and PHEV markets. We expect a

roughly six-fold increase in LIB demand between 2015 and 2025, from 58 GWh to 387 GWh, with demand for automotive batteries

rising from 15 GWh to 279 GWh over the same period. Thus far, mobile phones and PCs have been the main source of demand for

LIBs, but over the next decade we think rapid growth in automotive applications will bring battery operations to a major turning

point. Even allowing for an average annual decrease of about 5% in battery prices—to encourage greater uptake—we think the

market for automotive LIBs could grow sharply between 2015 and 2025, from US$4 bn to a massive US$24 bn.

Exhibit 10: We expect strong EV and PHEV demand EV and PHEV volume forecasts (K units)

Exhibit 11: Automotive battery market could grow six-fold over the next 10

years LIB market forecasts



20%

52%

27%

35%

27%

38%

18%

22%

10%

19%

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

EV PHEV YoY

10 9 7 215 1517 9 11

3

81

302710 17

4

279

49

0

50

100

150

200

250

300

Mobile phone PC Tablet Machine tool Automotive Others

2015 2020 2025

(GWh)

2015$ 4bn

2025$ 24bn

Automotivebattery market (USD)



LIB capacity utilization is currently low; we estimate US$25bn investment by 2025

LIB makers appear to have surplus capacity. Global production capacity is 100 GWh (combined consumer electronics and

automotive battery capacity). In 2014, actual production was 45 GWh, equating to a capacity utilization of just 45%. Capacity

utilization rates at major battery makers are also around 70%. Thus, even excluding start-up battery makers in China, factories are

not particularly busy. We believe many battery makers are still not able to fully use the excess capacity built during the first EV

boom. The appetite for battery-related investment is rising, however, with an eye on 2020-2025, and we believe some major

investment announcements are likely over the next few years. Tesla’s Gigafactory is scheduled to commence operations at the end

of 2016 and aims to increase output to 50 GWh by 2020. The total investment is US$5 bn (including a US$1-2 bn investment by

Panasonic in a cell production line). Tesla has received more than 300,000 advance orders for the Model 3 (orders based on the

refundable deposit of US$1,000), and the astonishing demand prompted it to bring forward the start of Gigafactory production. Also,

in response to emission testing irregularities, Volkswagen announced it would invest to increase battery production capacity to 150

GWh by 2026. VW is revising its diesel strategy and accelerating investment in EVs and PHEVs. In China, meanwhile, with the

government offering generous subsidies for new energy vehicles (NEV), BYD and many other battery makers are announcing large

investments. Based on Tesla’s Gigafactory, 1 GWh of capacity requires capex of US$100 mn. On this basis, we calculate a total

investment of more than US$25 bn will be needed to realize battery demand of 279 GWh by 2025.

Exhibit 12: Surplus battery capacity LIB maker capacity and utilization

Exhibit 13: 1 GWh of production capacity requires investment of US$100 mn Examples of LIB factory investments

Source: Avicenne, Goldman Sachs Global Investment Research.


0%

10%

20%

30%

40%

50%

60%

70%

80%

0

5

10

15

20

25

30

35

40

45

50

Samsung LG Panasonic SONY Lishen ATL BYD Others

Production(2014)(GWh)Capacity(GWh)Operation ratio

Capacity(GWh)

CAPEX(mn$)

CAPEX/Capacity

SAFT 2008/1 0.6 150 250

LG Chem 2010/7 1.2 300 250

A123 2010/9 1.4 700 500

Loitech 2011/12 1.5 450 300

Nissan AESC 2012/12 5.0 1,000 200

BYD 2016 6.0 900 150

Tesla 2017~ 50.0 5,000 100



Up the technology curve: Next-generation LIBs, then all-solid-state batteries

Innovation for next-generation LIBs

Gravimetric energy density was just 30-50 Wh/kg when lead-acid batteries debuted in 1859, but this increased to 90-100 Wh/kg with

nickel-hydride batteries in 1990, and LIBs developed in 1991 achieved 200-250 Wh/kg while trying a variety of different materials.

Main LIB components include (1) cathode materials, (2) anode materials, (3) separators, and (4) liquid electrolytes. However, we

expect cathode materials and separators to change significantly in automotive batteries by 2020. Ternary materials (NCM) are

already the mainstream for cathode materials, but we expect the nickel ratio to rise to 80-90% from the current 30%. We also think

separators will change from dry-type separators to the wet-type separators widely used in consumer products. Each step is a

technological innovation to achieve even higher energy density.

Transition to post-LIB from 2020; all-solid-state in focus

We believe transition to post-LIBs could start from 2020 because the theoretical limits of LIBs are coming into view. We provide

further details later in this report, but think all-solid-state batteries are promising candidates for automotive batteries. All-solid-state

batteries replace liquid electrolytes with solid electrolytes to substantially increase energy density and make it easier to enhance

heat resistance and ensure safety. These batteries have properties that Toyota and other automakers regard as well-suited for

automotive batteries.

Battery and component makers also face changes

Nissan’s potential sale of its battery subsidiary Automotive Energy Supply Corporation (AESC; Nissan owns 51%, NEC owns 49%),

reported by the Nikkei on August 5, underscores the difficulty in establishing a business strategy in battery development amid rapid

technological innovation. Over the past 10-15 years, the positive electrode materials used in automobiles have evolved from iron

phosphate (mainly preferred by Chinese automakers) to manganese (used by Nissan), nickel acid (mainly Tesla), and ternary

materials (the current mainstream). With ternary materials set to become more nickel rich over 2017-18, we expect a further rise in

energy density. The accuracy of the Nikkei report is unknown, but we believe the competitiveness of the manganese materials that

Nissan has opted is gradually starting to wane. Both battery makers and component makers are struggling with the trends and pace

of technological innovation.



Exhibit 14: Major changes in battery materials Technological trends for the main four components of LIBs


Exhibit 15: Many components and materials makers are Japanese and Korean at present

Market shares for four main components and materials makers (2014)


2010s 2015-2020 2025 -

Cathode

$2.5bn

Anode

0.8bn

Separator

1.15bn

Electrolyte

0.68bn

LFP, LMO, NCA NCM(Nickel rich) LiCO

Graphite Graphite/Si Graphite/LTO

Dry Wet None

EC(Ethylene Carbonate) EC/PC (Propylenecarbonate) LGPS - Solid

Cathode Anode Separator Electrolyte

Nichia, 20%

L&F Material, 15%

Umicore, 15%

Toda Industrial, 10%

Nippon Chem,

5%

Tanaka Chem,

5%

Mitsubishi Chem,

5%

Nippon Denko,

3%Others,

22%Hitachi Chem, 30%

BTR, 20%

Mitsubishi

Chem, 15%

JFE Chem, 10%

Tokai Carbon,

10%

Nippon Carbon,

5%

Showa Denko,

5%

Kureha, 3%

Others, 2%

Asahi Kasei, 30%

Toray, 20%Celgard

, 15%

SK Innovation, 10%

Ube Industries, 5%

Sumitomo

Chem, 5%

Mitsubishi

Chem, 5%

Teijin, 3%

Others, 7%

Ube Industries, 20%

Mitsubishi

Chem, 20%

Panax, 15%

Chell Industries, 15%

LG Chem, 10%

Fuji Chem, 10%

Central Glass,

8%

Others, 2%



Rapid technological changes for cathode materials, cause for reluctance in large investments

Companies are competing hard to develop cathode materials in particular because these contribute directly to raising energy

density. The competitive environment is severe, and some industry reorganization has taken place during the past year, including

Toda Kogyo selling its entire cathode material business and Sumitomo Chemical increasing investment in Tanaka Chemical. For

automotive applications, LFP (iron phosphate) is the safest and lowest priced, and is being increasingly used by Chinese makers.

Despite the drawback of low energy density, we expect localized penetration to increase its presence to 15% in 2025, from 10% in

2014. LMO (manganese-based) is not well-suited for high energy density in automotive applications, as indicated by the reported

sale of AESC. We expect its presence to decrease to 9% in 2025, from 20% in 2014. Consequently, we expect NCA (nickel acid

lithium) material (used by Tesla) to expand with the Gigafactory startup, rising in presence to 14% in 2025, from 9% in 2014. We

expect NCM (ternary) to achieve high growth on a shift to nickel-rich material. However, we expect NCM adoption to gather pace in

the Chinese market amid efforts to increase energy density, resulting in a faster shift in demand to NCM from LFP.

Exhibit 16: NCA and NCM are main cathode materials, but LFP rising in China

Cathode material mix

Exhibit 17: Cathode makers have specialty areas

Cathode material market shares by manufacturer



36%26%

25%36%

9%14%

20% 9%

10%15%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2025E

LFPLMONCANCMLCO

LCO:Lithium cobalt oxide. Mainlyfor consumer electronic components.

LFP: Using phosphoric acid iron. Low energy density. Adopted by Chinese battery makers and we expect high volume growth.

LMO: Using manganese. Low energy density and expecting low volume growth.

NCA: Using Lithum nickelate. Adopted by Tesla and Panasonic in their 18,650 type battery.

NCM: Ternary system battery (cobalt, nickel, manganese). Aiming to improve energy density by increasing nickel composition from current 30% to 80-90% in the future.

CY2014 LCO CY2014 LMONichia 13% JGC 16%Umicore 17% Chinese local 26%B&M 7% Nippon Denko 8%Easpring 6% ShanShan 9%Reshine 11% Reshine 8%L&F 16% Nichia 7%Other China 14% Others 26%Others 16% CY2014 LFPCY2014 NCM Internal 29%Nichia 15% Cleriant 8%Umicore 31% Aleees 10%L&F 8% STL 11%ShanShan 11% Pulead 13%Reshine 4% Zhuoneng 6%Other China 8% BTR 2%Others 23% Others 21%CY2014 NCASumitomo Metal Mining 57%Toda 14%Nihon Kagaku Sangyo 13%Ecopro 5%Others 11%



Innovations in separators

Battery separators create a barrier between the positive (anode) and negative (cathode) electrodes to prevent electrical short-circuits

between internal battery components. While ionic conductivity is essential, separators also require a porous structure with

exceptional mechanical strength. A particularly important role of the separator is the so-called shutdown function. This function will

close (fill in) the pores on multilayer separators to prevent ionic transfer if the battery temperature rises abnormally for any reason

(overheats). We estimate that the automotive separator market was worth around US$600 mn in 2015 and totaled 0.5 bn m2 on a

surface-area basis. Separator usage is typically around 15-30 m2 per kWh, so as auto batteries rapidly increase to 279 GWh in 2025E

from 15 GWh in 2015, we expect the separator market to rapidly grow to 7 bn m2. Over the longer term, however, there is risk of the

market shrinking as separators would become unnecessary if all solid-state batteries emerge as the successor to lithium ion

batteries. Among major battery makers, Asahi Kasei has a global separator share of 30%, Celgard 15%, Toray Industries 20%, and

Sumitomo Chemical 5%.

Wet type separators may become a mainstream for auto

Separators come in two types: wet separators and dry separators. Wet separators have become the most widely used type in

consumer electronics applications, but dry separators remain the mainstream in automotive applications. Wet separators have the

advantage of being stronger than dry separators, which means they can be thinner. The main obstacle to the broader adoption of

EVs and PHEVs is range, and increasing the energy density of batteries has become a pressing issue. Dry separators generally

comprise three layers of polypropylene/polyethylene, but wet separators can be made using a single layer, which in theory means

thickness of just 6-7 microns is possible (compared with 16 microns for a dry separator). The disadvantages of wet separators are a

more expensive manufacturing process and greater difficulty in ensuring safety. Wet separator manufacturing production costs are

structurally higher because additional facilities are needed due to the use of solvents. That said, the price differential versus dry

separators has now shrunk to around 10%-20%, thanks to the increasing size of production lines and volume efficiencies. On the

safety front, there are issues associated with the use of high-nickel cathode materials. However, technology has now been

developed to increase heat resistance by adding a special ceramic coating to wet separators, and we expect to see an increase in the

number of manufacturers using wet separators for automotive applications.



Exhibit 18: Separator market is growing rapidly Separator demand by total surface area (1,000m2) and market scale (¥ mn)

Exhibit 19: We see greater uptake of wet type separators Estimated demand for wet and dry type separators for automotive application

(1,000m2)



Cutting costs while improving energy density

We would expect higher energy density to reduce battery costs. As of 2015, we estimate cell costs at US$250 per kWh, pack costs at

US$140, and total costs at US$390. By 2025, however, we think costs could be reduced to US$164 for cells, US$25 for packs, and

US$189 overall. We expect the four main components noted above to see annual cost reductions of 3-5%, and also expect decreases

in R&D costs and depreciation based on mass production benefits. Packs have a high ratio of fixed costs, making them likely to

benefit from mass production. At present, Tesla has the most aggressive outlook for battery price declines, and seeks to reduce total

costs to US$100 by 2020. Our estimate is generally near the market consensus, and we expect no fundamental cost breakthrough

until the mass production of all-solid-state batteries.

