Microvast – solid player in the electric vehicle market
Hi, today I will describe a company that is supporting the global electrification trend while investing heavily in R&D. I think the company timed its public listing perfectly as it attracts capital at the right time for capturing a part of the huge untapped electric energy market. The company currently trades under ticker symbol “MVST”.
1. Executive summary
Microvast is a leading battery technologies company founded in China in 2006. It integrated its first ultra-fast charge batteries into public transit buses in China since 2010. The company has already delivered over 28 thousand battery systems that are operating today.
Although their batteries were designed to initially address the commercial electric vehicle market, its technology is also fully suitable for passenger vehicles while also being flexible enough to activate in the energy storage market.
Led by its CEO and founder, Microvast runs a multiple-stage plan that aims to facilitate the electrification of urban transport systems by progressively introducing battery systems to city buses, taxis and passenger cars.
2. Investment thesis
a) Vertically integrated battery producer – offers highly customized solutions with short production cycle and solid margins
b) Huge TAM with a strong focus on commercial vehicles (CVs)
c) Field-proven proprietary technology across the entire battery system
3. Company overview
3.1 Product overview
The lithium-ion battery (LIB) is the most utilized type of electric battery in the world. In the past it has been used primarily for portable consumer electronic devices, especially phones and notebooks. Recently, the application area has been extended to power tools as well as many transportation vehicles (e-bikes, scooters or cars). Currently, the bestselling electric cars use Li-ion batteries as their primary fuel source.
There are four main reasons why the LIB has become the dominant rechargeable battery chemistry in nearly all industries:
Safety
Lithium is the most energy dense chemistry in use and with added features it is the safest.
Energy density
Energy density is the measure of how much energy a battery can store relative to its weight (per mass or volume). It is typically presented in Watt-hours per kilogram (Wh/kg). A watt-hour is a measure of electrical energy that is equivalent to the consumption of one watt for one hour. A high energy density will deliver the same amount of energy, but in a smaller footprint compared to a battery with lower energy density resulting in more potential applications.
Fast charging
With the recent developments in this area of study, batteries can now take between 15 and 45 minutes for a full charge.
Long life
The cycle life represents the number of times a battery can be charged and discharged over its lifetime.
Nowadays, electric vehicles require a significant storage capability hence batteries need to be organized in packs. The packs contain a number of modules, which contain many cells. For instance, Tesla model S P85 has around 7104 cells that are organized in 16 modules.
Going further on a cell level, every battery has four components: two electrodes (anode and cathode), a separator (to prevent shorting), and an electrolyte (to move charges between the electrodes).
1. Anode- the negative electrode in the cell
2. Cathode - the positive electrode in the cell
3. Electrolyte - allows the transfer of the lithium ions between the plates
4. Separator - plastic films that prevent direct contact of the anode and cathode
Microvast has developed proprietary technology advancements across battery components in order to provide safe battery solutions for its customers. We can see the most important ones below:
Vertically integrated
An important edge that Microvast possesses is its highly vertically integrated R&D and industrialization system.
The company creates everything in-house, from its own battery components (anode, cathode, electrolyte and separator) to its cells that are later grouped into modules and packs. Microvast creates two standard cell sizes to facilitate the sale of its modules.
Its vertically integrated supply chain allows the company to provide highly customized battery solutions while at the same time shortening the time required for a production cycle compared with a scenario where multiple vendors are involved.
Products portfolio
Before presenting Microvast’s portfolio, we must define some key areas of the electric vehicles (EVs) market:
commercial vehicles = trucks, light duty vans, busses, trains or other heavy-duty trucks
passenger vehicles = passenger cars or taxis
Microvast offers a full spectrum of battery packs to its customers:
1) LTO (Lithium Titanate) – ultra fast charging (~10 minutes), ultra-long life cycle
Used for buses and mining trucks, it was introduced in 2011. Lithium titanate is used in the anode in place of carbon, which allows electrons to enter and exit the anode faster than in other types of lithium-ion batteries. Their only drawback is low energy density.
