MVST - Microvast: A Sustainable Competitive Advantage Will Continue To Move Shares Higher

2023-05-21 07:20:31 ET

Summary

• Microvast has patent-protected IP giving it a technological advantage in the heavy-duty Lithium Ion space.
• They have a large and fast-growing order book from some of the world's largest OEM Truck and Bus companies.
• With three sites on three continents approaching completion, a surge in revenue and profits is highly likely.

Microvast Holdings Inc. ( MVST ) shares launched at $10; they hit a high above $25 in January 2021 and fell steadily to a low of $0.88 last month. They have bounced back above $2, which could signify that the bottom is in and the shares have entered a growth stage.

The shares have the potential to get back above $19, according to Simplywall.st, which uses analyst forecasts to build a DCF model.

I track 21 battery companies, of which seven primarily manufacture Lithium batteries. The performance of these companies is shown.

Flux Power Holdings ( FLUX ) and Electrovaya (EFLVF) have stood out over the last 12 months. I am long both and have written about Electrovaya twice . In the previous three months, Microvast is up 79%. This article will look at the reasons for this move higher and try to determine if there is a high probability that it will continue.

MVST makes Lithium Ion Batteries

They are based in China and make Lithium Ion batteries for the heavy-duty vehicle market and stationary storage applications. In this respect, CATL (SHE:300750) will be their biggest direct competitor.

Microvast is a vertically integrated battery company; they manufacture all battery components, including anodes, cathodes, electrolytes, separators, cells, packs, and trays. Microvast then assembles these components into complete battery packs and systems and sells them to OEMs.

Microvast builds bespoke batteries to suit each customer using four chemistries Lithium Titanate, Lithium Ferrophosphate, and both types of Lithium Nickel Manganese cobalt oxide. This is a unique proposition in the battery companies I track.

Microvast has established markets in Asia, Europe, and America and production facilities in all three areas.

Technical Advantage

All companies try to develop technological advantages, and battery companies have a few areas to work on. Like EFL Microvast has developed a patent-protected separator, EFL used ceramics to build its edge, but Microvast has used Polyaramid (a compound similar to Kevlar) and has 26 patents ( 10K 2022 P4). They also have an exclusive cathode technology protected by 33 patents that minimize the use of cobalt. Thirdly they have unique electrolytes; unlike other Lithium-ion batteries, Microvast uses a non-flammable electrolyte that will not catch fire even if a flame is applied. These three exclusive technologies combine to increase the stability of Microvast batteries, improving thermal properties and making the battery safer to use.

The IP makes Microvast batteries faster charging with high Wh/Kg giving the company a significant and sustainable competitive advantage.

In 2022 Microvast and General Motors ( GM ) were selected for a $200 million grant by the DOE's battery initiative to support the development of these proprietary products.

Why the Sudden Share Price Growth

None of the above discussions on technology is new; it was documented in previous earnings calls throughout 2022 and did not move the shares. It is often the case that new technology needs the validation of commercial sales to validate it, and that validation arrived in the Q1 2023 earnings release.

Q1 2023 results smashed expectations

Revenue beat by 21%.

Earnings per share beat by 23%.

Loss per share was below $0.01. In the same quarter, 2022, it was -$0.15, a 93% improvement.

The fall in share price to below $1 now looks overdone; over the last three years, EPS has increased by an average of 23%, and the share price has fallen by an average of 43%.

Can the share price rise continue?

Short answer yes!

It's a growth story

I have already covered the technological advances and advantages that Microvast has. But can they produce these batteries in volume, sell them in volume and make a profit?

Revenue was up 28% in Q1 2023; Yang Wu CEO said this was due to European commercial vehicle customers beginning initial production. During Q1, Microvast completed the construction of its Wangzhou facility, giving it a 3 GWh annual capacity. That increased capacity could represent an additional $500 million pa in revenue if it is all sold. Wu said that 50% of this additional capacity is already sold, and they have $487 million of confirmed backlog orders.

As of December 31, 2022, we had an annual manufacturing capacity of approximately 3 GWh cell, module and pack capacity, 600 tons per year of cathode capacity, 3,000 tons of electrolyte capacity and 5 million square meters of separator material capacity on a pilot line. All of this capacity is currently derived from our facility in Huzhou, China."

(10K P7)

Microvast has a 170,000 sq ft site in Germany that takes materials from China and assembles batteries with a 3GWh capacity. Changes to EU rules on sourcing batteries probably mean they will have to increase the number of raw cells manufactured in Europe and not import quite as much from China. The demand for batteries in Europe is on a significant upward curve, so they may have to simultaneously increase the German assembly site.

The US facility in Clarksville, Tennessee ( purchased in 2021 ) will provide a further 2 gigawatts of capacity and is due online in Q4 this year. (69% of the backlog in Huzhou is for US customers, and 22% is for Europe)

A further Mexican facility, constructing stationary storage container products, is due online in Q3 this year. Although this article is not focusing on stationary storage, it is a product line that will add revenue this year; the first 3 megawatt containers will ship from Mexico to the US in Q3.

By the end of 2023, Microvast expects capacity to reach 7GWh globally and 11GWh by 2025. That is an increase in capacity of 266% in the next 2-3 years.

Sales and Revenue

Microvast is growing capacity and building that capacity in all three major markets, Europe, China, and the US. The next question is about revenue. Can they sell all of these batteries?

The nearly $500 million backlog, discussed in the earnings call, represents orders from 80 commercial vehicle OEMs and will likely all be multi-year repeat sales.