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Auto

Non-auto

Market size

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Wt Dry



Exhibit 20: We expect battery unit prices to decrease by half…

LIB cost breakdown (US$)

Exhibit 21: …with Tesla having the most optimistic cost outlook kWh unit price outlook (US$)



Search for suitable post-LIB technology: All-solid-state batteries in the lead

Post-LIB development competition is growing more severe as LIBs approach their theoretical limits. All-solid-state battery

technology has advanced noticeably in the past 5-10 years amid intensifying development competition with lithium-air batteries,

multivalent ion batteries, and sulfur-based batteries. More than 3,000 patents for all-solid-state batteries were filed in 2002-2011, far

higher than other post-LIB technologies. Toyota/Tokyo Institute of Technology, Hitachi Zosen, Ohara, and other companies have

announced technological innovations for all-solid-state batteries in 2016.

0

50

100

150

200

250

300

350

400

450

2015 2020E 2025E

Pack costCathodeAnodeElectrolyteSeparatorOthersDepreciationDirect laborEnergyR&DSales&AdmMargin

0

50

100

150

200

250

300

350

400

450

2015 2016E 2017E 2018E 2019E 2020E

High estimate Low estimate (Tesla)



Exhibit 22: Post-LIB development Features of next-generation batteries

Exhibit 23: All-solid-state battery development has picked up in recent years Number of patent filings in 2002-2011


Source: NEDO, Goldman Sachs Global Investment Research.

Strengths and weaknesses of all-solid-state batteries

All-solid-state batteries seek to increase energy density and reduce cost by replacing liquid electrolytes with solid electrolytes. These

batteries have high potential for quickly eliminating EV disadvantages in our view. In addition to raising energy density, they offer

prospects for improved safety and operating temperature flexibility. However, technological hurdles remain for mass production.

All-solid-state batteries require new production processes, including pressurization and calcination. There is also risk of producing

toxic hydrogen sulfide (sulfide-based solid-state electrolytes produce hydrogen sulfide in reaction to moisture). Companies are

examining various methods to address hydrogen sulfide, including the use of sturdy cases that are hard to break and use of

hydrogen sulfide gas detectors to quickly detect gas generation.

All-solid state battery

Lithium-air batteries

Sodium ion battery

Polyvalent ionbattery

Sulfur-based batteries

NAS

Battery using polyvalent cations with divalent or trivalent ion (Li +is monovalent). Research is ongoing for various ions such asMg 2+, Ca 2+ etc.

Replace electrolyte liquid to solid. High level of safety sinceinorganic solid electrolyte is noninflammable. Electrolyte issulfur.

Cathode material: sulfur, anode material: sodium, andelectrolytes: ceramic. Energy density is 110Wh/kg. Operationtemperature is high (300-350℃).

Uses oxygen as cathode active material. High energy densitybut need high level of technological innovation.

Replace cathode material from Li+ to Na+ . Sodium is rich as anatural resource and possibility of further cost reduction.

Sulfur-based batteries use a sulfur material for the positiveelectrode, but sulfur is water soluble, so sulfur-based solid arefrequently used for the electrolyte.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

All Solid Battery Lithium-airBattery

Na ION Battery Polyvalent ionbattery

Sulfer-basedbattery

Organic Battery

OthersKoreaChinaEuropeUSJapan



Exhibit 24: All-solid-state batteries feature greater energy density and safety; need to overcome mass production challenges Advantages and disadvantages of all-solid-state batteries


Exhibit 25: LIB using liquid electrolyte between cathode and anode LIB diagram

Exhibit 26: All-solid-state battery using solid electrolytes rather than liquid

electrolytes All-solid-state battery diagram



Merits

SafeWide range of operating temp. High energy densityHigh volume energy densityDemerits

Low productivityLow power densityUnknown accidents

→ Conductivity of solid electrolyte is not very high.→ Some research warn against a generation of hydrogen sulfide.

→ Less risk of fire due to no liquid electrolyte.→ Especially in low temperature.→ It is possible by using sulfur for electrode material.→ Easy to form a layered structure.

→ Need pressurization or calcination to form a solid electrolyte.


Separator

Lithium ion battery

Li+

Li-

Li-

Li-

Li-

Li-

Li+

Li+Li+

Li+

Li+

Anode CathodeLiquid


All-solid-state battery

Li+

Li-

Li-

Li-

Li-

Li-

Li+

Li+Li+

Li+

Li+

Anode CathodeSolid



Multiple players in all-solid-state battery development

Toyota, Sekisui Chemical, and Hitachi Zosen are targeting mass production of all-solid-state batteries in 2020-2025. Samsung Elec.,

Daimler, and Sony have also announced R&D initiatives, but their mass production timeframes are unknown. BYD has launched a

special team and is conducting research into all-solid-state batteries. Leading auto parts maker Bosch acquired the all-solid-state

battery venture company Seeo. Consumer electronics maker Dyson also entered the battery business by acquiring Skit3. We think

expectations are rising for using all-solid-state batteries not only for automotive applications, but for consumer products as well.

All-solid-state battery production processes differ greatly from current LIBs

The production of all-solid-state batteries can be broadly separated into three main methods. (1) Hitachi Zosen and Toyota use a

powder pressing process that applies pressure to sulfide-based solid electrolytes and the cathode/anode. This method increases

ionic conductivity by making the contact state more adhesive through component interface movement. Ensuring ionic conductivity

within the solid state is the primary hurdle for replacing liquid electrolytes with solid electrolytes. (2) Bosch and Sekisui Chemical

are developing a coating-based process that performs roll-to-roll layering. Electrolytic materials often use semi-solid materials. (3)

Dyson and Applied Materials are developing a semiconductor process, but expansion to high-capacity automotive batteries is

difficult. We would expect this to be used mainly for consumer products.

Exhibit 27: Growing interest in all-solid-state batteries for both automobiles and consumer products

Leading manufacturers and technological features

Source: Nikkei Elec, Goldman Sachs Global Investment Research.

Powder and pressure Coating Semiconductor

Mass production Hitachi Zosen established a massproduction method.

Mass production is possible by roll-to-rollprocess. Under development

Energy densityHigh value from the research done byHigh Tokyo University and TokyoInstitute of Technology.

Average High theoretical value but unsuitable formass production.

Power densityHigh value from the the research doneby High Tokyo University and TokyoInstitute of Technology.

Average Challenge is how to make a separatorthinner.

Safety Risk: generation of hydrogen sulfidefrom sulfide-based electrolyte.

Sekisui Chemical is confident in thesafety of the battery. High level of safety

Toyota Sekisui Chemical (acquired Enax) Dyson (acquired Sakit3)Hitachi Zosen Bosch (acquired Seeo) Applied MaterialsSamsung Zeptor

Battery makers



Exhibit 28: All-solid-state batteries use special pressing process Comparison of production processes for all-solid-state batteries and LIBs

All-solid-state battery production process

LIB production process


Anode

Cathode

Separator

Coating Insert electrolyteLaminateDry

Liquid Electrolyte



Case study: Samsung’s exploding mobile phone batteries

1) What is happening inside the batteries?

At a press briefing on September 2, 2016, Samsung Electronics (SEC) announced that it will recall all Galaxy Note 7 (Note 7) that have been shipped, around 2.5mn units globally. SEC indicated that the problem stems from issues with the battery cell, while it declined to mention the supplier of the batteries that caused these problems. SEC explained that it mainly uses batteries from two different suppliers, and that an error in the manufacturing process at one supplier caused the cathode and anode of the battery to contact each other which resulted in the battery exploding.

2) Automotive batteries differ from consumer electronics ones, but further safety measures are inevitable

In the case of Note 7 explosion, the battery used is polymer-type while Samsung SDI supplies can-type for EV batteries. So they are different types of batteries, but the risk here is that there could be reputational risk as OEMs will be reluctant to use battery produced by a company that has seen problems even if that was for another application. Another potential implication is increase in entry barriers for EV battery suppliers given OEMs will likely raise safety measures for batteries.

3) Learning from past incidents of battery overheating

There have been several incidences of LIBs overheating in addition to the recent cases involving Samsung. We think there are generally two causes for such overheating (exact cause still unclear for Samsung). The first is a problem with the separator between the positive and negative electrodes. The battery’s safety becomes compromised if the separator is not strong enough or it is damaged by the presence of foreign materials. The second is the possibility of a problem in the battery pack. The battery includes a mechanism (known as a battery management system) that acts as a block when there is a large outflow of electric current. If this battery management system does not function properly for some reason, then it can become impossible to control a thermal runaway in the battery.



EV and PHEV penetration set to accelerate through 2025E

PHEVs could take off by 2020, followed by EVs thereafter

We forecast vehicles with an electric powertrain system will account for 25% of global auto sales in 2025, up from 5% in 2015. While

we expect hybrids to be the main type of electrified vehicle, electrification is gaining traction, driven by the aggressive adoption of

car purchase subsidies in Europe and China. In California and nine other US states, electrification is likely to accelerate from 2018,

spurred by zero-emission vehicle (ZEV) regulations (requiring the sale of a certain volume of PHEVs, EVs, and FCVs, according to

annual sales volume). We forecast global demand for EVs and PHEVs combined will increase sharply to 6.8 mn vehicles in 2025,

from 650,000 vehicles in 2015. In our view, PHEVs will lead the way through 2020 due to battery performance constraints, with the

EV market entering a sharp expansionary phase from 2020.

Even stricter CO2 environmental regulations, moves toward RDE

Fuel economy standards could tighten intermittently between 2020 and 2025, mainly in the US and Europe. The US corporate

average fuel economy (CAFE) target of 54.5 mpg for the 2025 model year and the possible European CO2 emission targets of 95

g/km by 2020 and of 72 g/km by 2025 (not officially decided yet) represent very challenging hurdles for automakers. China has

decided to tighten fuel efficiency standards in response to increasing environmental problems, a heavy reliance on overseas energy

(already more than 50%), and urban traffic congestion. We expect the VW emissions scandal that surfaced in October 2015 to have a

significant impact on emission/fuel economy regulations. In Europe, discussions are progressing ahead of the adoption of Euro 6c

emission standards in 2017, and automakers will need to pay increased attention to the difference between real-world and test-

mode fuel economy.

CO2 emissions: The Euro 6c CO2 emission measurements use the Worldwide harmonized Light vehicles Test Procedures (WLTP),

the unified testing mode for Japan, the US, and Europe. The difference between test-mode and real-world fuel economy is

calculated by comparing real driving emissions (RDE) conditions with WLTP results. New models tested from September 2017 will

need to conform to a permitted difference of 2.1x or less between RDE fuel economy and certified (catalog) fuel economy.

Discussions are also under way on narrowing this difference to 1.5x.

NOx and PN standards: The New European Driving Cycle (NEDC) is currently used to assess emission levels, but under Euro 6C

RDE tests will be adopted as the uniform testing method in Europe. RDE test procedure details are currently under discussion, with

technical adjustments being made to testing environments (test course, latitude, altitude, etc.).

ZEV regulations prompting action; hybrid vehicles to be excluded from ZEV category from 2018

Automakers are rushing to launch EVs and PHEVs in part because of the ZEV regulations announced by the state of California, US.

Major automakers need to generate ZEV credits equivalent to 4.5% of the vehicles they sell in California from 2018, but hybrid

vehicles will no longer be included in the ZEV category. Mid-tier automakers must also generate ZEV credits, like major automakers,

five years later, from 2023. As such, we think electrification is inevitable even at Mazda Motor and Fuji Heavy Industries.



Exhibit 29: Electrification set to continue Demand estimates by powertrain

Exhibit 30: CO2 emissions need to be cut by over 20% Reductions called for in CO2 emission standards in major countries


Source: Goldman Sachs Global Investment Research

EVs becoming a reasonable solution

Automakers need to move forward with electrification at some point in order to meet stricter standards. Establishing EV business

models is a matter of urgency for all automakers. EVs and PHEVs do not differ significantly in terms of well-to-wheels CO2

emissions, with both being around 60-80 g/km (these figures naturally change depending on the method of electric power

generation). On the cost side, however, the more battery prices decline, the more likely that an EV business model may make sense.

We estimate that with PHEVs the additional cost of reducing CO2 emissions by 1 gram is US$139 and that with EVs the cost of a 1-

gram reduction is nearly the same, at US$124, based on 2015 per-kWh battery prices. A drop in per-kWh battery prices to around

US$100, however, would bring the cost of a 1-gram reduction down to US$31, which would make EVs an inexpensive CO2 reduction

solution, rivaling auto lightweighting and downsizing turbo engines. From automakers’ perspective, we see grounds to continue

investing heavily in EVs through 2030.

