ELMS

Publicly traded companies mentioned herein: Chongqing Sokon Industry Group Co Ltd (601127 CH), Contemporary Amperex Technology Co Ltd (300750 CH), Dongfeng Motor Group Co Ltd (489 HK), Electric Last Mile Solutions I (ELMS), Ford Motor Co (F), General Motors Co (GM), Stellantis NV (STLA), Tesla Inc (TSLA)

Highlights

The presenter is long ELMS, a pre-revenue, speculative play in the Class 1 EV commercial truck space, with a $960MM market cap / $730MM enterprise value. The company is commercializing for the U.S. market an already commercialized EV vehicle in China. He views this as a pure execution play, and thinks the stock which is trading at ~$7.50 has potential to trade to his ~$10 target over the next year if the plan outlined in the thesis below is met.

In China, the company manufacturing and selling these vans is called Sokon Group and its partner is Dongfeng. As part of the proof of concept, Sokon already has 30,000+ Class 1 electric vans already on the road in China.

There are a series of staged bets on this play related to logistics and regulatory risk for the company in bringing the van to the U.S. market. The first step is in being able to assemble this van on time and on budget here in the U.S. We have high confidence in this step. Last month, management re-affirmed their guidance for 1,000 units to be delivered this calendar year. That may not seem like a big number but given the supply chain and logistical challenges that automakers have faced this year; we view this as encouraging. They can do this because this is largely an assembly operation. 

Management is a strong point for this story. One is the former CFO of Ford China (Albert Li) and the CEO is the former President of Cadillac and Hummer for GM (James Taylor). They are working out of a no-frills office in a retrofitted Hummer plant in Indiana that required $160MM in CAPEX to get it fully operational. They could be characterized as very nuts and bolts, and refreshingly, they are not selling investors on some big picture vision as investors often hear in the EV space. 

The rollout of the van will come in three phases. Phase 1 is a vehicle without a full safety system that can be used in restricted places like warehouses and airports. This step allows them to validate and get the miles on the road necessary to get them to Phase 2—which will be a one-seater van. From there, they will be focusing on noise, comfort, cruise control and incorporating certain regulatory requirements for the US market like back-up cameras, US standard bumpers, airbags, and the like. It’s only in Phase 3 where you get to a product that truly comps to the Ford Transit van, which will be the true competitor here.

The batteries come from CATL (3-year supply agreement), which is the same battery manufacturer that supplies Tesla in China. The body, box and frame of the van come from Sokon; the motor comes from JJE, which is a big supplier to Fiat/Chrysler.

When looking at sales volume targets put forth by management, they appear modest, although that’s probably not the real challenge. The real challenge is gaining legitimate market acceptance for the van in the US. We’re excited about the TAM, which is Class 1 delivery vans. The U.S. market has sales of 500,000 of these vans per year, and is probably the least crowded commercial EV space in the U.S. Most of the big names in the space are targeting Class 3 trucks, and even Ford’s electric Transit van will be a Class 2. For this Class 1 van, customers will be HVAC professionals, plumbers, municipalities, telecom repair, etc. The target price for this van is $25,000. The value proposition is an electric propulsion commercial vehicle with a genuinely competitive total cost of ownership. 

The goal here is modest market share over time in a segment where the incumbent vans are the Ford Transit Connect and Ram ProMaster. Ford and Chrysler right now have no announced plans for electrification of those vans in the Class 1 space.