2) LFP (Lithium Ferrophosphate) – low cost with a good life cycle
It is used primarily for heavy equipment and industrial environments because of their ability to withstand a lot of pressure and a wide range of temperatures.
3) NMC-1 (Lithium Nickel- Manganese-Cobalt) - Ultra-fast charging (~15 minutes), long life cycle
Introduced since 2017, it is used for buses and commercial vehicles because of their high energy density. NMC batteries can handle larger charge currents and a greater range in temperature than LCO batteries.
4) NMC-2 (Lithium Nickel- Manganese-Cobalt Oxide) - highest energy density, fast charging (~30 minutes for a full charge) and long life cycle
Used for commercial and passenger vehicles, it was introduced in 2019 and provides the best energy density with only 30 minutes needed for a full charge. NMC batteries are used in most vehicles powered by Microvast because of their 270 Wh/kg energy density, which is one of the highest values across the market.
5) High Energy Density Target Cell – available in 2022
This battery will be available starting with 2022. It will bring with it a great energy density (~330 Wh/kg) with 45 minutes needed for a full charge.
The technology behind it allowed Microvast to win in 2019 the R&D 100 award for “High Energy Density and Safe Battery System for Powering Electric Vehicles” in partnership with Argonne National Laboratory.
“Microvast Inc. and Argonne National Laboratory have developed a revolutionary high energy density, high-power, and very safe battery system based on four breakthrough technologies. This battery provides a higher energy density, longer life, and safer operation than any other state-of-the-art lithium-ion battery on the market.” – R&D world
3.2 Business overview – How does the company make money?
For now, battery packs are the sole source of revenue for Microvast. Designed primarily for the unique commercial market, Microvast serves a wide range of both hybrid as well as fully electric vehicles:
The company expects to grow significantly in the passenger vehicles market, but as of now the generated revenue from passenger segment is no more than 5%.
However, Microvast is currently supplying batteries to the largest Chinese OEM company after competing with the largest cell maker in the world:
“We currently supply to SAIC Motor, the largest OEM in China and in this project we competed with CATL, the largest cell maker in the world - we won by performance and by price” - Dr Wenjuan Mattis, CTO of Microvast
Revenue generation
For the year ended December 31, 2020, Microvast’s top five customers contributed 31.4% of their revenue. This revenue concentration is representative of the long sale cycle and relatively small customer base in the industry. Microvast estimates its sale cycle to be between 2 to 4 years depending on the solution provided, mainly because of the customer’s preliminary technology review as well as a long period of test and evaluation.
Microvast’s sales force engages multiple potential customers like electric vehicle and drive train manufacturers or integrators and utility companies for energy storage in order to present their technological advancements. They do the same with R&D engineers for passenger car OEMs and consumer electronics manufacturers for which Microvast can sell battery components.
As a result of its go-to-market strategy, the company signed multiple strategic partnerships, most notable with Oshkosh Corporation. Oshkosh builds specialty trucks, military vehicles and truck bodies and has recently won a multi-billion contract with the United States Postal Service (USPS) to provide between 50 000 and 165 000 'next generation' USPS mail trucks while using Microvast as a supplier of batteries. The production is expected to start in 2023 and will be both for zero-emission battery vehicles as well as fuel-efficient, low-emission vehicles.
“I'm guessing that electrified product will grow over time, but electrification will be a big, big part of this fleet that we deliver over the next 10 years.” - John Pfeifer, USPS CEO
There is no doubt that the revenue will be dependent on two major aspects:
- the trend of electrification – that seems to be a huge tailwind for Microvast
- Microvast’s go-to-market strategy and its ability to leverage its world class technology for establishing long-term partnerships, as having a great technology doesn’t always equal great sales
Existing lines of business
Microvast has been primarily using its manufacturing plant established in China. Additionally, the company has been expanding its global footprint by building manufacturing facilities in Berlin and Houston, Texas.
