27 August 2024

Electric vehicle industry melt downs.

Several years ago there were waiting lists to purchase electric vehicles but not now.

·      Profits of German auto giant Mercedes have plunged by 21 percent as sales of its new range of electric vehicles has gone into freefall.

·      Porsche has abandoned its sales targets for battery powered cars confronted with collapsing demand.

·      Reportedly Ford is losing $US50,000 on every electric vehicle it sells, and its overall profit is down by 35 percent.

·      Tesla’s profits have dropped by 45 percent.

·      Shares in Germany’s Varta have fallen by 70 percent amid reports that it may have to be rescued from bankruptcy after heavy losses on making batteries for hybrid sports cars.

·      Belgian chemical group Umicore announced a 1.6 billion Euros write down due to waning EV demand and postponed its plans for a battery recycling plant.

There is too much capacity in the industry with companies over investing in factories and distribution centres. All of this occurred in advance of the massive Chinese entry into the market with a new range of cheap EVs. Worldwide, thousands of new EVs are piling up with far too few buyers. Reports of EV battery fires, lack of charging facilities and higher insurance costs have scared away potential buyers.

In a telling sign, Australian car dealers are refusing trade-ins of EVs. The risk of requiring an expensive battery replacement has scared them off buying EVs as trade-ins.

Vast subsidies for EV production in Europe and by the Biden administration in the US have proved to be a massive waste of taxpayer’s dollars with Ford losing $50,000 US despite receiving a subsidy of $7,000 US per vehicle.

The signs point to further massive deterioration in the electric vehicle market. It is likely to be years before this market stabilizes. Australians are keeping their existing diesel/petrol powered vehicles, particularly as the second-hand market has plummeted.

Gullible governments are besieged by rent seekers with overtures to throw money at fanciful schemes. We are not being told the cost of green energy subsidies by the Commonwealth Government due to confidentiality agreements and off budget financing.

Electric vehicle sales in Europe were only 13.9 percent of car sales in the first six months of 2024 down from 14.2 percent in the first half of last year.

Tesla, the world’s biggest electric car maker, has recorded declines in the past two quarters. Tesla shares fell by 12 percent after its quarterly results revealed a 45 percent drop in profit.

Risks of the impact of punishing tariffs is making car makers reluctant to place orders for Chinese batteries while Western car makers have been slow to adopt Chinese batteries which tend to use an alternative form of chemistry. President Biden has announced a 100 percent tariff on electric cars and a 25 percent tariff on batteries. Presidential candidate Trump is in favor of high tariffs to protect American manufacturers from Chinese competition.

European companies have slashed/postponed plans to build new battery plants.

Investment in Lithium and Rare Earths stocks turn sour. 

Lithium minerals prices are under pressure due to a wall of supply and weak short-term demand. Popular rare earths producer Lynas recently traded at $6.09 per share. This is well up from its low point in 2015 but far below its high point of $23.37 on 31 May 2011. Other companies having significant rare earths resources have also suffered recently. A recent search of Lithium producers other than major miners where it is a minor adjunct to their main commercial activity revealed that most are losing money at a significant rate.

Rare earths dividends. 

Iluka (ILU) recent dividend of $0.07 per share for a yield of 1.27%

Arafura (ARU) No current dividend

Northern Minerals (NTU) no dividends

Australian Rare Earths (AR3) no dividends

It must be concluded that investment in this sector is extremely speculative.

Pilbara Minerals Ltd. 

Lithium and Tantalite miner Pilbara Minerals has recently moved to acquire Brazilian Lithium miner Salinas but the share market is very negative toward the deal. Share price on 16/08/2024 of $2.82 is well below its recent peak price of $5.09 on 31/10/2022 reflecting a global oversupply of lithium.

Calculating returns on shares. 

Be careful of quotes as to growth rates of investments. On the day of writing BHP was trading at $40.47. 20 years previously it was $10.59. It had appreciated by $29.88 or 14.11 percent per year if assessed on a linear fashion. But that is not a correct way of measuring its growth which averages 6.53 percent compound per year. To that figure would be added its dividend grossed up to include franking credits.

It is also important to review the long-term chart and note the substantial differences between peaks and troughs in a share price over time.

