Polypores Possible Position in Tesla Gigafactory Outweighs Near-Term RisksRaymond Billings (Author) Published Date : Jun 19, 2014 10:44 ET
Although the rapidly changing landscape in the lithium battery industry has created several near-term risks for Polypore, analysts believe the possibility of the company playing a role in Tesla s gigafactory outweighs these risks and have upgraded shares to Outperform. Our recent caution regarding the outlook for Polypore was primarily attributable to our view that the company s competitive advantage had diminished somewhat, a view we formed following the surprising discontinuation of sales to LG Chem and our conclusion that LG Chem had found an adequate substitute for Polypore.
We continue to believe that, at the least, there will be continued pressure on the price of lithium battery separator for electric vehicle applications. In addition, we believe increased competition could result in Polypore losing some share at existing customers. Despite these perceived challenges, we are now more optimistic regarding the overall outlook for the company because we believe it is likely Polypore will partner with Tesla to manufacture separator for the planned gigafactory. Given an abundance of unknowns, the Tesla opportunity is difficult to quantify (even to construct a rough range of outcomes), but we believe it is possible that sales to Tesla could account for more than half of Polypore s earnings by 2020. Tesla gigafactory opportunity.
Based on input from several industry sources, we believe Polypore is the front-runner in Tesla s separator material selection process for the planned gigafactory. Polypore s recent settlement with Sumitomo (related to separator-coating intellectual property), coupled with Sumitomo s current position as the supplier of separator material used in the Tesla (Panasonic) cells, also contributes to our view. At the time of the settlement, Polypore management indicated that the relatively small expected royalty payments of a few million dollars per year (in the near term) were, in part, so small because Polypore did not press for a substantial royalty given that Polypore viewed Sumitomo as a potential long-term partner leading us to believe that the real value in the settlement could ultimately be a partnership in which Polypore supplies the best-in-class separator material and Sumitomo contributes expertise in the application of ceramic coating.
In addition, we view Polypore as a logical choice given Polypore s low-cost position (cost to manufacture is lower for dry-type separator compared with wet-type), long-standing reputation for quality, available equipment (underutilized manufacturing lines could be moved to Tesla facility), and proximity to Tesla (Polypore is the only manufacturer of commercial dry-type lithium battery separator in the United States).
Polypores Possible Position in Tesla Gigafactory Outweighs Near-Term Risks