SES AI Stock: Leading The Charge (NYSE:SES)

SES AI (NYSE:SES) is leading the charge to develop a new, improved battery for the growing electric vehicle market. It probably has an 18-month advantage over its nearest competitor and looks set to go into commercial production of its products in 2025. The company is well-funded, has diverse ownership, and has a clear technological advantage. The managers have a history of making good decisions, carefully changing their technical focus, and signing joint development agreements with three major auto manufacturers, giving them a clear competitive advantage.

A string of catalysts will likely arrive throughout 2024, propelling the share price higher. I am rating them a solid Buy with a positive outlook.

Background

SES began in 2012 as a spin-out from Harvard University; they were funded with grant money and intended to develop a solid-state electrolyte battery using patented technology developed by the founder and his team at Harvard. In 2015, SES made the first of many excellent decisions and dropped the license to use this technology. They doubted its manufacturability and moved to a technology that could deliver the same improvements with ease of manufacture.

In 2015, they began to focus on their current core technology, a high-concentration solvent in salt electrolyte, and by 2021, they had developed more than 19 generations of this core technology.

Early in 2021, SES began to develop its hybrid Li-metal cell, pairing the high salt electrolyte with a Li-metal anode. In 2021, they showcased the Apollo cell, a 107 Ah Li-metal cell, and sent samples to potential customers. These samples were a huge success and led to a step change in the company’s fortunes.

The Competition

Several small companies are trying to develop new battery technology; of the 17 battery companies I follow, six fall into this subcategory. Each has potentially groundbreaking technology improving the anode, the separator, the electrolyte, or some combination of these three things. If they can successfully manufacture a battery at volume with significantly improved performance at a price acceptable to OEMs, then the potential rewards are enormous.

They are all small companies; some are pre-revenue, some are pre-profit, and they should all be considered very high-risk. It is improbable that they will all be successful, making it essential to choose investments carefully. Both competitive and financial analysis will help determine a winning investment portfolio.

I have written about Amprius (AMPX) and Electrovaya (ELVA) more than once and have invested in both. After writing about them, I decided not to invest in Solid Power (SLDP), and all three decisions looked correct when writing this article.

Electrovaya delivered a 100% return in 2022/3, and the more recent trade I took (Oct 2023) is up over 50%. My recent investment in Amprius is up 30%, and Solid Power is down 25% since I reviewed it.

I intend to analyze the three remaining companies in this sector in the coming weeks, hoping to find more high-potential opportunities.

SES Commercial Progress

SES signed three A sample JDA agreements on the back of the Apollo cell samples. General Motors GM (March 2021), Hyundai (May 2021) and Honda (Jan 2022). SES received $2.4 million from these Auto OEMs in Q3 2023 and booked this as contra R&D rather than revenue. (Q3 earnings CFO)

In November, one of the OEM customers (either Honda or GM; see discussion on Hyundai below) moved to a B sample JDA. This is a big deal; it puts SES ahead of the competition and represents a serious commitment from the OEM as they will build and test cars using the SES battery. (Q3 earnings)

A b-sample is a crucial moment when an OEM commits to building full test cars with SES batteries on board, representing a significant investment; it usually means that the OEM intends to move to full production as long as the B and C samples meet expectations.

Moving to the B sample puts SES further ahead of its peer group on the road to the commercialization of EV batteries. (With the possible exception of Electrovaya). SLDP has produced an A1 sample for an auto EV (BMW). However, like QS and its A0 sample given to Toyota, at least three iterations of the A samples are expected to deliver improved performance before moving toward B sampling. It likely means that SES is currently 18 months ahead of the competition.

In the Q3 earnings call, the CEO said the other two OEMs were a few months behind, implying we can expect two further announcements of B samples in 2024.

It is worth pointing out precisely what SES means by A, B, and C sample (10Q Q3 2023 Page 16)

A-Sample batteries are functional prototypes developed for OEMs based on their technical specifications.

B-Sample batteries, have much higher throughput and tested in actual vehicles,

C-Sample batteries would be fully functional, mature samples for mass production and tested for full drivability.

In the earnings Q and A section, the CEO said the B-sample process will take between 12 and 18 months. 2024 should see two more B sample announcements and 2025 the first C sample agreement, with 2026 seeing two more C sample announcements and one Start Of Production (SOP).

The B sample will have an energy density of 400 Wh per KG, much higher than the batteries in the current Lithium-ion batteries used in EVs. It contains 100Amp Hour cells (these are actual figures, not commercial design targets)

The Technology

SES has acquired a competitive advantage by developing patent-protected compounds, proprietary techniques, and trade secret processes. The result is industry-leading cells and three joint ventures with leading OEMs.