0

20,000

40,000

60,000

80,000

100,000

120,00020

12

2013

2014

2015

2016

E

2017

E

2018

E

2019

E

2020

E

2021

E

2022

E

2023

E

2024

E

2025

E

FCV

EV

PHEV

HV

Internal combustion engines

Using ICE96%

Using battery20%

Using fuel cell0.5%

(K units)

153 156

120

165

89

116

72

118

0

20

40

60

80

100

120

140

160

180

200

US CAFE Japan Europe China

2014

2025E

(g/km)

-42% -26%

-40%

-28%



Exhibit 31: EV and PHEV CO2 emissions do not differ significantly on a well-

to-wheels basis

CO2 emissions by powertrain (g/km)

Exhibit 32: EVs could become an inexpensive CO2 emissions reduction

solution in 2030

Estimated additional cost of a 1-gram reduction in CO2 emissions (US$)

Source: NEDO.


Price and driving range are the keys to EV penetration

The high price of EVs is the main obstacle to their penetration, as reflected in price concerns being cited by 50% of consumers who

participated in a 2016 Ministry of Economy, Trade and Industry survey in Japan. The next largest issues are driving range (cited by

13%) and a lack of charging facilities at home (10%). Improvements in energy density should dispel at least two of consumers’ major

concerns. Around 53% of the respondents said they would be satisfied with a driving range of 300 km/200 miles, and 80% said that

given a driving range of 500 km/300 miles, this factor would not be an obstacle to buying an EV. This is why we see 60 kWh as the

ideal battery capacity for EVs.

21.1

40.1

67.4

0 20 40 60 80 100 120 140 160

GasolineVehicle

PHEV

EV Well to TankTank to Wheel



Exhibit 33: Price is the main issue with EVs, followed by driving range Impediments to buying an EV (2016 survey)

Exhibit 34: Around 50% of consumers would be satisfied with a driving range

of 300 km

EV driving range survey, 2016

Source: METI.

Source:METI.

Investment recoupment period growing shorter every year

With price being the greatest concern when considering purchase of an EV, we see US$100 per kWh as a reasonable battery cost

target, based on lifecycle cost for the entire ownership period. Based on battery capacity of 60 kWh, car owners would recoup the

higher cost of purchasing an EV in six years. If we additionally factor in a rise in crude oil prices, the recoupment period would be

significantly reduced even if we assume a battery cost of US$200 per kWh in 2020. Assuming a WTI price of US$100/bbl, the

recoupment period for EVs would be eight years in 2020. We estimate that the recoupment period in the first half of 2000s was

around five years, and that this drove the sharp growth in hybrid cars then.

0% 10% 20% 30% 40% 50% 60%

Expensive

Short running distance

No EV charging facility at home

Few EV charging station

Spending long time for charging

Worse automobile performance

Not attractive

16% 15% 18% 20%

28% 26%27% 27%

44%41%

40% 36%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015

80km160km320km480km640km



Exhibit 35: A drop in cost to US$100/kWh would bring the EV investment

recoupment period down to six years Investment recoupment period (years) for EV purchase with battery price as the

variable (US case study)

Exhibit 36: EV investment recoupment period could be shorter depending on

crude oil price Investment recoupment period (years) based on US$200/kWh cost and 60 kWh

battery capacity (US case study)



China’s NEVs shape a unique culture

China’s presence in forecasts of EV and PHEV penetration is increasing day by day. The country is giving its full support to NEVs

through subsidies from the national government and license plate issuance benefits from regional governments. We see potential

for EVs to spread even though driving distances and battery costs have not reached our ideal levels. China’s NEV market (excluding

hybrids) had already grown to 300,000 vehicles in 2015, making it the world’s largest market ahead of the US at over 100,000

vehicles and Japan at 30,000 vehicles. China is looking at NEVs with specifications close to the US ZEV standards noted above in

2020. We expect EVs and PHEVs to quickly penetrate the Chinese market and think China will account for 60% of global demand

through 2020. Thereafter, we think China’s presence will decline as EV and PHEV penetration advances in developed markets, but

still expect nearly 50% of EVs and PHEVs to be sold in the Chinese market.

18

29

41

10

18

25

2

6

10

0

5

10

15

20

25

30

35

40

45

40kWh 60kWh 80kWh

300$/kWh

200$/kWh

100$/kWh

0

2

7

18

0

3

6

13

0

3

4

8

0

2

4

6

8

10

12

14

16

18

20

Gasoline Diesel Hybrid EV

WTI=$45

WTI=$65

WTI=$100



Exhibit 37: China is already the world’s largest NEV market HV, PHEV, and EV sales in Japan, US, and China (Thous.)

Exhibit 38: Expect China to account for majority of global NEVs in 2020 China’s NEV market outlook (excluding commercial vehicles, K units)

Source: CAAM, Goldman Sachs Global Investment Research.


NEVs are supported by robust subsidies

NEV policies have been established with robust support from the Chinese government. China relies on overseas supplies for over

60% of its crude oil, making NEV policies increasingly important from the standpoint of energy security. Our China analyst Yipeng

Yang estimates that the NEV business of BYD, which sells the most NEVs in China, had an operating margin above 15% in 2015.

However, excluding subsidies, it may have had a negative operating margin in excess of 10% in real terms (this real profit margin is

roughly equal to Tesla). Automakers involved in NEVs in China have been able to save cash for reinvestment amid the worst period

for earnings due to business startup. However, the government has indicated that it intends to eliminate NEV purchase subsidies

from 2020. It will likely no longer be possible for all NEV makers to reap excess returns on an ongoing basis. We expect both Tesla

and BYD to achieve positive operating profits in real terms in 2018-2019 on lower battery costs and mass production benefits.

45

247

77 7617 17

30

84

48 53

13 13

189 209

857

1,013

0

200

400

600

800

1,000

1,200

CY2014 CY2015 CY2014 CY2015 FY2013 FY2014

HEVPHEVEV

China US Japan0%

10%

20%

30%

40%

50%

60%

70%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

EV

PHEV

EV/China



Exhibit 39: Top NEV makers have double-digit (%) op. margins after subsidiesComparison of margins at BYD and Tesla

Exhibit 40: China plans to annually reduce NEV purchase subsidies Overview of subsidies (Thous. RMB, R:ranges)

Note: Comparable OPM excludes subsidies.


Source: CAAM, Goldman Sachs Global Investment Research.

China to reduce purchase subsidies, but lays groundwork for NEVs to expand

Even if China eliminates NEV purchase subsidies in 2020, we believe it will still have policies to support NEV penetration. In

particular, many more cities are considering the adoption of license plate issuance regulations in response to more severe air

pollution and traffic congestion. Special measures for NEVs that are unique to China, such as the preferential issuance of license

plates and absence of travel restrictions, could support EV and PHEV penetration from 2020. We expect the government’s NEV-

related costs to stabilize at around 0.5% of national expenditures from 2020 vs. around 0.7% in 2015.

-4.0%

9.6%

16.5%

12.6%

-11.1%

8.8%

-12.6%

6.3%

-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

18%

2015 2016E 2017E 2018E 2019E 2020E

BYD-NEV OPM

Tesla OPM

BYD-NEV comparable OPM

Tesla comparable OPM

0

10

20

30

40

50

60

70

2013 2014 2015 2016E 2017E 2018E 2019E 2020E

EV 80≤R<150 (100≤R<150 from 2016)EVEV 150≤R<250EV R≥250PHEV R≥50

(K Rmb)



Exhibit 41: China likely to expand support other than purchase subsidies from 2021 China’s support for NEVs


0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

-

50,000

100,000

150,000

200,000

250,000

2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Other incentivesNEV license plate fee benefitNEV purchase subsidyTotal NEV subsidy as % of govt. budget

(RMB mn)



Stocks in focus

Stocks in focus



LG Chem: Strong and diversified EV battery client base; reiterate CL-Buy

Source of opportunity

LG Chem is the third-largest producer of EV battery globally with: 1) a globally diversified customer base and

competitive cost structure; 2) capability to mass produce batteries with mainstream NCM (Nickel, Cobalt, Manganese)

technology. Its customer base includes global major automakers in US/Europe/Asia including General Motors,

Hyundai-Kia Motors, Renault, SAIC Motor and Geely. Many of these players expect major launches in 2H16 e.g., GM

Bolt, Renault (Zoe), Hyundai (Ioniq), in which case LG Chem could enjoy high volumes translating into lower fixed

costs per unit, likely improving profitability from 2H16. Also, we see potential upside for LG Chem in the Chinese

market assuming no further regulatory headwinds as its NCM batteries have significantly higher energy density and

require much advanced technology compared to LFP (Lithium Iron Phosphate) batteries that are currently prevalent in

China. While Chinese players are actively trying to catch up with EV battery technology, it will likely take time to build

track record in energy density/safety/cost, which supports why major automakers such as SAIC or Geely use LG

Chem’s batteries. We believe LG Chem’s EV battery revenue will grow on average 48% for 2016/17/18E, and expect its

EV battery business to pass breakeven point in 2017E. We see its risk-reward as attractive as Chemicals (92% of 2015

EBIT) should benefit from favorable product exposure while the share price already implies a negative value for EV-

battery. In line with this, and given its 40% upside to our 12m target price, we reiterate CL-Buy on LG Chem.

Catalysts

1. Launch of EVs with LG Chem batteries in 2H16 – We expect EV battery sales to pick up from 3Q given planned EV

launches from GM (Bolt), Renault (Zoe), Hyundai (Ioniq) and Chinese passenger car makers in 2H16. We expect

revenue recognition to start from August for GM/Renault (new car launch in October). Higher volumes also

translate to lower fixed costs per unit, likely improving profitability from 3Q16 for LG Chem’s(LGC) EV-battery

segment.

2. Strong core chemical earnings; gradual turnaround in other segments – We believe LG Chem’s core chemicals

earnings will stay strong in 3Q, despite some moderation from 2Q highs, as improving SAP profitability partly

offsets blended spreads decline. Combined with a turnaround in the non-chemicals business, (stronger EV-battery

performance, small battery expansion), we expect LG Chem to continue its strong earnings sequentially in 3Q16.

Valuation

Our 12-m SOTP-based target price of W335K is unchanged. Our calculations indicate that LGC’s SOTP valuation may

rise by 10% vs. our base case if the company’s guidance on EV battery revenues is achieved (54% sales CAGR in 2016-

20 vs. GSe base case 30%). However, market is pricing in a negative value for the EV battery business, implying a

favorable risk reward.

Key risks

Slower-than-expected turnaround of EV and small battery businesses, lower-than-expected chemical margins, CROCI-

dilutive M&A.

INVESTMENT LIST MEMBERSHIP

Asia Pacific Buy listAsia Pacific Conviction Buy list

Coverage View: Neutral

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

LG Chem (051910.KS)

Asia Pacific Chemicals Peer Group Average

Key data Current

Price (W) 238,500

12 month price target (W) 335,000

Market cap (W bn / US$ mn) 17,538.0 / 15,896.7

Foreign ownership (%) --

12/15 12/16E 12/17E 12/18E

EPS (W) 18,410 21,431 23,254 24,317

EPS growth (%) 40.8 16.4 8.5 4.6

EPS (diluted) (W) 15,679 21,431 23,254 24,317

EPS (basic pre-ex) (W) 18,410 21,431 23,254 24,317

P/E (X) 14.0 11.1 10.3 9.8

P/B (X) 1.5 1.2 1.1 1.0

EV/EBITDA (X) 6.5 5.3 4.6 4.1

Dividend yield (%) 1.7 2.2 2.4 2.5

ROE (%) 9.2 11.6 11.5 11.1

CROCI (%) 11.8 12.1 12.2 12.1

1,800

1,850

1,900

1,950

2,000

2,050

2,100

2,150

220,000

240,000

260,000

280,000

300,000

320,000

340,000

360,000

Sep-15 Dec-15 Apr-16 Jul-16

Price performance chart

LG Chem (L) Korea SE Composite (KOSPI) (R)

Share price performance (%) 3 month 6 month 12 month

Absolute (6.7) (23.9) (7.6)

Rel. to Korea SE Composite (KOSPI) (9.3) (25.9) (10.6)

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 9/22/2016 close.



