Best Mid-Cap Fund Manager Sees Korea Winning Battery Trade Warby
Hyundai bets against concerns over China ban on NCM batteries
Chun Taekmo's fund generated a 19% return over three years
The manager of South Korea’s best mid-cap equity fund sees the nation’s battery makers overcoming "protectionism" by China to become stock-market stars this year.
Chun Taekmo, a chief fund manager of Hyundai Investments Co. who foresaw the success of cosmetics company AmorePacific Corp. and drug firm Hanmi Pharm Co. three years ago, is betting on small-cap suppliers for Korea’s battery makers. Chun’s Hyundai Investment Low Price Securities Feeder Investment Trust 1 was the best equity fund in the nation over three years with a 19 percent return.
Shares in LG Chem Ltd. and Samsung SDI Co. slumped 7.6 percent and 13 percent respectively this year as the Chinese government signaled it will stop offering subsidies for electric vehicles if they use nickel-cobalt-manganese (NCM) batteries made by the companies. Chun’s small-cap focus has paid off as Asia’s fourth-largest economy shifted away from smokestack industries to a focus on innovation and he says the superior quality of South Korean products will win out in the end.
"China’s alleged decision is nothing but protectionism," Chun said in an interview at his office in Seoul on Feb. 5. "The technology of the Chinese producers is lagging behind that of LG Chem and Samsung SDI. In the long term, the Chinese makers can’t win."
Chun oversees 13 trillion won ($10 billion), including the fund that invests 70 percent of assets on small- or mid-cap companies with their stock prices lower than 25,000 won ($20). A quarter of its holdings are in pharmaceutics or biotechnology, such as Green Cross Cell Corp. and Hanmi Pharm, and 10 percent are in cosmetics, like AmorePacific Corp. The Kospi index fell 0.1 percent on Tuesday.
More than 80 percent of companies on the Kospi 200 Index of the nation’s biggest shares that reported earnings for the fourth quarter missed analysts’ estimates, according to data compiled by Bloomberg. In the industrial sector, all but one of 19 companies missed the consensus. On the small-cap Kosdaq, 72 percent fell short.
Zhang Xiangmu, director of the Equipment Department at the Ministry of Industry and Information Technology of China, said at a conference on Jan. 24 that China would exclude Chinese buses using NCM batteries from a new-energy recommendation list and suspend subsidies until an assessment of the technology is completed, according to a report from the official Xinhua News Agency. Samsung SDI and LG Chem declined to comment on the ongoing worries over the Chinese ban.
LG Chem, the world’s fifth-largest battery maker for electric vehicles by market share, is expected to lose about 200 billion won in sales this year if the suspension is enforced, according to Hwang Kyu Won, an analyst at Yuanta Securities Korea. The action would aid China’s BYD Co., which produces the less-advanced lithium iron phosphate-based batteries in the country, he said.
"Currently, the Chinese ban is only for buses," Hwang said. "But if this ban is applied to all kinds of vehicles, there are no foreign automakers that can enter the China’s EV market."
The drop in the two battery makers is largely because of "concern around the Chinese ban of NCM-based lithium ion batteries," according to Mark Newman, a senior analyst at Sanford C Bernstein Hong Kong, although he said there’s no official document outlining the curbs.
"I do still see a lot of value in both LG Chem and Samsung SDI’s NCM-based lithium ion battery technology," Newman said in an e-mailed interview on Feb. 12. The Chinese government is "trying to give domestic China based battery makers some time to catch up and develop their own NCM as they know they are way behind and in trouble."
Global shipments of batteries for electric vehicles expanded 59 percent in 2015, according to a report from Korea’s SNE Research. Japan’s Panasonic Corp. held a leading 36 percent market share, BYD came second with about 11 percent, LG Chem ranked fifth, with 7.7 percent, Samsung was sixth with 5.2 percent and SK Innovation ninth with 3.2 percent.
Chinese makers’ market share grew from 6 percent to 18 percent, while Korea’s expanded to 17.7 percent from 16.9 percent and Japan’s shrank to 64.3 percent from 76.8 percent.
"Globally, there are few countries that are using Chinese batteries because it has problems with the technology," Chun said. "The ban could temporarily hurt Korean makers, but in the long term, the ban would be meaningless."