The technology delivers a denser and lighter battery than current EV batteries but can be manufactured using existing Li-ion processes, making it manufacturable at scale, a key advantage its competitors have yet to prove is possible.

The research at SES is ongoing and primarily focused on the electrolyte and the anode.

Electrolyte

The key differentiating technology is a patent-protected liquid electrolyte developed in-house by SES. It uses a proprietary purification process; its main salt, LiFSI, is held at much higher concentrations than standard liquid electrolytes with no free solvent molecules. The solvent used is patent-protected, non-volatile, and non-flammable (described as self-extinguishing). It contains proprietary additives to improve its safety profile. I have already mentioned that the electrolyte is in its 19^th generation. I expect development to continue as this technology pushes the envelope of what can be achieved by non-solid electrolytes.

SES also use a solid electrolyte to protect the anode.

Anode

The new ultra-thin Li-metal anode has a proprietary manufacturing process and a trade secret coating providing a mechanical barrier. SES is currently using an extrusion process to produce the lithium foil and has developed the process for making it wide, allowing the manufacturing of the 100 amp hour cell that is going to B sample. Two other methods exist for producing this type of anode, and the CEO has indicated they may switch processes later for increased efficiency (Q3 earnings call). The anode has a composite coating that improves safety and cycle life, but no information regarding its composition has been made public despite analyst questions.

The thin anode makes the battery lighter than a comparable-sized conventional Li-ion battery.

Li-metal technology has been held up by the formation of dendrites on the anodes with repeated recharging. These dendrites have been known to pass through the separator and short-circuit the battery. The use of the proprietary anode coating and the hybrid solid/liquid electrolytes have changed the nature of the dendrites so that they form a dense lithium coating on the anode without the needle-like structure that could penetrate the separator. The A sample testing has proven this technology safe and meets its targeted performance characteristics.

Cathode and Separator

SES has designed a high nickel content cathode that is more stable than the traditional versions. With a new coating, the cathode has passed all safety tests (investor presentation slide 27). Both the cathode and separator are improved industry standard items.

Manufacturing Sites

SES has manufacturing sites in Shanghai and South Korea (investor slide show) and a research and development site at the headquarters in the US. The two manufacturing sites have a different focus. Shanghai has been focused on Automotive OEM customers and was announced in 2021. It is a 300,000 sqft facility, and the first production line (Line -1) began producing cells in March 2022. It can produce 1,000 cells per month. The facility is being upgraded with Lines 4 and 5, which will make the B samples for OEMs. These lines will be operational in 2024, each with a capacity of 1,000 cells per month.

In 2022, the South Korean facility described as a pre-production facility was finalized. It houses lines 2 and 3, producing A samples for two JDAs. In a recent article, the CEO discussed a third B sample line in South Korea (see discussion on Hyundai below). It is unclear if this will be a sixth line or if one of the two B sample lines initially slated for Shanghai is now going to South Korea. In the Q3 earnings, he implied that this facility will focus on the eVTOL and UAM markets, leaving the Shanghai facility to focus on the EV market.

The B sample manufacturing lines (designated Line 4 and Line 5) are due to be complete in the first half of 2024 and will each be capable of producing enough batteries for ten cars a year. In the Q3 earnings, the CEO expects to transition to C samples at the end of 2024 and begin commercial production in late 2025/6. Lines 1,2, and 3 will produce cells for B sampling until lines 4 and 5 are operational. In total, SES can make batteries for 50 cars in 2024. It does not sound like a lot, but it is the amount needed to satisfy the current requirements of its JDAs.

Management discussion 10Q Q3 2023

Customers

A total of 6 OEMs have invested in SES, and three have announced JDAs for the SES battery.

Honda and GM

This image is from the 2023 Honda Business Briefing. The briefing states that Honda intends to release new battery technologies in the second half of the 2020s and describes SES as a battery research and development company with which they are jointly developing semi-solid state Li-metal batteries.

LG Energy Solutions is their chosen manufacturer of lithium-ion batteries. In June 2023, the two companies began building a 2 million square foot facility in Ohio that will produce 40 GWh pouch-type lithium-ion batteries from late 2025. LG is also investigating Li-metal anode batteries but appears behind SES’s development.

GM was a lead investor in SES with a 2021 $139 million investment; we know they signed a sample JDA, but little information has been published since then.

