Electric cars drive investor interest

By Alice Ross
Published: June 12 2009 17:56

Interest in electric vehicles has been soaring this year – to the extent that fund managers are warning there could be a bubble in some stocks.
As governments seek to incentivise consumers to buy electric cars, and carmakers to reduce the emissions on their vehicles, a host of smaller companies has sprung up to supply the burgeoning industry.

Many investors have taken their cue from Warren Buffett. The veteran investor’s decision last year to buy shares in BYD, the Chinese battery and vehicle manufacturer, has sent the stock soaring, up 156 per cent since January.
Shares in Denso and GS Yuasa, two Japanese battery and electronics companies that supply hybrid-electric pioneers Toyota and Honda, have also risen – both are up by more than 60 per cent this year.
Carmakers are locked in fierce competition to build or improve existing electric vehicles, with most major manufacturers throwing development money at new projects.
Yet electric vehicles, or “hybrids”, which are part- electric, part-conventional fuel, still account for only a tiny part of the car market.
Last year, about half a million hybrid vehicles were sold worldwide, compared with total car sales of 50m units – market penetration of less than 1 per cent.
Consequently, fund managers fear that the valuations of lithium ion battery producers, and other suppliers to hybrid vehicles, may be too optimistic.
“It does surprise us that it’s run so much this year,” says Bruce Jenkyn-Jones, investment director at environmental specialist Impax Asset Management. “It’s not consistent with the number of vehicles that have been sold – it’s definitely forward-looking.”
“There is a scarcity of stocks for playing the electric vehicle story which is why there’s a risk of a bubble that we would suggest is starting to take place.”
Charlie Thomas, fund manager at Jupiter, says this bubble is also driven by spending in the US, where car companies are under pressure to cut emissions.
However, the long-term prospects for electric vehicles look strong.
The Society of Motor Manufacturers and Traders says the £250m that the government this year earmarked for encouraging the use of electric cars will “incentivise the uptake of electric vehicles” – though sales of hybrids are down about a third this year.
In the not too distant future, though, the whole country could be driving electric cars. Gordon Brown said last year that every car in the UK should be hybrid or electric by 2020.
Development risks remain. A decade ago, there was great excitement about the development of fuel cell technology – but this has turned out to be more expensive and tricky to develop for smaller vehicles than anticipated.
Thomas says that both Toyota and Honda have told him they are conservative about how fast electric vehicle technology will develop. “A lot of people have been focusing on battery technology, but it’s still very unproven stuff,” he warns.
“There’s not a lot of liquidity and lots of investors chasing the idea,” says Jenkyn-Jones. “It’s not a well-developed investment area – which explains why there’s potential for valuations to go up a lot.”
Plug into a wide choice
Investors who want to gain exposure to electric vehicles are not spoilt for choice.
Bruce Jenkyn-Jones at Impax Asset Management, the environmental specialist, estimates that only about 10 stocks offer direct exposure to electric hybrid vehicles.
Investors can buy shares in carmakers – though this does not necessarily mean they are investing in the new technology. Such stocks include Honda, Nissan and Hyundai. Even battery producers such as Panasonic, which makes batteries for the Prius, derive most of their earnings from other products. Other producers and suppliers include Johnson Controls, Saft, Ener1, Maxwell, Sanyo and BYD, which is the pick of Warren Buffett, the US investor.
Investors also need to do some homework on these stocks. For example, Ener1, a US battery technology, is applying for a large government grant. Edward Guinness, manager of the Guinness Atkinson Alternative Energy fund, points out that if Ener1 gets the grant, the stock is likely to soar; if not, it may not move much.
“Keep an eye on car sales and see whose hybrid vehicle is selling the most and see who its suppliers are and buy them,” suggests Jenkyn-Jones.
Investors need not even wait to see which carmakers will be more successful at marketing the new wave of electric cars. Charlie Thomas at Jupiter likes Ricardo of the UK, which is developing different forms of hybrid cars. “It’s interesting to buy Ricardo as it’s involved in the design of the cars so you can get early exposure rather than having to wait for the cars to be successful,” he notes.
Investors could also consider an unlisted stock. Reva is the Indian company behind the G-Wiz, General Motors’ new electric car – though whether sales will soar is another question.
One alternative is to buy producers of the membrane to a particular lithium ion battery. Denso supplies batteries to Toyota, but a big supplier of membranes to batteries is Polypore, which also supplies BYD.
Copyright The Financial Times Limited 2009