Sales to Europe grew almost 300% year over year and now account for 22% of total revenue. Microvast has previously said that Iveco is a significant customer and noted in the 8K that IVECO has placed a large backlog order for their electric truck division. (IVECO was going to work with Nikola (NKLA). The agreement was an essential element of my article on Nikola , the JV has ended, and IVECO, with 11% of the European commercial market, is now moving ahead independently into the BEV truck and bus market).

Several large-scale orders were discussed in the earnings call. The Chief revenue officer talked about the commercial success of the new 53.5Ah product with large Bus companies and provided some key features; it has a max of 466kWh and a 10-year life span. They have received an order for 350 units from XCMG and major orders from Gaussin and CAMC , showing that the product works well for heavy-duty trucks and buses.

The European market is likely to grow exponentially over the next few years. Many cities impose low-emission zones with significant penalties for driving diesel engines. We own an RV with a 2.8L diesel engine, and to drive in London's ULEZ zone is currently priced at $375 per day. In August, the ULEZ zone is being expanded to cover almost all of Greater London. The Transport for London website says buying an electric vehicle is the only way to avoid this charge.

It will not be long before owning a diesel vehicle will be un-economic in all the major cities of Europe. In France we have to display a sticker and are banned from entering 11 cities at certain times when pollution is high, again we have to buy an electric vehicle to avoid this. It is a similar story across the entirety of Europe.

The demand for commercial electric vehicles will be enormous in Europe for the coming years, and Microvast seems to have developed the right products at just the right time.

MVST Commercial Battery Products

In the May earnings call, management mentioned the new 53.5Ah battery eight times. Slide 5 of the presentation stated that 75% of their order backlog is for the new product and that they expect $500 million pa of revenue from this product alone. I have highlighted the critical specifications of the product and compared it with the other commercial batteries from MVST and the commercial battery offerings from CATL, which have a 37% market share .

CATL announced in 2022 that it would bring a 255 Wh/Kg battery to market in 2023 and recently said it was preparing to launch a 500 Wh/Kg product, but neither is currently available.

For the time being, MVST appears to have a significant competitive advantage, of course, this is a fast-changing market, but with orders in place and production capacity built, we can realistically expect to see the guided revenue increases of an additional $500 million in revenue from the Huangzhou site from Q2 2023 to Q2 2024 and $700 million from the Clarksville site Q1 2024 to Q1 2025. An additional $1.2 billion in revenue by 2025 would be transformational, increasing revenue by 600% in 2 years.

Can they make a profit?

It is one thing to increase revenue but quite another to make a profit.

CATL increased its gross margin from 14% Q4 2022 to 21% Q1 2023 and reported a $4 billion profit for the full year 2022. Margin fluctuates with demand, but using CATL as a benchmark, we can assume that MVST needs to get its margin in the range of 14% to 22% to make a profit.

The trend for MVST is clearly in the right direction; in Q1 2023, they hit a Gross Margin high of 10.3%, and the previously identified increased volume should be sufficient to drive economies of scale and deliver above 14%.

Again using CATL as a benchmark would imply a net income of $150 million (applying the same percentages of revenue to net income). That is a healthy profit and aligns with the figures used by simplywall.st to generate its $19 price target. (simplywall.st has an income average of $144)

Microvast Finances

Can they afford all of his growth? And if not, how will they fund it?

Debt has been reasonably stable during the growth period so far, and although cash has been decreasing, it is still higher than debt.

Dilution was only 2.5% last year; for these small growing companies, that is quite reasonable. The company's ownership is spread over the different investor types than most. This is a good thing, it makes the share liquid, but the institutional holders will reduce volatility a little as they tend to hold on for the longer term.

In the Q1 earnings call, the CFO stated that a negative free cash flow of $47 million was led by an operating loss of $11 million and $31 million of CapEx spent on Huzhou and Clarksville. A further $4.5 million of Capex was spent on R&D facilities.

Microvast has a project finance facility with a remaining usable balance of $67 million, and the CFO said that all remaining CapEx payments could be satisfied by this facility. In addition, their credit line has $9.5 million undrawn, and they are hoping to add a further $30 million working capital credit line in Q2.

Forward guidance of full-year CapEx spend in the region of $200 million was given, and the likelihood that the Clarksville site will need additional debt financing was mentioned. Compiling all of these figures into a table, we get.

They will need around an additional $137 million to complete the three planned manufacturing sites. Government grants will likely cover some of this, but even if they have to take on this much debt, they would still have a debt-to-equity ratio of less than 50%, which seems reasonable. They could use some of the cash on hand but have already said they will take on debt.

Clearly, they can finance the expansion.

I think I have now has shown the following.

Microvast has:

1. Exclusive battery tech validated by orders
2. The finances to complete the build-out of its capacity
3. The orders to sell that capacity
4. The margin to make a profit

Conclusion

Microvast has excellent patent-protected technology validated by significant repeat orders from large-scale OEMs on three continents. The US business is taking off and will have a large production facility in place later this year that already has substantial orders to fill.

European business is snowballing and likely to surge further, driven by Governmental policy.

The Chinese factory is complete and has forward sold much of its capacity.

The combination of technological advantage, large-scale industrial orders, a solid balance sheet, and a good cash runway makes for an excellent outlook.

Choosing battery companies to invest in has been very profitable over the last twelve months. Electrovaya and Flux have been excellent high-return investments. Having completed my research, I will add Microvast to my holdings and update the comments when I do.

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