Honda will strengthen its alliance with GM (Business briefing), co-developing a series of low-cost electric vehicles that will go on sale in 2027. The Honda GM alliance possibly accounts for both being in JDA with SES and the low-cost electric vehicles would fit with the production of SES batteries. It is not inconceivable that the LG-Honda manufacturing site in the US will be used to produce these batteries.

It is only me reading between the lines, and there is no corroboration; however, that is how we deliver Alpha, putting together the story from disparate information.

Hyundai

Hyundai is a strategic investor in Hyundai and has been A sample testing the batteries for EVs. Hyundai also has an eVTOL affiliate called Supernal. At the December 2023 battery day, SES showcased the prism cell produced on the existing production lines designed to work with eVTOL applications.

In an interview with the Korean Herald, the CEO of SES said that he expects to announce a B sample agreement with Hyundai early in 2024 and has chosen the site of its Korean expansion to improve the synergies with Hyundai as they build a Li-Metal development and research base.

Of the three production lines in Korea, we are preparing one for developing B-Sample lithium-metal batteries for EVs in Uiwang, near Seoul, with Hyundai Motor Group,

The B line here could be line 4 or 5, but it is unclear.

eVTOL

AMPX announced last quarter that they had received three orders from eVTOL companies, and they already supply batteries to Airbus for their high-altitude drones. SES is interested in this market and has dedicated its South Korean facility to producing batteries. The CEO implied that ten cars and five eVTOLs would have the same amount of battery but said that you would never get an order from an auto OEM for ten vehicles. Still, you will likely get an order for five planes from an eVTOL manufacturer. He also stated that the eVTOL companies do not have the same A, B, C, and SOP testing phases as the Auto companies; they mix the stages, so he thinks line 5 will be for commercial sales to eVTOL customers. He gave no clear guidance as to any eVTOL orders. He mentioned JOBY, Archer, and Hyundai in his remarks.

Finances and Valuation

SES has a flawless balance sheet with zero debt and an equity value of over $360 million.

In the Q3 earnings call, the CFO gave guidance of a 2024 cash burn of $65 million for operations and $75 million for capex to build the two new B sample lines. For the first nine months of 2023, cash usage was $43.9 million, and Capex was $12.3 million. Cash usage in Q3 2023 came slightly below the equivalent 2022 figure. The cash usage forecast shows an increase of just over 10%, with a significant increase in capex for the new manufacturing lines.

At this higher level of cash usage, they have enough cash on hand to get to at least 2027, and with commercial operations due to begin in 2025, they are in a robust financial position.

SES does not have a great deal of Wall Street coverage ( this is common with these small battery companies; when I began coverage of AMPX and ELVA, they were in a similar position; however, as revenue arrived, coverage came with it.) Seeking Alpha states they have coverage from two analysts with a single price target of $4, and Simplywall.st says they have zero analyst price targets.

The current Market cap is $527 million; with $342 million of cash on the books, the business seems significantly undervalued. Its price to Book ratio is much lower than its peer group; SES is at 1.5 against an average of 5.4, giving SES a target price increase of more than 350%.

Ownership of the company is quite widespread among the different types of shareholders; this is quite unusual. More often, ownership is dominated by one or two types of shareholders. It does mean the company is not controlled by a small number of shareholders and is unlikely to favor the insiders over the general public.

The shareholders have seen little dilution in the last 12 months, and with such a solid balance sheet, I do not expect any dilution in the medium term.

Risks

SES is a small cap pre-revenue research and development company. The risks are significant; the largest revolve around technology. The progress to B sample is excellent news but it does not guarantee any future revenue, the large auto OEMs are looking at multiple battery technologies, and the one from SES may not be the one actually chosen. As recently as 2022, the metal anode technology revealed small holes when sampled. SES brought the manufacturing in-house at that point, and I am making the large assumption that these technical issues have been solved with the move to a B sample

Conclusion

SES is leading the charge to provide a new high-density battery for EV manufacturers to replace the Li-ion batteries that dominate at present. The SES solution has proven to be manufacturable and is moving to B sample production this year with at least one OEM and probably three.

The company has a strong balance sheet with enough cash to reach commercial activities in 2025/6, doing so years before its peer group of companies.

SES has minimal Wall Street coverage and a price-to-book figure below the average for its competitors. It appears to be flying below the gaze of most investors and looks significantly undervalued, considering its cash position and the commercial progress it has made.

Three significant price-moving events will likely occur in the next 12 months. The two remaining OEMs should move to B sample, and the other will hopefully announce the start of C sampling.

In 2025, SES will hopefully report the start of commercial production for an automotive OEM. If that happens, it will be worth many times its current value.