LG Chem: Summary financials

Profit model (W bn) 12/15 12/16E 12/17E 12/18E Balance sheet (W bn) 12/15 12/16E 12/17E 12/18E

Total revenue 20,206.6 21,931.7 24,135.0 25,034.6 Cash & equivalents 1,704.9 1,350.2 1,990.8 2,679.6

Cost of goods sold (16,540.5) (17,914.2) (19,752.7) (20,498.8) Accounts receivable 3,398.9 3,304.8 3,636.8 3,772.3

SG&A (1,842.5) (1,999.8) (2,200.7) (2,282.7) Inventory 2,338.6 2,355.8 2,597.6 2,695.7

R&D -- -- -- -- Other current assets 1,213.2 1,213.2 1,213.2 1,213.2

Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 8,655.6 8,224.0 9,438.4 10,360.9

EBITDA 3,079.7 3,342.6 3,613.9 3,811.6 Net PP&E 8,867.2 9,142.2 9,309.9 9,351.4

Depreciation & amortization (1,256.1) (1,325.0) (1,432.3) (1,558.6) Net intangibles 501.9 501.9 501.9 501.9

EBIT 1,823.6 2,017.7 2,181.6 2,253.0 Total investments 330.8 1,055.3 1,055.3 1,055.3

Interest income 37.5 64.4 50.1 73.9 Other long-term assets 223.2 223.2 223.2 223.2

Interest expense (58.1) (40.7) (24.6) (17.2) Total assets 18,578.7 19,146.7 20,528.7 21,492.7

Income/(loss) from uncons. subs. (128.9) 25.0 35.0 35.0

Others 76.3 0.0 0.0 0.0 Accounts payable 2,243.1 2,974.3 3,273.1 3,395.1

Pretax profits 1,750.4 2,066.4 2,242.2 2,344.7 Short-term debt 2,145.9 800.0 800.0 500.0

Income tax (401.1) (495.9) (538.1) (562.7) Other current liabilities 409.9 409.9 409.9 409.9

Minorities (4.5) 5.5 5.9 6.2 Total current liabilities 4,799.0 4,184.2 4,483.0 4,305.0

Long-term debt 474.1 474.1 274.1 74.1

Net income pre-preferred dividends 1,353.8 1,575.9 1,710.0 1,788.2 Other long-term liabilities 202.2 202.2 202.2 202.2

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 676.2 676.2 476.2 276.2

Net income (pre-exceptionals) 1,353.8 1,575.9 1,710.0 1,788.2 Total liabilities 5,475.2 4,860.4 4,959.2 4,581.2

Post-tax exceptionals (200.8) 0.0 0.0 0.0

Net income 1,153.0 1,575.9 1,710.0 1,788.2 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 12,991.5 14,174.2 15,457.5 16,799.4

EPS (basic, pre-except) (W) 18,410 21,431 23,254 24,317 Minority interest 112.1 112.1 112.1 112.1

EPS (basic, post-except) (W) 15,679 21,431 23,254 24,317

EPS (diluted, post-except) (W) 15,679 21,431 23,254 24,317 Total liabilities & equity 18,578.7 19,146.7 20,528.7 21,492.7

DPS (W) 4,505 5,358 5,814 6,079

Dividend payout ratio (%) 28.7 25.0 25.0 25.0 BVPS (W) 176,671 192,755 210,206 228,455

Free cash flow yield (%) 8.0 12.0 7.2 9.3

Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E

Sales growth (10.5) 8.5 10.0 3.7 CROCI (%) 11.8 12.1 12.2 12.1

EBITDA growth 25.1 8.5 8.1 5.5 ROE (%) 9.2 11.6 11.5 11.1

EBIT growth 39.1 10.6 8.1 3.3 ROA (%) 6.3 8.4 8.6 8.5

Net income growth 32.8 36.7 8.5 4.6 ROACE (%) 9.7 11.0 11.7 11.8

EPS growth 32.8 36.7 8.5 4.6 Inventory days 55.7 47.8 45.8 47.1

Gross margin 18.1 18.3 18.2 18.1 Receivables days 61.2 55.8 52.5 54.0

EBITDA margin 15.2 15.2 15.0 15.2 Payable days 51.8 53.2 57.7 59.4

EBIT margin 9.0 9.2 9.0 9.0 Net debt/equity (%) 7.0 (0.5) (5.9) (12.5)

Interest cover - EBIT (X) 88.9 NM NM NM

Cash flow statement (W bn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E

Net income pre-preferred dividends 1,353.8 1,575.9 1,710.0 1,788.2

D&A add-back 1,256.1 1,325.0 1,432.3 1,558.6 P/E (analyst) (X) 14.0 11.1 10.3 9.8

Minorities interests add-back 4.5 5.5 5.9 6.2 P/B (X) 1.5 1.2 1.1 1.0

Net (inc)/dec working capital 257.9 808.0 (275.0) (111.7) EV/EBITDA (X) 6.5 5.3 4.6 4.1

Other operating cash flow 0.0 0.0 0.0 0.0 EV/GCI (X) 0.9 0.7 0.6 0.6

Cash flow from operations 2,942.3 3,714.3 2,873.3 3,241.3 Dividend yield (%) 1.7 2.2 2.4 2.5

Capital expenditures (1,423.8) (1,600.0) (1,600.0) (1,600.0)

Acquisitions 225.4 (724.5) 0.0 0.0

Divestitures 0.0 0.0 0.0 0.0

Others (270.9) 0.0 0.0 0.0

Cash flow from investments (1,469.3) (2,324.5) (1,600.0) (1,600.0)

Dividends paid (common & pref) (331.3) (394.0) (427.5) (447.0)

Inc/(dec) in debt (314.2) (1,345.9) (200.0) (500.0)

Common stock issuance (repurchase) 29.8 0.8 0.8 0.8

Other financing cash flows (140.5) (5.5) (5.9) (6.2)

Cash flow from financing (756.1) (1,744.6) (632.7) (952.5)

Total cash flow 716.9 (354.8) 640.6 688.8 Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



BYD: To benefit from China’s fast-growing NEV market, valuation attractive; reiterate Buy

Source of opportunity

Electrification is set to reshape China’s auto market and we expect BYD to lead this trend given its strong product

portfolio, vertically integrated model and high OPM vs. peers. A comparative analysis with Tesla shows many

strategic similarities but BYD’s new energy vehicle business trades at a sizable discount, which we see as

unjustified given its large cost savings, capacity utilization, and front-loaded investment. China’s new energy

vehicle market is poised to deliver c.30% CAGR (vs. c.4% for overall car market) over the next decade. We

maintain our Buy rating on the strong NEV growth story in China.

Catalysts

1) More cities in China are likely to announce local preferential policies in the new energy vehicle (NEV) segment

once the result of the subsidy fraud probe is announced; 2) BYD plans to launch PHEV versions of the Song/Yuan

SUVs and its e-logistic product this year; 3) Increased battery capacity should remove the bottleneck of recent

years; 4) Our 2016E-18E EPS are up to 41% above Bloomberg consensus (we believe the street has not

sufficiently factored in BYD’s unique competitive edge in new energy vehicles), and strong FY2016 earnings could

be a positive catalyst; 5) Potential introduction of fuel consumption & NEV credit trading system in China.

Valuation

Our 12-month target price of HK$61.93 is based on a sum-of-the-parts valuation, with the lion’s share contributed

by BYD’s NEV business (using a 10-year DCF). We see BYD’s current valuations as attractive given: 1) its 20X 12-

month fwd. P/E is below historical median -1std; 2) the NEV business (incl. EV battery) trades at 1.1X 2020E P/S

and 11.0X 2020E P/E, well below Tesla’s 1.4X and 20.0X respectively, and we expect this gap to narrow given the

strong medium-term revenue/earnings growth outlook for BYD’s business; 3) completion of its recent private

placement has improved balance sheet/cash flow metrics.

Key risks

Scaling down of purchase subsidy for NEV; lower market share/OPM as competition increases; disruptive battery

technologies impacting competitive edge.


Asia Pacific Buy list


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





BYD Co. (1211.HK)

Asia Pacific Autos & Autoparts Peer Group Average

Key data Current

Price (HK$) 54.00

12 month price target (HK$) 61.93

Market cap (HK$ mn / US$ mn) 110,705.4 / 14,273.2

Foreign ownership (%) --

12/15 12/16E 12/17E 12/18E

EPS (Rmb) 1.14 1.87 2.51 3.23

EPS growth (%) 537.9 63.7 34.7 28.4

EPS (diluted) (Rmb) 1.14 1.87 2.51 3.23

EPS (basic pre-ex) (Rmb) 1.14 1.87 2.51 3.23

P/E (X) 28.7 24.9 18.5 14.4

P/B (X) 2.5 2.5 2.3 2.1

EV/EBITDA (X) 12.9 10.1 9.2 8.0

Dividend yield (%) 0.0 1.3 1.4 1.7

ROE (%) 9.8 11.7 13.1 15.1

CROCI (%) 14.1 12.8 13.7 13.7

7,500

8,500

9,500

10,500

11,500

12,500

13,500

30

35

40

45

50

55

60



BYD Co. (L) Hang Seng China Ent. Index (R)


Absolute 16.5 27.5 45.6

Rel. to Hang Seng China Ent. Index 3.2 14.7 44.7




BYD Co.: Summary financials

Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E

Total revenue 77,612.0 103,214.1 132,373.6 159,351.5 Cash & equivalents 6,010.9 15,318.1 11,321.1 7,591.1


SG&A (8,659.2) (11,773.7) (15,761.8) (19,133.4) Inventory 15,750.6 20,206.5 26,087.7 31,445.9

R&D -- -- -- -- Other current assets 5,592.9 6,152.2 6,459.8 6,782.8


EBITDA 9,013.4 14,567.0 17,226.3 20,227.1 Net PP&E 39,039.0 43,599.3 48,475.2 53,078.0

Depreciation & amortization (5,313.6) (6,492.1) (7,005.9) (7,499.9) Net intangibles 7,168.7 5,927.7 4,686.8 3,445.8

EBIT 3,699.8 8,074.9 10,220.5 12,727.3 Total investments 4,960.1 4,834.3 4,720.2 4,643.0

Interest income 53.4 120.2 306.4 226.4 Other long-term assets 9,798.8 10,778.7 11,317.7 11,883.5

Interest expense (1,517.0) (1,591.8) (1,407.6) (1,284.5) Total assets 115,485.8 142,094.2 157,224.1 172,024.7

Income/(loss) from uncons. subs. 3.0 0.0 0.0 0.0

Others 1,555.8 (267.5) (139.4) (102.6) Accounts payable 30,655.8 36,142.2 45,290.1 52,939.4

Pretax profits 3,795.0 6,335.8 8,979.8 11,566.6 Short-term debt 26,412.9 27,412.9 27,212.9 26,512.9

Income tax (656.8) (1,110.1) (1,663.1) (2,257.9) Other current liabilities 9,041.4 10,684.0 10,756.0 11,242.5

Minorities (314.8) (400.6) (458.3) (504.3) Total current liabilities 66,110.1 74,239.1 83,259.0 90,694.8

Long-term debt 11,229.9 11,229.9 11,229.9 11,029.9

Net income pre-preferred dividends 2,823.4 4,825.1 6,858.4 8,804.4 Other long-term liabilities 2,116.5 2,539.8 3,047.7 3,504.9

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 13,346.4 13,769.7 14,277.6 14,534.8

Net income (pre-exceptionals) 2,823.4 4,825.1 6,858.4 8,804.4 Total liabilities 79,456.5 88,008.8 97,536.6 105,229.6

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income 2,823.4 4,825.1 6,858.4 8,804.4 Preferred shares 0.0 0.0 0.0 0.0


EPS (basic, pre-except) (Rmb) 1.14 1.87 2.51 3.23 Minority interest 3,734.8 4,135.4 4,593.8 5,098.1

EPS (basic, post-except) (Rmb) 1.14 1.87 2.51 3.23

EPS (diluted, post-except) (Rmb) 1.14 1.87 2.51 3.23 Total liabilities & equity 115,485.8 142,094.2 157,224.1 172,024.7

DPS (Rmb) 0.00 0.60 0.63 0.81

Dividend payout ratio (%) 0.0 32.3 25.0 25.0 BVPS (Rmb) 13.04 18.31 20.19 22.62

Free cash flow yield (%) (2.6) (5.3) (1.5) (0.4)


Sales growth 40.2 33.0 28.3 20.4 CROCI (%) 14.1 12.8 13.7 13.7

EBITDA growth 46.8 61.6 18.3 17.4 ROE (%) 9.8 11.7 13.1 15.1

EBIT growth 91.8 118.3 26.6 24.5 ROA (%) 2.7 3.7 4.6 5.3

Net income growth 551.3 70.9 42.1 28.4 ROACE (%) 7.1 8.9 10.0 11.1

EPS growth 537.9 63.7 34.7 28.4 Inventory days 77.7 84.6 84.4 87.0


EBITDA margin 11.6 14.1 13.0 12.7 Payable days 170.6 157.2 148.5 148.6

EBIT margin 4.8 7.8 7.7 8.0 Net debt/equity (%) 87.8 43.1 45.4 44.8

Interest cover - EBIT (X) 2.5 5.5 9.3 12.0

Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E

Net income pre-preferred dividends 2,823.4 4,825.1 6,858.4 8,804.4

D&A add-back 5,313.6 6,492.1 7,005.9 7,499.9 P/E (analyst) (X) 28.7 24.9 18.5 14.4

Minorities interests add-back 314.8 400.6 458.3 504.3 P/B (X) 2.5 2.5 2.3 2.1

Net (inc)/dec working capital (5,915.3) (7,082.2) (5,611.6) (6,707.9) EV/EBITDA (X) 12.9 10.1 9.2 8.0

Other operating cash flow 1,305.6 (864.7) (99.2) (229.1) EV/GCI (X) 1.3 1.4 1.3 1.2

Cash flow from operations 3,842.1 3,770.9 8,611.8 9,871.6 Dividend yield (%) 0.0 1.3 1.4 1.7

Capital expenditures (6,072.5) (10,321.4) (10,589.9) (10,357.8)

Acquisitions 0.0 0.0 0.0 0.0

Divestitures 1,808.6 904.3 452.1 0.0

Others (6,472.5) (519.7) (628.3) (629.2)


Dividends paid (common & pref) 0.0 0.0 (1,642.6) (1,714.6)

Inc/(dec) in debt 10,465.6 1,000.0 (200.0) (900.0)

Common stock issuance (repurchase) 0.0 14,473.0 0.0 0.0

Other financing cash flows (1,510.7) 0.0 0.0 0.0

Cash flow from financing 8,954.9 15,473.0 (1,842.6) (2,614.6)

Total cash flow 2,060.5 9,307.1 (3,996.9) (3,730.1) Note: Last actual year may include reported and estimated data.