There is a Module & Pack facility that will start production in Berlin in 2021 as well as a manufacturing amenity that is currently being built and will produce batteries for the US market starting with the summer of 2022. Increasing manufacturing capacity as well as expanding the company’s presence to Europe and the United States are crucial components of the business. The management has made it clear that some of the proceeds from the public listing will be redirected towards the manufacturing of these two facilities.
Besides the higher margins that the company expects in the western areas, from the company’s 14A report filing we can see that Europe revenue is only around 23% at the end of fiscal year 2020, the highest value ever recorded. Additionally, North America is only around 0.5% of Microvast’s revenue so the company is still heavily concentrated around Asia-Pacific (more details in the “Financial overview” section) with basically no presence in the United States.
3.3 Growth opportunities
Microvast’s management has made it clear that an additional source of revenue for the company is providing individual battery components to the OEMs (original equipment manufacturer) that will produce their own batteries. The company has initiated strategic plans to start selling these battery components to OEMs, primarily their aramid separator and gradient cathode for which their technology is top-notch.
This strategy seems to be a different way of approaching the EV market. Since there will probably be many auto manufacturers that will create their own batteries (ex: Tesla), Microvast found a way to generate revenue through them while continuing to serve the potential manufacturers that will get batteries through a 3rd party supplier. Still, the company expects this source of revenue to materialize starting with 2023 for the aramid separator and 2025 for the gradient cathode.
Additionally, Microvast hopes to leverage its history in the commercial vehicles market to acquire customers in other high-growth energy markets. For instance, energy storage solutions may be a potential market where Microvast estimates that it will activate by 2022. This market can provide an additional type of revenue for Microvast: an energy management software-as-a-service revenue.
Furthermore, the company expects the consumer electronics to be an addition market for its battery components (aramid separator and gradient cathode).
4. Industry Overview
The electric vehicles industry will be huge. The number of EVs sold in 2020 is only between 3% and 4% of the total number of cars sold worldwide. There are many studies trying to forecast the size of the market, but these are all estimates. Nonetheless, all of them have in common a high estimate of the CAGR (compound annual growth rate) of the electric vehicles market, mostly around 20%.
Even with a staggering impact following the COVID-19 pandemic, the EVs sector gained back its momentum in the second half of 2020 as the market showed positive signs of recovery. Some studies estimate a -9.7% growth for the EV market in 2020, but a massive growth will follow, getting from $246.74 billion in 2020 to $985.72 billion in 2027, growing at a CAGR of ~17.5%.
The constant efforts to curb greenhouse gas emissions have led to the implementation of strict emission laws by the governments, which, in, turn will bolster the healthy growth of the market. For instance, European Union has set a new optimistic target to cut carbon emissions by at least 55% by 2030, compared with 1990 levels.
On the same note, driven by favorable government subsidies and incentives (reduced buying price, zero or very low registration fees, high amount of infrastructure investments), the momentum for electric vehicles encouraged the automakers to increase their production of EVs.
“The global electric vehicle charging stations market size was valued at $39.70 billion in 2019 & is projected to reach $100.96 billion by 2027, at a CAGR of 23.24% during 2020-2027” - Fortune Business Insights
However, for now Microvast’s primary market is commercial vehicles. In spite of the damaging effects of the COVID-19 pandemic, when some of the electric buses manufacturers were forced to halt the production, the global electric bus market came in at 170 thousand units in 2020. It’s expected to reach 192 thousand in 2021 and 544 thousand in 2028, growing at a 16% CAGR. Out of these units, around 90% of them will be powered by an electric battery.
Other studies put the global electric vehicle market at around $162.34 billion in 2019, and it is projected to reach $802.81 billion by 2027, registering a CAGR of 22.6%. Asia-Pacific, one of Microvast’s first markets is the highest revenue contributor, accounting for $84.84 billion in 2019, and is estimated to reach $357.81 billion by 2027, with a CAGR of 20.1%.
