But a sharp rise in production will pose operational risks and increase the challenge of keeping leverage stable, according to a new report from Moody’s Japan KK.
“Automakers’ compliance with emission standards will increase battery electric vehicle (BEV) and battery production amid tightening carbon regulations,” said Motoki Yanase, Moody’s Vice President and Senior Credit Officer.
The International Energy Agency projects global battery capacity for BEVs and plug-in hybrid vehicles will grow by 24 per cent on a compounded annual basis between 2020 and 2030.
“Although this will drive battery makers’ production volumes and revenues — and in turn their profits — large investments for rapid expansion comes with operational risks and the challenge of maintaining healthy leverage, all of which could weaken credit quality,” said Yanase.
Strong battery maker-automaker relationships will be critical for EV battery makers’ credit quality. Those with solid relationships with automakers that have a clear strategy to expand BEV sales will see their revenue and profit stay stable.
Among the four rated battery makers, Contemporary Amperex Technology’s margin will remain the highest and stay around low double-digits over next 12 to 18 months, thanks to high capacity utilization and China’s EV subsidies.
In comparison, other battery makers’ margins are single-digit or less.
Maintaining healthy financial leverage against increasing investment will also be key for battery makers’ credit quality. Moody’s expects LG Chem and Panasonic’s EBITDA growth will keep pace with debt increases, such that their leverage (debt/EBITDA) will be between 2.0x and 3.0x in the next 12 to 18 months.
Meanwhile, Contemporary Amperex Technology’s net cash position will support its credit quality and SK Innovation’s higher leverage, and thus lower rating, reflects the weakness in its refining and petrochemical businesses and heavy capital spending.
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