Panasonic Corp: Leading LIB supplier globally, but Neutral on tough market outlook

What's changed

Panasonic is a leading supplier of lithium-ion and automotive batteries, and has around 20% market share in

automotive lithium-ion batteries globally. We believe greater uptake of EV/ PHEVs will be a tailwind to its

businesses. Sales of automotive batteries in FY3/16 stood at around ¥150 bn (2% of consolidated sales), but we

expect this figure to rise sharply to ¥350 bn by FY3/19. Panasonic is the sole supplier of lithium-ion batteries to

Tesla, and is contracted to supply two billion battery cells between 2014 and 2017. Panasonic is also planning to

invest in Tesla’s Gigafactory – the large battery factory that Tesla is building in Nevada (US), and will contribute

around 30%-40% of the investment in the factory to build an LIB cell production line. The goal is to produce 50

GWh of battery packs each year, beginning in 2H2016, of which 35 GWh will be for automotive use. Much of the

plant’s output will be used in Tesla’s next-generation vehicle, known for now as the Model 3, due to be launched

in 2017. We believe Gigafactory start-up should deliver cost reductions of around 40% for manufacturing

batteries for Panasonic, which will permeate to Tesla’s lower accrual cost.

Implications

The Automotive & Industrial Systems (AIS) company has seen a sharp drop in sales of batteries for ICT

applications, and the rechargeable battery business produced a loss. We believe Panasonic is looking to generate

stable profits on fixed-cost savings. Longer term, we see fewer growth businesses boosting overall sales/profits,

making profit growth largely a function of forex moves and streamlining. We maintain our Neutral rating in the

absence of any positive catalysts in the near term.

Valuation

Our 12-month target price is ¥1,100, based on FY16E average EV/DACF for Asia tech firms (6.88X). Our target

price implies 5% upside.

Key risks

Downside: AC/housing sales shortfalls, sharp rise in auto-related fixed costs; Upside: unexpected white goods

growth, wider battery margins.


Neutral


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Panasonic Corp. (6752.T)

Japan Internet, Games & Consumer Electronics Peer Group Average

Key data Current

Price (¥) 1,052

12 month price target (¥) 1,100

Market cap (¥bn) 2,441.6

SEC (¥bn) 3/16 3/17E 3/18E 3/19E

Revenue 7,553.7 7,460.1 7,999.7 8,512.7

yoy % chg. (2.1) (1.2) 7.2 6.4

Revenue CoE -- 7,600.0 -- --

Op. profit 415.7 343.7 408.9 434.8

Op. profit CoE -- 310.0 -- --

EPS (¥) 83.4 58.2 80.8 91.2

yoy % chg. 7.4 (30.2) 38.7 12.8

EPS CoE (¥) -- 62.5 -- --

P/E (X) 16.4 18.1 13.0 11.5

P/B (X) 1.9 1.4 1.3 1.2

EV/EBITDA (X) 3.3 3.6 3.1 2.9

CROCI (%) 5.2 8.7 10.0 10.4

EV/GCI (X) 0.6 0.4 0.4 0.4

1,150

1,250

1,350

1,450

1,550

1,650

1,750

1,850

800

900

1,000

1,100

1,200

1,300

1,400

1,500



Panasonic Corp. (L) TOPIX (R)


Absolute 12.0 2.7 (20.7)

Rel. to TOPIX 7.1 2.2 (14.3)




Panasonic Corp.: Summary financials

Profit model (¥bn) 3/16 3/17E 3/18E 3/19E Balance sheet (¥bn) 3/16 3/17E 3/18E 3/19E

Revenue 7,553.7 7,460.1 7,999.7 8,512.7 Cash & equivalents 1,014.3 1,231.5 1,161.5 1,167.2

Cost of goods sold (5,340.0) (5,346.5) (5,820.8) (6,307.8) Accounts receivable 845.7 835.3 895.7 953.1

Gross profit 2,213.7 2,113.7 2,178.9 2,204.8 Inventory 756.4 747.1 801.1 852.5

SG&A and other (1,798.0) (1,770.0) (1,770.0) (1,770.0) Other current assets 437.9 437.9 437.9 437.9

Operating profit 415.7 343.7 408.9 434.8 Total current assets 3,054.4 3,251.8 3,296.2 3,410.7

Net interest income/(expense) 3.5 1.9 2.0 2.0 Net PP&E 1,301.2 1,359.3 1,405.8 1,443.0

Equity in earnings of affiliates 12.6 12.6 10.0 10.0 Net intangibles 630.0 630.0 630.0 630.0

Net other nonoperating inc/(exp) (202.2) (78.0) (80.0) (80.0) Total investments 179.5 192.0 202.0 212.0

Recurring profit -- -- -- -- Other long-term assets 432.0 432.0 432.0 432.0

Extraordinary income 0.0 0.0 0.0 0.0 Total assets 5,597.0 5,865.1 5,966.0 6,127.7

Extraordinary expense 0.0 0.0 0.0 0.0

Pretax profit 229.6 280.1 340.9 366.8 Accounts payable 942.2 943.4 1,027.1 1,113.0

Income tax (14.5) (114.6) (118.3) (120.2) Short-term debt 21.7 262.2 170.7 120.2

Minority interest (21.8) (30.4) (35.0) (35.0) Other current liabilities 1,416.9 1,416.9 1,416.9 1,416.9

Net income 193.3 135.2 187.5 211.6 Total current liabilities 2,380.9 2,622.5 2,614.7 2,650.1

Long-term debt 704.2 604.5 546.4 488.8

Capital expenditures (excl. leases) (241.8) (341.0) (341.0) (341.0) Other long-term liabilities 657.6 657.6 657.6 657.6

Capital expenditures (incl. leases) (241.8) (341.0) (341.0) (341.0) Total long-term liabilities 1,361.8 1,262.1 1,204.0 1,146.4

Depreciation & amortization (286.5) (282.9) (294.5) (303.8) Total liabilities 3,742.7 3,884.7 3,818.7 3,796.5

EPS (basic) (¥) 83.4 58.2 80.8 91.2 Minority interest 149.3 179.6 214.6 249.6

EPS (fully diluted) (¥) 83.4 58.2 80.8 91.1 Total common equity 1,705.1 1,800.8 1,932.6 2,081.5

Total liabilities & equity 5,597.0 5,865.1 5,966.0 6,127.7

BVPS (¥) 735.8 775.9 832.7 896.9

DPS (¥) 15.0 17.0 24.0 27.0 Net debt (288.3) (364.8) (444.3) (558.2)

Dividend payout ratio (%) 18.0 29.2 29.7 29.6

Ratios 3/16 3/17E 3/18E 3/19E

Year-on-year change (%) 3/16 3/17E 3/18E 3/19E

Revenue (2.1) (1.2) 7.2 6.4 CROCI (%) 5.2 8.7 10.0 10.4

Operating profit 8.8 (17.3) 19.0 6.3 ROE (%) 11.0 7.7 10.0 10.5

Recurring profit -- -- -- -- ROA (%) 3.3 2.4 3.2 3.5

Net income 7.7 (30.1) 38.7 12.8 Net debt/equity (%) (16.9) (20.3) (23.0) (26.8)

EPS (basic) 7.4 (30.2) 38.7 12.8 Interest coverage ratio (X) 24.4 NM NM NM

EPS (fully diluted) 7.4 (30.2) 38.7 12.8

Valuation 3/16 3/17E 3/18E 3/19E

Margins (%) 3/16 3/17E 3/18E 3/19E

Operating profit 5.5 4.6 5.1 5.1 P/E (X) 16.4 18.1 13.0 11.5

EBITDA 9.3 8.4 8.8 8.7 EV/EBITDA (X) 3.3 3.6 3.1 2.9

Recurring profit NM NM NM NM EV/GCI (X) 0.6 0.4 0.4 0.4

Net income 2.6 1.8 2.3 2.5 P/B (X) 1.9 1.4 1.3 1.2

Dividend yield (%) 1.1 1.6 2.3 2.6

Cash flow statement (¥bn) 3/16 3/17E 3/18E 3/19E FCF yield (%) 4.7 4.4 5.1 6.6

Net income 193.3 135.2 187.5 211.6

D&A add-back 286.5 282.9 294.5 303.8

Minority interest add-back 21.8 30.4 35.0 35.0

Net (inc)/dec in working capital 136.5 21.0 (30.7) (22.9)

Other operating cash flow (239.4) (12.6) (10.0) (10.0)

Cash flow from operations 398.7 456.9 476.3 517.5

Capital expenditures (incl. leases) (241.8) (341.0) (341.0) (341.0)

Purchases of long-term securities (30.7) 0.0 0.0 0.0

Sales of long-term securities 0.0 0.0 0.0 0.0

Other investing cash flow (1.7) 0.0 0.0 0.0

Cash flow from investments (274.3) (341.0) (341.0) (341.0)

Dividends paid (common & preferred) (34.8) (39.5) (55.7) (62.7)

Incr./(decr.) in debt (247.0) 140.8 (149.6) (108.1)

Common stock issuance (0.1) 0.0 0.0 0.0

Other financing cash flow (108.7) 0.0 0.0 0.0

Cash flow from financing (390.6) 101.4 (205.3) (170.8) Note: Last actual year may include reported and estimated data.

Total cash flow (266.1) 217.3 (70.1) 5.7 Source: Company data, Goldman Sachs Research estimates.



Toyota: Leading all-solid-state battery development, but Neutral on stiff competition

What's changed

Toyota, which pioneered the shift to hybrid technology in 1997 with the launch of the Prius, the world’s first

mass-produced hybrid vehicle, is the dominant market leader in nickel-metal hydride (Ni-MH) batteries for

automotive applications. Primearth EV Energy (PEVE), a joint venture between Toyota (80%) and Panasonic

(20%), is a core supplier of Ni-MH batteries, but also produces some lithium-ion batteries (LIBs), albeit on a very

small scale (we estimate production capacity of 1 GWh or less). We believe Toyota’s view on existing LIBs is that

they do not provide customers with sufficient product value, and that it is now focusing on all-solid-state

batteries as a next-generation replacement. In short, we believe the company considers investing significant

amounts in existing LIB technologies as a risk. In March 2016, Toyota and the Tokyo Institute of Technology

jointly announced the successful development of an all-solid-state battery with a high energy density, achieved

through the use of a new electrolyte (with high ionic conductivity). The announcement also trumpeted a major

reduction in battery charging time, hinting at the significant potential of all-solid-state battery technologies.

Implications

We stay Neutral. Near term, we see signs of a peak-out in the North American market, a key earnings source, and

downward pressure on margins from stiffer competition, even for Toyota. In the medium term, however, we

believe Toyota is one of few automakers able to invest actively in next-generation technologies due to its strong

funding position (we estimate Toyota will have c.¥9tn in funds available for investment over the medium term).

We believe Toyota could gain a technological advantage in the battery field, assuming it can achieve a

breakthrough in all-solid-state battery development.

Valuation

Our 12-month target price of ¥6,400 is based on FY3/18E P/B vs. ROE correlation. Our P/B vs. ROE-implied P/B

multiple is 1.0x in FY3/18E.

Key risks

Risks include forex swings, and stiffer competition in the US market. In the battery business, a key risk is weaker

competitiveness if all-solid-state battery development proves difficult, or prices of existing LIBs decline rapidly.