Taking all of this into account, Microvast estimates a TAM (total addressable market) of around $30 billion for commercial vehicles, $22 billion USD for passenger vehicles and around $22 billion for energy storage market and consumer electronics.
4.1 Existing trends
While electric vehicles may be advantageous over conventional vehicles, the upfront cost of the former is higher than gas-powered vehicles. Because of this high cost, consumers weren’t attracted in the past by the battery powered vehicles. The battery pack is an EV’s largest cost component, accounting for roughly 20-30% according to ARK Invest. But during the recent years, thanks to an acceleration in battery pack cost declines, the total cost of an electric vehicle has started to drop at a fast pace.
Wright’s Law
According to Wright’s Law, for every cumulative doubling in production, costs tend to decline by a fixed percent. Because of the cost decline of the battery pack, the data suggests that electric vehicles prices will drop below gas-powered ones in the next couple of years, continuing to fall afterwards as well.
“One 200+ mile range electric vehicle has as much battery power as 5,000 iPhones, so if just 1% of auto sales were to convert from gas powered to electric, they would more than double the demand for batteries relative to those required for smartphones globally” - ARK Invest, 2019
The lithium-ion batteries are a good case study for Wright’s Law. Ark Invest estimated the $100/ kWh as being an approximate critical cost threshold after which new segments of the auto market could open to lithium-ion batteries which, in turn, can also propel the utility-scale energy storage which we know from above is a potential market for Microvast.
Recently, for the first time ever, battery pack prices of less than $100/kWh have been reported for e-buses in China. While it is the lowest reported price, the volume-weighted average price for e-buses in China was slightly higher, $105/kWh. The global average price per kilowatt-hour came in around $137/kWh, falling by 89% from 2010.
All of the above are really encouraging signs for the electric vehicle market. The mass production of the electric batteries will be carried at a faster pace than ever before, pushing the world towards a low-emissions future while at the same time creating more opportunities for Microvast and its peers.
4.2 Technology developments
It seems like the biggest technology disruptor for the LIB is the solid-state battery. Many company have recently presented to the market significant breakthroughs in this field. Many of them have become public via SPAC (Special Purpose Acquisition Company) reverse mergers, like Quantumscape Inc. or Solid Power Inc (the company attracted funding from investors like BMW and Ford). However, Quantumscape estimates will register revenue starting with 2024, while Solid Power will earn around $2 million in revenue in 2021, $3 million in 2022 and only $4 million in 20223.
The good news is that Microvast is also investing in solid-state batteries. During a recent investor presentation, Microvast’s chief technology officer has revealed that the company is currently investing in R&D for three major technology advancements:
- solid-state lithium battery
- lithium-metal battery – it can have an energy density of more than 1000 Wh/kg
- 80-degree Celsius high temperature cell
The solid-state technology, as well as the other two types of battery seem to be great advancement opportunities, but for now they remain farfetched. That’s why Microvast might have the upper hand here since it already generates solid revenue while at the same time keeping an eye open for continuous innovation.
5. Competition
Competition in the industry is intense. The market is subject to changing trends quickly and frequent introduction of new technology advancements. There is a high number of potential competitors for Microvast, like Panasonic, LG chemical or BYD Electronic. Below I will shortly describe two of the biggest competitors for Microvast. Both offer proprietary battery systems and electrification solutions:
Contemporary Amperex Technology Co. Ltd. (CATL)
The biggest competitor for Microvast seems to be CATL.CATL is a global leader in the development and manufacturing of lithium-ion batteries, with a strong focus on R&D. CATL creates its own battery cells while being a provider of batteries for vehicle companies like Tesla or NIO, which makes it a market leader in battery deployment in 2021.
On top of that, the Chinese company has partnerships with Daimler Truck (will provide the batteries for Mercedes-Benz eActros LongHaul starting with 2024) as well as a close relationship “with an eye to future cooperation” with Volkswagen Group. It focuses on the same markets as Microvast: commercial vehicles and passenger vehicles.