Neutral


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Toyota Motor (7203.T)

Japan Automobiles Peer Group Average

Key data Current

Price (¥) 6,144



SEC (¥bn) 3/16 3/17E 3/18E 3/19E

Revenue 28,403.1 26,470.0 26,700.0 27,100.0

yoy % chg. 4.3 (6.8) 0.9 1.5

Revenue CoE -- 26,000.0 -- --

Op. profit 2,854.0 1,850.0 2,000.0 2,150.0

Op. profit CoE -- 1,600.0 -- --

EPS (¥) 741.4 511.5 557.1 607.6

yoy % chg. 7.8 (31.0) 8.9 9.1

EPS CoE (¥) -- 474.2 -- --

P/E (X) 10.1 12.0 11.0 10.1

P/B (X) 1.4 1.1 1.0 0.9

EV/EBITDA (X) 3.3 3.9 2.9 2.0

CROCI (%) 14.1 11.4 10.8 10.7

EV/GCI (X) 0.5 0.3 0.2 0.1

1,150

1,250

1,350

1,450

1,550

1,650

1,750

1,850

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000



Toyota Motor (L) TOPIX (R)


Absolute 9.0 4.3 (15.1)

Rel. to TOPIX 4.3 3.8 (8.2)




Toyota Motor: Summary financials


Revenue 28,403.1 26,470.0 26,700.0 27,100.0 Cash & equivalents 5,482.9 6,402.5 7,886.5 9,455.0


Gross profit 6,947.0 5,775.9 5,946.4 6,131.9 Inventory 2,061.5 1,920.0 1,940.0 1,970.0

SG&A and other (4,093.1) (3,925.9) (3,946.4) (3,981.9) Other current assets 8,665.0 9,051.4 9,344.1 9,113.7

Operating profit 2,854.0 1,850.0 2,000.0 2,150.0 Total current assets 18,209.6 19,233.9 21,050.6 22,448.7

Net interest income/(expense) 122.5 111.0 111.0 115.0 Net PP&E 9,740.4 9,901.2 9,848.2 9,850.5


Net other nonoperating inc/(exp) 7.0 13.0 13.0 13.0 Total investments 10,071.4 10,815.4 11,633.8 12,534.0

Recurring profit -- -- -- -- Other long-term assets 9,406.2 7,930.2 6,698.6 4,624.7



Pretax profit 2,983.4 1,974.0 2,124.0 2,278.0 Accounts payable 2,389.5 2,226.9 2,246.2 2,279.9


Minority interest (121.5) (127.0) (131.0) (136.0) Other current liabilities 13,030.8 13,284.8 13,447.4 13,087.0

Net income 2,312.7 1,513.0 1,615.0 1,726.0 Total current liabilities 16,124.5 16,225.8 16,417.8 16,101.0

Long-term debt 584.8 589.8 594.8 599.8

Capital expenditures (excl. leases) (1,292.5) (1,340.0) (1,200.0) (1,300.0) Other long-term liabilities 12,630.2 13,077.3 13,379.1 12,948.6

Capital expenditures (incl. leases) (1,292.5) (1,340.0) (1,200.0) (1,300.0) Total long-term liabilities 13,215.0 13,667.1 13,973.9 13,548.4

Depreciation & amortization (885.1) (920.0) (990.0) (1,040.0) Total liabilities 29,339.4 29,893.0 30,391.7 29,649.5


EPS (fully diluted) (¥) 741.4 511.5 557.1 607.6 Total common equity 16,746.9 17,184.9 18,029.6 18,986.5


BVPS (¥) 5,368.4 5,809.8 6,219.8 6,683.6

DPS (¥) 210.0 210.0 210.0 210.0 Net debt (2,239.6) (3,144.0) (4,613.0) (6,166.0)


Ratios 3/16 3/17E 3/18E 3/19E


Revenue 4.3 (6.8) 0.9 1.5 CROCI (%) 14.1 11.4 10.8 10.7

Operating profit 3.8 (35.2) 8.1 7.5 ROE (%) 12.9 8.4 8.8 8.9

Recurring profit -- -- -- -- ROA (%) 4.9 3.2 3.3 3.5

Net income 6.4 (34.6) 6.7 6.9 Net debt/equity (%) (12.4) (17.5) (24.5) (31.1)

EPS (basic) 7.8 (31.0) 8.9 9.1 Interest coverage ratio (X) 80.6 50.0 52.6 59.7

EPS (fully diluted) 7.8 (31.0) 8.9 9.1

Valuation 3/16 3/17E 3/18E 3/19E

Margins (%) 3/16 3/17E 3/18E 3/19E



Recurring profit NM NM NM NM EV/GCI (X) 0.5 0.3 0.2 0.1

Net income 8.1 5.7 6.0 6.4 P/B (X) 1.4 1.1 1.0 0.9

Dividend yield (%) 2.8 3.4 3.4 3.4


Net income 2,312.7 1,513.0 1,615.0 1,726.0

D&A add-back 885.1 920.0 990.0 1,040.0


Net (inc)/dec in working capital 163.5 119.0 (20.7) (26.3)

Other operating cash flow 978.0 1,027.5 785.1 730.8

Cash flow from operations 4,460.9 3,706.5 3,500.4 3,606.5

Capital expenditures (incl. leases) (1,292.5) (1,340.0) (1,200.0) (1,300.0)

Purchases of long-term securities 0.0 0.0 0.0 0.0


Other investing cash flow (1,890.0) (1,067.1) (977.8) (1,293.2)



Incr./(decr.) in debt 658.8 454.3 574.2 1,024.8

Common stock issuance (778.2) (450.0) (160.0) (170.0)

Other financing cash flow 474.9 237.0 356.0 297.0

Cash flow from financing (423.6) (379.8) 161.5 555.2 Note: Last actual year may include reported and estimated data.

Total cash flow 854.7 919.6 1,484.1 1,568.5 Source: Company data, Goldman Sachs Research estimates.



Toray: No. 2 supplier of LiB separators globally, further expansion underway; Neutral

What's changed

Toray Industries’ wholly-owned subsidiary, Toray Battery Separator Film, is the world’s No. 2 supplier of lithium-

ion battery (LiB) separators after Asahi Kasei Group. Back in 1984, TonenGeneral Group’s predecessor Toa

Nenryo Kogyo commenced research into separators. In 2010, TonenGeneral formed a 50:50 joint venture with

Toray, which became a wholly owned subsidiary of the latter in January 2012. The JV has two manufacturing

bases, one in Japan (Nasu) and one in Korea, which account for 0.27bn m2 capacity (GS estimate). The company

already announced a plan to expand its Korea production by 30% by the end of 2017 and we expect total capacity

will reach over 0.3bn m2 by 2017.

Toray Battery Separator Film’s Setela separators are manufactured using the wet-type biaxial stretching method,

and at present most sales are for consumer electronics applications. Although the company itself does not

disclose detailed sales figures, based on rival manufacturers’ data, we surmise that separator sales came to about

¥25.0 bn in FY3/16 (about 1.2% of Toray’s consolidated sales). Converting Toray Battery Separator Film into a

wholly-owned subsidiary resulted in goodwill of ¥31.0 bn, which is being amortized over ten years under the

straight-line method, eroding profit by ¥3.1 bn annually. However, according to Toray, the separator business is

profitable even after goodwill amortization. Apparently, both sales and profit continued to grow in 1Q FY3/17.

Although there also has been no disclosure in terms of its customer base, the Nikkei (Sept 9) reported that Toray

has begun supplying Sumitomo Chemical with separator substrates.

Implications

The absence of any signs of a slowdown in demand for aircraft-use carbon fiber is a positive, but the outlook is

highly uncertain for a number of other businesses, including overseas apparel-use fibers, LCD materials, and

carbon fiber for non-aviation applications. We continue to regard full-year guidance as somewhat aggressive, and

we stay Neutral.

Valuation

Our 12-month target price of ¥1,000 is based on FY16E materials’ sector average EV/GCI vs. CROCI/WACC

(implies P/B of 1.6X, P/E of 16X).

Key risks

Key risks include oil price and forex fluctuations, and Boeing 787 production trends.


Neutral


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Toray Industries (3402.T)

Japan Chemicals & Fibers Peer Group Average

Key data Current

Price (¥) 986



Local GAAP (¥bn) 3/16 3/17E 3/18E 3/19E

Revenue 2,104.4 2,154.8 2,201.4 2,243.1

yoy % chg. 4.7 2.4 2.2 1.9

Revenue CoE -- 2,160.0 -- --

Op. profit 154.5 160.0 170.0 179.0

Op. profit CoE -- 170.0 -- --

EPS (¥) 56.4 61.0 66.0 69.8

yoy % chg. 26.9 8.1 8.2 5.8

EPS CoE (¥) -- 65.7 -- --

P/E (X) 18.2 16.2 14.9 14.1

P/B (X) 1.7 1.5 1.4 1.3

EV/EBITDA (X) 9.3 9.0 8.5 8.0

CROCI (%) 6.7 5.3 5.3 5.4

EV/GCI (X) 0.7 0.6 0.6 0.6

1,150

1,250

1,350

1,450

1,550

1,650

1,750

850

900

950

1,000

1,050

1,100

1,150



Toray Industries (L) TOPIX (R)


Absolute 6.7 5.5 (3.2)

Rel. to TOPIX 2.0 4.9 4.6




Toray Industries: Summary financials


Revenue 2,104.4 2,154.8 2,201.4 2,243.1 Cash & equivalents 120.2 99.7 75.6 84.3


Gross profit 441.9 454.3 470.7 485.4 Inventory 394.0 403.0 410.2 416.6

SG&A and other (287.4) (294.3) (300.7) (306.4) Other current assets 93.1 93.1 93.1 93.1

Operating profit 154.5 160.0 170.0 179.0 Total current assets 1,009.6 1,007.7 999.7 1,022.7

Net interest income/(expense) (3.8) (5.7) (5.2) (4.9) Net PP&E 830.6 913.6 949.7 982.5


Net other nonoperating inc/(exp) -- -- -- -- Total investments 256.0 264.7 274.7 284.7

Recurring profit 150.2 160.0 171.9 181.4 Other long-term assets 95.0 95.0 95.0 95.0



Pretax profit 137.8 150.0 161.9 171.4 Accounts payable 213.1 218.0 221.9 225.3


Minority interest (7.1) (7.3) (7.8) (8.2) Other current liabilities 167.7 167.7 167.7 167.7

Net income 90.1 97.5 105.5 111.6 Total current liabilities 571.3 633.1 563.7 537.4

Long-term debt 510.3 456.0 474.2 472.1

Capital expenditures (excl. leases) -- -- -- -- Other long-term liabilities 171.8 171.8 171.8 171.8

Capital expenditures (incl. leases) (129.2) (175.0) (130.0) (130.0) Total long-term liabilities 682.1 627.8 646.0 643.9

Depreciation & amortization (86.8) (92.0) (93.9) (97.2) Total liabilities 1,253.5 1,260.9 1,209.7 1,181.3


EPS (fully diluted) (¥) 56.4 61.0 66.0 69.8 Total common equity 946.7 1,021.9 1,103.4 1,189.4


BVPS (¥) 592.2 639.0 690.0 743.8

DPS (¥) 13.0 14.0 15.0 16.0 Net debt 580.6 603.7 572.7 532.2


Ratios 3/16 3/17E 3/18E 3/19E


Revenue 4.7 2.4 2.2 1.9 CROCI (%) 6.7 5.3 5.3 5.4

Operating profit 25.1 3.6 6.3 5.3 ROE (%) 8.6 9.1 9.2 9.0

Recurring profit 16.8 6.5 7.4 5.5 ROA (%) 3.9 4.2 4.4 4.6

Net income 26.9 8.2 8.2 5.8 Net debt/equity (%) 56.7 54.5 47.9 41.2

EPS (basic) 26.9 8.1 8.2 5.8 Interest coverage ratio (X) 28.9 22.9 26.2 28.9

EPS (fully diluted) 26.9 8.1 8.2 5.8

Valuation 3/16 3/17E 3/18E 3/19E

Margins (%) 3/16 3/17E 3/18E 3/19E



Recurring profit 7.1 7.4 7.8 8.1 EV/GCI (X) 0.7 0.6 0.6 0.6

Net income 4.3 4.5 4.8 5.0 P/B (X) 1.7 1.5 1.4 1.3

Dividend yield (%) 1.3 1.4 1.5 1.6


Net income 90.1 97.5 105.5 111.6

D&A add-back 86.8 92.0 93.9 97.2


Net (inc)/dec in working capital (36.5) (13.8) (12.2) (10.9)

Other operating cash flow 48.6 (8.7) (10.0) (10.0)

Cash flow from operations 196.1 174.3 185.0 196.1

Capital expenditures (incl. leases) (129.2) (175.0) (130.0) (130.0)

Purchases of long-term securities 0.0 0.0 0.0 0.0


Other investing cash flow (25.2) 0.0 0.0 0.0

Cash flow from investments (154.4) (175.0) (130.0) (130.0)


Incr./(decr.) in debt (22.0) 2.5 (55.1) (31.8)

Common stock issuance 0.2 0.0 0.0 0.0

Other financing cash flow 4.8 0.0 0.0 0.0

Cash flow from financing (37.8) (19.8) (79.1) (57.4) Note: Last actual year may include reported and estimated data.

Total cash flow 4.0 (20.5) (24.1) 8.7 Source: Company data, Goldman Sachs Research estimates.



Samsung SDI: Shifting focus from mobile to EV, but challenges ahead; Neutral

What's changed

Given its solid captive customer base, Samsung SDI (SDI)’s battery business focused mostly on consumer

electronics and mobile before 2010, resulting in slow growth in EV battery. However, SDI started to grow its EV

battery business in 2010, expanding its customer base to BMW and Chinese automotive makers, among others.

However, we foresee incremental challenges for SDI’s EV battery business. As a consequence of its late entrance,

first of all, SDI’s customer base is less diversified, compared to leading makers. Secondly, SDI is producing can-

type battery for EV, but the cost reduction curve for its can-type battery seems slower than our expectation for

the past couple of years, which limits rapid customer expansion. In our view, SDI’s standardized module sales

growth will likely become one of major factors for the company to enhance its cost structure. Lastly, we foresee

the ongoing regulation risk on its EV battery business in China. In May 2016, China’s Ministry of Industry and

Information Technology (MIIT) indicated that it will announce new regulatory measures under which it will only

provide subsidies to EVs that use batteries made by registered companies that meet certain criteria including a

quality certification for battery suppliers to have longer than a one-year production history in China. We continue

to believe that the potential regulatory measures are another example of the Chinese government trying to

support the growth of local battery makers that are still smaller in size compared to global battery makers, and

these measures add further risk to SDI for achieving rapid growth in its Chinese EV battery businesses.

Implications

In our view, SDI has built solid track record with increasing market shares in consumer/mobile battery business.

However, we do not expect SDI’s success in mobile battery will directly translate into the EV battery industry

given diverging industry dynamics and customer base. Remain Neutral.

Valuation

We maintain our SoTP-based 12-month target price of W105,000, implying P/E and P/B of 25.6X and 0.7X for

FY17.

Key risks

Faster/slower ramp-up for EV battery and electronic material businesses.


Neutral


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Samsung SDI Co (006400.KS)

Asia Pacific Technology Peer Group Average

Key data Current

Price (W) 99,500

12 month price target (W) 105,000

Market cap (W bn / US$ mn) 6,988.7 / 6,334.6

Foreign ownership (%) 36.3

12/15 12/16E 12/17E 12/18E

EPS (W) 767 5,049 4,102 6,483

EPS growth (%) 164.2 558.7 (18.8) 58.1

EPS (diluted) (W) 767 5,049 4,102 6,483

EPS (basic pre-ex) (W) 767 (10,464) 4,102 6,483

P/E (X) 150.5 19.7 24.3 15.3

P/B (X) 0.7 0.6 0.6 0.6

EV/EBITDA (X) 14.6 NM 12.3 10.0

Dividend yield (%) 0.9 1.5 1.5 1.5

ROE (%) 0.5 3.2 2.6 4.0

CROCI (%) 6.5 (1.5) 7.7 7.7

1,800

1,850

1,900

1,950

2,000

2,050

2,100

2,150

2,200

2,250

85,000

90,000

95,000

100,000

105,000

110,000

115,000

120,000

125,000

130,000



Samsung SDI Co (L) Korea SE Composite (KOSPI) (R)


Absolute (7.9) (5.7) 0.5

Rel. to Korea SE Composite (KOSPI) (10.4) (8.1) (2.8)




Samsung SDI Co: Summary financials

Profit model (W bn) 12/15 12/16E 12/17E 12/18E Balance sheet (W bn) 12/15 12/16E 12/17E 12/18E

Total revenue 7,569.3 5,383.0 6,264.4 7,098.5 Cash & equivalents 1,288.0 1,383.1 1,082.8 802.7


SG&A (872.0) (1,066.0) (530.1) (631.0) Inventory 750.0 553.9 603.8 677.5

R&D (571.0) (567.5) (597.5) (646.8) Other current assets 1,814.3 2,356.9 1,818.7 1,193.3


EBITDA 603.6 (309.7) 604.2 764.9 Net PP&E 3,229.0 2,823.1 3,533.4 4,218.2

Depreciation & amortization (663.4) (465.7) (488.9) (522.6) Net intangibles 1,277.6 978.6 1,037.0 1,097.7

EBIT (59.8) (775.4) 115.3 242.3 Total investments 5,172.9 5,351.7 5,656.3 6,121.0

Interest income 33.0 42.0 45.7 36.8 Other long-term assets 1,771.9 1,978.3 1,900.4 1,825.5

Interest expense (46.8) (44.4) (42.3) (41.3) Total assets 16,225.3 16,109.8 16,384.7 16,794.4

Income/(loss) from uncons. subs. 279.9 144.8 304.7 464.7

Others (167.2) (153.4) (71.3) (127.3) Accounts payable 378.1 415.4 452.9 508.1

Pretax profits 39.1 (786.5) 352.1 575.1 Short-term debt 1,047.2 711.0 681.0 651.0

Income tax (13.4) 32.1 (88.0) (143.8) Other current liabilities 1,776.0 1,733.5 1,733.5 1,733.5

Minorities 28.2 19.4 24.0 24.0 Total current liabilities 3,201.3 2,859.9 2,867.4 2,892.7

Long-term debt 702.5 623.3 623.3 623.3

Net income pre-preferred dividends 53.8 (735.0) 288.1 455.3 Other long-term liabilities 1,068.3 1,328.5 1,437.2 1,495.6

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 1,770.8 1,951.9 2,060.6 2,118.9

Net income (pre-exceptionals) 53.8 (735.0) 288.1 455.3 Total liabilities 4,972.1 4,811.8 4,928.0 5,011.6

Post-tax exceptionals 0.0 1,089.6 0.0 0.0

Net income 53.8 354.7 288.1 455.3 Preferred shares 8.2 8.2 8.2 8.2


EPS (basic, pre-except) (W) 767 (10,464) 4,102 6,483 Minority interest 241.2 239.8 215.8 191.8

EPS (basic, post-except) (W) 767 5,049 4,102 6,483

EPS (diluted, post-except) (W) 767 5,049 4,102 6,483 Total liabilities & equity 16,225.3 16,109.8 16,384.7 16,794.4

DPS (W) 1,000 1,500 1,500 1,500

Dividend payout ratio (%) 130.4 29.7 36.6 23.1 BVPS (W) 156,664 157,322 159,924 164,907

Free cash flow yield (%) 2.1 (12.2) (0.1) 0.3


Sales growth 38.3 (28.9) 16.4 13.3 CROCI (%) 6.5 (1.5) 7.7 7.7

EBITDA growth 0.0 (151.3) 295.1 26.6 ROE (%) 0.5 3.2 2.6 4.0

EBIT growth (184.5) NM 114.9 110.1 ROA (%) 0.3 2.2 1.8 2.7

Net income growth 164.2 558.7 (18.8) 58.1 ROACE (%) 0.3 (6.5) 2.3 3.6

EPS growth 164.2 558.7 (18.8) 58.1 Inventory days 44.8 52.6 42.1 41.9


EBITDA margin 8.0 (5.8) 9.6 10.8 Payable days 22.5 32.0 31.6 31.4

EBIT margin (0.8) (14.4) 1.8 3.4 Net debt/equity (%) 4.1 (0.4) 1.9 4.0

Interest cover - EBIT (X) NM NM NM 53.9

Cash flow statement (W bn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E

Net income pre-preferred dividends 53.8 (735.0) 288.1 455.3

D&A add-back 663.4 465.7 488.9 522.6 P/E (analyst) (X) 150.5 19.7 24.3 15.3

Minorities interests add-back (28.2) (19.4) (24.0) (24.0) P/B (X) 0.7 0.6 0.6 0.6

Net (inc)/dec working capital (68.9) 470.8 (80.5) (124.7) EV/EBITDA (X) 14.6 NM 12.3 10.0

Other operating cash flow 260.8 (1,024.4) 420.2 294.0 EV/GCI (X) 0.6 0.5 0.5 0.5

Cash flow from operations 881.1 247.4 1,092.7 1,123.3 Dividend yield (%) 0.9 1.5 1.5 1.5

Capital expenditures (705.4) (1,132.5) (1,100.0) (1,100.0)

Acquisitions 0.0 (1,194.5) 0.0 0.0

Divestitures 638.6 0.0 0.0 0.0

Others 182.2 2,627.9 (157.6) (168.1)

Cash flow from investments 115.3 300.9 (1,257.6) (1,268.1)

Dividends paid (common & pref) (70.3) (70.2) (105.4) (105.4)

Inc/(dec) in debt (28.2) (415.3) (30.0) (30.0)

Common stock issuance (repurchase) 0.0 0.0 0.0 0.0

Other financing cash flows (237.5) 32.3 0.0 0.0

Cash flow from financing (336.0) (453.2) (135.4) (135.4)

Total cash flow 660.4 95.1 (300.3) (280.1) Note: Last actual year may include reported and estimated data.




Other beneficiaries

Other beneficiaries

Other beneficiaries



Asahi Kasei (3407.T, Not Covered): Expertise in both dry-type and wet-type separators

Asahi Kasei is a diversified chemicals maker established in 1922. It reported sales of ¥1,940.9 bn, operating profit of ¥165.2 bn, and

an operating margin of 8.5% in FY15. Sales weightings were 52% for the material group, 33% for homes and 15% for health care,

with the separator business forming part of the material group’s electronics segment. In FY15, the electronics segment generated

sales of ¥121.6 bn, operating profit of ¥4.4 bn, and an operating margin of 3.6%, while FY16 guidance is for sales of ¥137.0 bn and an

operating loss of ¥2.5 bn (including goodwill amortization associated with an acquisition). Previously, Asahi Kasei mainly developed

wet-type separators, but with the August 2015 acquisition of Polypore, it now also offers the Celgard dry-type separator. As of 2015,

Asahi Kasei dominated rivals, with a global market share of 45% in wet-type separators. The company aims to cater to diverse

customer needs given it is one of the few companies with both wet-type and dry-type technologies. According to Asahi Kasei, wet-

type and dry-type separators will each account for about 50% of overall demand in the medium term.

Tanaka Chemical (4080.T, Not Covered): Specialist cathode precursor manufacturer

Tanaka Chemical is a specialist manufacturer of cathode precursors for lithium-ion and nickel-metal hydride (NiMH) batteries. In

FY15, it had sales of ¥15.3 bn and an operating loss of ¥0.3 bn. Just under 10% of unit sales were for use in NiMH batteries for

consumer electronics applications and just over 10% were for use in NiMH batteries for automotive applications. Precursors for

lithium-ion batteries used in consumer electronics account for roughly 50% of unit sales, and those for automotive lithium-ion

batteries make up the remaining 30% or so. In recent years, the sales weighting for automotive lithium-ion battery cathode

precursors has been rising. Tanaka Chemical sees the lithium-ion battery market expanding from 60GWh in 2015 to 210GWh in 2025,

in line with which it looks for the cathode material market to grow from 80,000t to 260,000t. The company’s balance sheet

deteriorated somewhat after some large-scale capex in 2011 and a subsequent fall in the market, however on 31 August 2016, it

announced plans to raise capital by issuing new shares via a private placement to Sumitomo Chemical. This would take Sumitomo

Chemical’s stake in Tanaka Chemical to 50.1%. The two have been collaborating already for development of next-generation nickel-

cobalt-manganese (NCM) cathode materials with a nickel weighting as high as 90%, which should contribute to further increasing

batteries’ energy density.

W Scope (6619.T, Not Covered): Dedicated wet-type separator manufacturer

W Scope is a dedicated manufacturer of wet-type separators for lithium-ion batteries. It reported sales of ¥7.5 bn, operating profit of

¥1.9 bn, and an operating margin of 26% in FY15. At present 65% of sales are for use in consumer electronics, with automotive

applications making up the remaining 35%; however, over the next three to five years, W Scope aims for automotive applications to

have a larger sales weighting. Of the company’s sales, 58% are to Chinese companies, with Korea’s LG Group accounting for a

further 22%, A123 for 10%, and Xalt for 6%. W Scope uses a sequential stretching method to manufacture its polymer film, as

opposed to the simultaneous stretching method commonly used. According to its latest medium-term plan unveiled on 9 August

2016, the company is targeting sales of ¥10 bn in FY16, ¥13 bn in FY17, and ¥17 bn in FY18. Management has also expressed

confidence in achieving an operating margin of 20% or greater by 2025. Furthermore, W Scope seeks to attain a global market share

of 8% or higher in 2016, 15% in 2020, and 20% in 2026.



Hitachi Zosen (7004.T, Not Covered): Focused on all-solid-state batteries

Hitachi Zosen is a machinery manufacturer whose core business is environmental systems. In FY15, the company had sales of

¥387.0 bn, operating profit of ¥15.1 bn, and an operating margin of 3.9%. While the environmental systems & industrial plants

segment generated sales of ¥241.6 bn and the machinery segment ¥104.5 bn, the former delivered operating profit of ¥14.8 bn,

accounting for the majority of consolidated earnings. Hitachi Zosen is focusing on solid-state batteries as a potential application for

the mechanical press technologies it has built up over the years. It already has developed a sample product with energy density of

200Wh/kg, with a lithium transition-metal oxide cathode and sulfur solid electrolyte. As yet, solid-state batteries make almost no

contribution to sales. To enable mass production, Hitachi Zosen believes it needs to establish a low-cost manufacturing process, and

it plans to persist with its efforts to develop the technology for pressure-forming machinery for this purpose.



Appendix

Appendix



1. Glossary of terms

Electric vehicle (EV): EV is an automobile that runs on a motor with electric power charged from an external source. It is free of

CO2 emissions as it does not use gasoline or other petroleum derivatives. Lithium ion batteries are the mainstream power source

for EVs.