However, there are a few different characteristics for the vehicle batteries supplied by CATL. When describing their passenger vehicles offering, on their website they quote an “energy density of up to 215 Wh/kg”, which is much lower compared to the batteries currently sold by Microvast for passenger vehicles (around 270 Wh/kg for NMC-2). On top of that, Microvast has surpassed CATL as the provider of batteries for SAIC Motor which is another encouraging sign that Microvast can compete with a much larger company like CATL.
Proterra – concentrated around three business lines:
Proterra Powered - designs, manufactures, sells, and integrates battery systems for commercial vehicles
Proterra Transit - designs, manufactures, and sells electric transit buses as an OEM in North America
Proterra Energy - provides turnkey fleet-scale, high-power charging solutions and software services, ranging from fleet and energy management software-as-a-service
Proterra offers its potential customers a much wider range of products. Besides batteries, it also offers EV components, system integrations and even the powertrain. Daimler is a strategic partner as well as an investor in Proterra, giving the company credibility.
Proterra targets the same market as Microvast (commercial vehicles) with its Proterra Powered business line and will probably be a solid competitor for Microvast, especially in North America. However, Proterra doesn’t create its own cells yet. It uses a 3rd party supplier for the cells as it intends to invest in a cell manufacturing capacity in the future.
To sum up, the battery market is highly fragmented. As of now, I only focused on the strong revenue-generating competitors. Since there are many companies targeting this space, Microvast will have a tough time differentiating itself from the competition. Still, their technology is promising especially since it can surpass some of the characteristics shown by a market leader like CATL.
6. Management
Besides being a founder-led company, the management owns a very big part of the company – around 30%.
While these are generally great signs, management has actually revised its revenue guidance for 2021, from $230 million to around $150 million, which is a massive 35% cut. Since we only limited data as evidence and already seeing management cut the revenue guidance with their first earnings report as a public company might be a warning to carefully watch the future earnings reports to see how management executes.
7. Risks
- global supply chain chip shortages – it had malicious consequences on the earnings report for Q2 of 2021.
- battery technology has a very high pace of innovation – for instance Chinese electric vehicles manufacturer NIO has already announced a new battery option for its electric cars - 150 kWh battery packs, consisting of ultra-high energy density solid-state cells with an energy density of 360 Wh/kg, which is 10% more than what Microvast’s High Energy Density Target Cell will offer starting with 2022. However, they did not mention the company that’s going to provide them with this solid-state battery.
- alternative sources of energy might disrupt the commercial vehicles electric market, for instance hydrogen fuel cell buses can have a longer life span compared with electric buses and a faster refueling speed.
- high competition may put pressure on pricing, lowering the margins
- the company is still very concentrated around the Asia-Pacific area and the international expansion might be more difficult than expected
8. Financial overview
Microvast chose to become a public company via a SPAC (Special Purpose Acquisition Company) reverse merger. From the data offered by the company, estimated revenue seems to be a solid metric for the company, especially compared to some of its public listed peers:
Based on current business conditions, trends and other factors, Microvast is introducing a revenue guidance range for the fiscal year ending December 31, 2021 of $145.0 million to $155.0 million, which would represent year-over-year growth of 34.9% to 44.2% compared to $107.5 million for the fiscal year ended December 31, 2020.
Below we can see a revenue forecast for 2021 and beyond, split on business unit:
Since the company is building two factories in Europe and the US, the management has a clear picture of the demand for their products. The evidence is the $1 to $1.5 billion backlog the company has contracted through 2027. On the back of that, Microvast estimates it will become EBITDA positive in 2021 with an EBITDA margin around 5%, growing from -11% for 2020.
However, according to the last 14A filling published by the company, the revenue has actually decreased in 2019 compared with 2018, mostly because of the decline in the Asia-Pacific area. Still, the company had free cash flow from operations in 2019 and 2020, which is a good sign:
Realized revenue for 2018-2020 is detailed below:
As we can see from above, the Asia-Pacific area has seen a significant fall in demand during 2019. Although it has regained some of its momentum in 2020, it is still around half of the 2018 volume. On the bright side, Europe has seen a significant increase in 2020, the revenue growing at 128% year-over-year (yoy) compared to 2019. Still, the biggest market remains by far the Asia-Pacific. Additionally, we can see the market penetration for North America is basically non-existent as of now.