Hybrid vehicle (HV): An HV is an automobile that runs on two power sources: Engine and electric motor(s). HVs largely break down

into three categories based on their drivetrain, namely series, parallel, and power-split. The motor’s support leads to fuel efficiency

improvement during the drive.

Plug-in hybrid vehicle (PHV): PHV is a type of HV that allows one to charge electricity directly to a storage battery from a

residential power plug. Similar to HVs, PHVs have series and parallel drivetrains. A PHV’s battery volume is larger compared to that

of a HV, but smaller compared to that of an EV. Driving distance for PHVs depends on the battery size.

Anode: The electrode that releases electrons on discharge, the positive side.

Cathode: The electrode that receives electrons through the discharge process, the negative side

Separator: Battery separators create a barrier between the positive (anode) and negative (cathode) electrodes to prevent electrical

short-circuits between internal battery components.

Electrolyte: The material that separates anodes and cathodes and acts as a medium for charge transfer inside the cell.

Energy density: The amount of energy (Wh) that a battery can deliver per unit of volume, similar to specific energy.

kWh: kilowatt-hour; if energy is being transmitted or used at a constant rate (power) over a period of time, the total energy in

kilowatt-hours is the power in kilowatts multiplied by the time in hours. It is the measure of energy use or discharge over a specific

period of time.

kW: kilowatt; the measure of energy use or discharge at a moment of time.

Real Driving Emissions (RDE) testing: Method of regulating exhaust gas emissions based on data obtained during on-road

testing. This involves installing a portable emission measurement system (PEMS) on the vehicle, and measuring nitrous oxide (Nox)

and particle number (PN) emissions when driving along a predetermined route. Europe is now mulling the introduction of RDE.

Zero emission vehicle (ZEV) regulations: The emission regulatory framework at the state level in the United States. Regulations

announced by California will exclude hybrids from the ZEV category from 2018 and only include PHEVs, EVs, and FCVs.



2. Lithium supply/demand outlook

Adequate supplies of lithium at present

Lithium is the key material used in LIBs, and for a rare metal it is in quite plentiful supply. Global lithium reserves amount to 14 mn

tons, according to the US Geological Survey as of January 2016. Based on output of 30,000 tons in 2015, a simple calculation

suggests that current reserves of lithium will suffice for over 400 years. The near-term supply/demand balance is by no means tight,

as our global commodities team estimates the world’s lithium mines are operating at only around 70% of capacity at present. The

reality is, though, that much of the lithium is produced in Australia and Chile. Swings in lithium price could well see China, which

has relatively high mining costs, assume a greater presence.

Rapidly expanding EV market likely dictates that production be ramped up quickly

Automotive LIBs contain 60 kg of lithium (assuming a battery storage capacity of 40-60 kWh), far greater than the equivalent figures

of 6 grams for mobile phones and 40 grams for notebook PCs. Based on our forecasts for growth in EV and PHEV sales, we calculate

that 360,000 tons of lithium will be required annually by 2025. As of 2015, batteries accounted for 37% of lithium consumption,

followed by ceramics/glass at 30% and other uses at 33%. By 2025, though, we expect the battery weighting to exceed 80%, at which

point batteries would be the key to lithium supply/demand.

Lithium supply/demand likely to gradually tighten from 2020 onward

Obtaining an accurate picture of lithium supply/demand is difficult, as China’s production capacity is not entirely clear. Given

increasing demand for lithium as a component of automotive batteries, however, our commodities team thinks it’s possible that

lithium supply/demand will tighten from 2020 onward. Although there is no benchmark trading price for lithium, a rise in the price of

lithium is also conceivable. As outlined above, though, there are quite plentiful reserves of lithium, and it is likely that China would

increase production as it becomes better able to meet mining costs. Also, battery makers are undertaking research into lithium

recycling (recycling is physically possible, but cost is the main sticking point). Thus it seems unlikely that a shortage of lithium will

hinder further expansion in the EV and PHEV markets.



Exhibit 42: Australia and Chile among the leading producers of lithium 2015 lithium output by country (ton)

Exhibit 43: Chile’s lithium reserves account for more than half the total 2015 Lithium reserves by country (ton)

Source: US Geological Survey , Goldman Sachs Global Investment Research.

Source: US Geological Survey, Goldman Sachs Global Investment Research.

Exhibit 44: Automotive batteries by far the largest consumers of lithium Comparison of per-unit lithium consumption

Exhibit 45: Battery demand becoming determinant of lithium demand Lithium demand outlook by application (MT)

Source: Goldman Sachs Global Investment Research (2014).


Argentina, 3,800

Australia, 13,400

Brazil, 160

Chile, 11,700

China, 2,200

Portugal, 300

Zimbabwe, 900

Argentina, 2,000,000

Australia, 1,500,000

Brazil, 48,000

Chile, 7,500,000

China, 3,200,000

Portugal, 60,000

Zimbabwe, 23,000

2014Shipments

volume

Lithiumconsumption

per unit(mn units) kg 2014 2025

Mobile phone 1,200.0 0.006 8,400 18,135

Tablet-type device 260.0 0.025 7,800 16,840

Laptop 170.0 0.040 7,650 16,516

Electric tools 65.0 0.050 3,900 15,778

Hybrid 1.8 5.000 9,000 55,726

EV 0.3 40-60 18,000 360,000

storage - 1.5MT 1,000 13,786

Lithium For Battery Total lithium consumption

0

50,000

100,000

150,000

200,000

250,000

300,000

2010 2015 2020E 2025E

Others

Grease

Ceramic/glass

Battery



Exhibit 46: Lithium supply/demand to gradually tighten through 2020E Global supply/demand for lithium (MT)


0

50

100

150

200

250

300

350

2015 2016E 2017E 2018E 2019E 2020E

LCE

supp

ly, k

mt

Minera Exar JV

Mt Cattlin JV

Mt Marion JV

ALB La Negra 2

ALB La Negra 1

Orocobre Phase 1

Talison Expansion

Existing Capacity

Demand



3. Supply chain

Exhibit 47: Strong presence for Asian battery players


HEV PEVE AESC BEC (Yuasa) Hitachi LG Panasonic SDI JCI Toshiba A123Toyota ✔Honda ✔Nissan ✔ ✔GM ✔ ✔Ford ✔Hyundai ✔VW-Audi ✔BMW ✔ ✔Daimler ✔Fiat ✔MMC ✔ ✔

PHEV PEVE AESC BEC (Yuasa) LEJ (GS) LG Panasonic SDI JCI Litec SKToyota ✔ ✔Honda ✔ PEVE: Primearth EV Energy

Nissan ✔ AESC: Automotive Energy Supply Corporation

MMC ✔ BEC: Blue Energy (GS Yuasa Gr.)

GM ✔ SDI: Samsung SDI

Ford ✔ ✔ JCI: Johnson Controls

Hyundai ✔ A123: A123 Systems

VW-Audi ✔ LEJ: Lithium Energy Japan

BMW ✔ SK: SK Energy

Daimler ✔ ✔ ✔ SKI: SK Innovataion

Volvo ✔

EV AESC BEC (GS) LEJ (GS) LG Panasonic SDI Toshiba Liotec Tesla A123 SKI ENER1 BYDToyota ✔Honda ✔ ✔Nissan ✔MMC ✔GM ✔ ✔Ford ✔Hyundai ✔ ✔VW-Audi ✔BMW ✔Daimler ✔ ✔ ✔Volvo ✔PSA ✔Renault ✔ ✔Fiat ✔



Disclosure Appendix

Reg AC

We, Kota Yuzawa, Yipeng Yang, Nikhil Bhandari, Masaru Sugiyama, Shuhei Nakamura, Stefan Burgstaller, David Tamberrino, CFA and Marcus Shin, hereby certify that all of the views expressed in

this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or

indirectly, related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth,

returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage

universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,

ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month

volatility adjusted for dividends.

Quantum

Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make

comparisons between companies in different sectors and markets.

GS SUSTAIN

GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well

positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on

quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the

environmental, social and governance issues facing their industry).

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Kota Yuzawa: Japan-Automobiles. Yipeng Yang: China Autos. Nikhil Bhandari: ASEAN Plantations and Energy, Asia Pacific Energy, Korea Energy and Chemicals. Masaru Sugiyama: Japan Internet and

Games, Japan-Consumer Electronics, Japan-Media. Shuhei Nakamura: Japan-Advanced Materials sector. Stefan Burgstaller: Europe-Autos & Auto Parts. David Tamberrino, CFA: America-Autos &

Auto Parts, America-Autos Dealers, America-Tires. Marcus Shin: Korea Technology.

ASEAN Plantations and Energy: Bangchak Petroleum PCL, First Resources, Golden Agri-Resources Ltd., IRPC PCL, Perusahaan Gas, Petronas Chemicals Group, PTT Exploration and Production PCL,

PTT Global Chemical, PTT Public Co., Thai Oil, Wilmar International.

America-Autos & Auto Parts: BorgWarner Inc., Cooper-Standard Holdings, Delphi Automotive Plc, Ford Motor Co., General Motors Co., Harman International Industries Inc., Lear Corp., Magna

International Inc., Magna International Inc., Nemak, Tesla Motors Inc..

America-Autos Dealers: AutoNation Inc., Group 1 Automotive Inc..

America-Tires: Goodyear Tire & Rubber Co..

Asia Pacific Energy: Bharat Petroleum, Cairn India Ltd., China Petroleum & Chemical (A), China Petroleum & Chemical (ADS), China Petroleum & Chemical (H), CNOOC, CNOOC (ADR), Gas Authority of

India, Gujarat State Petronet, Hindustan Petroleum, Indian Oil Corp., Indraprastha Gas Ltd., Oil & Natural Gas Corp., Oil India, PetroChina (A), PetroChina (ADR), PetroChina (H), Petronet LNG, Reliance

Industries, Reliance Industries (GDR).

China Autos: Anhui Jianghuai Automobile Co., Baoxin Auto Group, Brilliance China Automotive, BYD Co., China Harmony New Energy Auto, Chongqing Changan Auto (A), Dongfeng Motor, FAW Car,

Fuyao Glass Industry Group (A), Fuyao Glass Industry Group (H), Geely Automobile Holdings, Great Wall Motor Co. (H), Great Wall Motor Co.(A), Guangzhou Automobile Group, Huayu Automotive

Systems, Minth Group, Nexteer Automotive Group, SAIC Motor, Sinotruk (Hong Kong), Weichai Power (A), Weichai Power (H), Weifu High-Technology Group (A), Zhengtong Auto Services Holdings,

Zhongsheng Group.

Europe-Autos & Auto Parts: Autoliv Inc., BMW, CNH Industrial, CNH Industrial, Continental, Daimler AG, Faurecia, Fiat Chrysler Automobiles NV, Fiat Chrysler Automobiles NV, GKN, Hella KGaA Hueck,

Michelin, Nokian Renkaat, Peugeot, Porsche, Renault, Valeo, Volkswagen, Volvo.

Japan Internet and Games: Bandai Namco Holdings, Capcom, CyberAgent, DeNA Co., Gree, Kakaku.com, Konami, LINE Corp., mixi, Nexon, Nintendo, Rakuten, Sega Sammy Holdings, Square Enix

Holdings, Yahoo Japan.



Japan-Advanced Materials sector: Daicel, Daido Steel, Hitachi Metals, JFE Holdings, Kansai Paint, Kobe Steel, Kuraray, Nippon Carbon, Nippon Paint Holdings, Nippon Shokubai, Nippon Steel &

Sumitomo Metal, Tokyo Steel Manufacturing, Toray Industries, UACJ.

Japan-Automobiles: Aisin Seiki, Bridgestone, Denso, Fuji Heavy Industries, Hino Motors, Honda Motor, Isuzu Motors, Mazda Motor, Mitsubishi Motors, Nissan Motor, Sumitomo Rubber Industries,

Suzuki Motor, Toyota Boshoku, Toyota Motor, Yamaha Motor.

Japan-Consumer Electronics: Panasonic Corp., Sony.

Japan-Media: Dentsu, Hakuhodo DY Holdings.

Korea Energy and Chemicals: GS Holdings, Hanwha Chemical, Kumho Petro Chemical Co., LG Chem, Lotte Chemical, S-Oil Corp., SK Innovation.

Korea Technology: Samsung Electro-Mechanics, Samsung Electronics, Samsung SDI Co., Samsung SDS Co., Seoul Semiconductor, SK Hynix Inc..

Company-specific regulatory disclosures

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant

published research

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 31% 54% 15% 66% 60% 50%

As of July 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 2,963 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment

Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See 'Ratings, Coverage groups

and views and related definitions' below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided

investment banking services within the previous twelve months.

Price target and rating history chart(s)

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant

published research

Regulatory disclosures

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or

other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or

specialist role. Goldman Sachs trades or may trade as a principal in debt securities (or in related derivatives) of issuers discussed in this report.

The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their

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