H1 2021 – a bumpy road
The first half of 2021 has been difficult for Microvast. The most significant hurdles have been the industry-wide semiconductor shortage, which resulted in a higher manufacturing cost per unit as well as a lower volume of orders placed by their customers. Additionally, the increase in raw material prices has also had an impact on the business.
Moreover, Microvast stated that the US factory that is being built in Tennessee will start the production in early 2023, instead of 2022 as it was earlier announced.
However, the most notable consequence of the turmoil is the negative gross margin that the company recorder. It came around -16%, decreasing from around 17% in H1 of 2020.
9. Valuation and technical
9.1 Valuation
The company has around 300.5 million shares, not including the 48 million from warrants or equity earn-out. Right now, the company trades under ticker symbol MVST with a price around $8. At this price the company has a market capitalization of around $2.8 billion taking into account the execution of all outstanding warrants.
Using the revenue for 2021, we get a Price/Sales around 18.6. This is almost identical with the Price/Sales for the last 12 months for CATL (Contemporary Amperex Technology) – around 19 according to Yahoo Finance. Utilizing the revenue estimate for 2022 of around $230 million, the company is now trading at a future Price/Sales of around 12. Still, these metrics are difficult to interpret because of the sector. There are many competitors, some established mature companies as well as companies that don’t expect to have any revenue for the next 2 to 3 years.
For now, we can pay attention to the expected revenue CAGR for 2020 to 2025. Microvast estimates a tremendous 87% CAGR for this period followed by a 24% CAGR for 2025 to 2030. This type of revenue growth justifies a high Price/Sales. However, the huge market opportunity doesn’t equal a strong execution, so we should be very careful if the company delivers on its estimates for 2021 and beyond. So far it has a past of reducing downwards the estimates so that’s not a great start.
9.2 Technical
From a technical perspective, the trend is bearish for both a short-term as well as long-term (almost a full year since the company was announced as going public via a SPAC reverse merger).
The current price is around $8 for Microvast. It is in a period of consolidation around the $7.5 area, which really resembles the one it had in May 2021. These periods of consolidation showcase indecision and pressure is building. Following the consolidation in May, the price went higher with 40%.
Additionally, the price is under both the 100 SMA and 200SMA on the daily chart (blue and red lines), which means they might provide more resistance when the price will intersect them.
Finally, we can see a clear trendline that has acted as a resistance in numerous occasions. I expect the price to gain more steam once the trendline is broken, especially if the breakout is supported by strong bullish volume.
Additionally, during the last week we see another technical point that had relative strength – the $8.25 level which rejected the price in numerous occasions so this level became a short-term resistance as well.
Please take into account that this is a growth company so it carries a high degree of risk. For the more cautious investors, the Q3 2021 report might offer a clearer image of the company and how it copes with the hurdles encountered. Please take all this information into account before investing.
To conclude, this $8 area seems to be a good entry point for a long-term holding. However, since the trend is bearish and “the trend is your friend”, you might open a partial position at this level and add more once the big red trendline has been conquered. Once the price will surpass it, more upside is possible. Remember that the company will probably report earnings for Q3 in around 2 weeks-time so that might another alternative if you want to wait and see how the company is dealing with the recent struggles.
10. Conclusion
To sum up, there are definitely many tailwinds in the electrification industry that will support Microvast in achieving its mission as long as its go-to-market strategy will be adequate. Microvast can succeed in the long run if they double down on their technology and keep innovating in order to stay ahead of the curve.
Remember to only invest in companies with your desired level of risk.
Disclosure: The article only expresses my opinion and it is NOT investment advice. Please do your own due diligence and only pick companies with your desired level of risk