US Total markets fund. 

The Vanguard US Total Markets (VTS) exchange traded fund’s chart indicates that it listed on the ASX on 29/5/2009. In the succeeding 15.25 years it has climbed from $58.12 to $399.30 which represents compound growth of 13.47 percent per year. Its dividend/distribution is tiny and is unfranked. It is a growth stock rather than an income producer. For a comparison with two similar ETFs see below.

72 Divided by X formula. 

X represents the percentage of capital growth per annum which is the divisor and the result is the number of years taken for an asset to approximately double in value. Hence:

At an annual increase of 6% the value will double in 12 years, at 4% it takes 18 years and at 9% it takes 8 years to double. $100 compounding at 7.2% will grow to $200 in 10 years.

AMP is a long-term disaster. 

Recently AMP issued an upbeat annual report, but this belies its history. Over the past 20 years its share price has declined from $6.25 to a recent price of $1.29. Its performance measured from its date of listing post demutualization in 1997 is far worse. It is now worth only about 5% of its price on the stock market on day of listing! Ouch.

Hub 24 a winner. 

Hub 24 is a company which supplies platforms for the administration of self-managed superannuation funds and investment portfolios and associated services. It listed on the ASX on 31/07/2007 at $6.62 and recently has traded at $49.60, representing compound annual growth of 12.55%.

We own shares in Hub24 via our investment portfolio. Readers must do their own research and seek advice as necessary.

Brambles Ltd.—We do not own Brambles. 

Brambles owns the Chep business which provides pallets and specialized containers to industry globally. Back in the early part of this century it ‘lost’ a vast number of pallets, which was basically an accounting problem. It was likely that large transportation firms were comfortable paying rent on a lesser stock of pallets than they actually had in use. Inevitably a significant number got written off if Brambles was unable to prove rental liability for the full stock. Pallets are perpetually moving on and off road, rail, and seaborne carriers. Normally on receipt of palletized stock the recipient signs paperwork for the pallets as well as the load or alternatively a carrier simply accepts an equivalent number of empty pallets in exchange. There can be a battle of wits between carriers and receiving warehouses resulting in losses of pallets in the exchange. A business pays rent on the number of pallets for which paperwork identifies it as having in its possession. The impact of the ‘loss’ of pallets was that the market treated Brambles accounts with caution. Hence its 20-year chart dates from 29/12/2006 rather than a full 20 years. Its performance over the approximately 17.75 years to 16/08/2024 has been mediocre with compound annual growth in share price of 0.15 percent per annum. Its dividends are small and only partially franked.

Potential investors need to treat with caution and do careful research.

Cleanaway Ltd.

Cleanaway appeals as an investment for the civic/green-minded, but its performance has been disappointing. Its peak price was $9.49 on 31/05/2007. It recently traded at $2.99.

We are not investors. Those considering it need to take care and do thorough research.

ARB Corporation Ltd. 

ARB remains one of my favourite stocks which we have long held in our SMSF and investment portfolio.

On 16/08/2024 it closed at $40.50 but 20 years ago it closed at $3.88. This equates to compound average growth of 12.44% per year. Dividends grossed up with franking credit amount to $0.91. ARB has consistently operated with a zero net debt while steadily increasing its global reach, manufacturing capacity, and distribution network including many owned distribution sites.

Readers must do their own research and seek advice as necessary.

CAR Group—Formerly known as Car Sales Ltd. 

Since listing on 30/09/2009 it has had impressive growth internationally following its founding in Australia. A classic disrupter, it effectively destroyed the heavy advertising of motor vehicles and all things related in major Australian newspapers. Up to 16/08/2024 its share price has grown at a compound rate of 16.93%. An extraordinary rate.

We own it in our investment portfolio.

Readers must do their own research and seek advice as necessary.

CSL Ltd. 

CSL is one of our favourite stocks, long owned in our SMSF and investment portfolio.

On 16/08/2024 CSL closed at $305.34 but 20 years ago it closed at $8.53, corrected for share splits. This represents average compound growth of 19.59%. Do note that it peaked a couple of years ago, fell away, and has since regained its growth path. The modest correction was related to its major purchase of Vifor which has taken time to integrate but is now performing reliably. CSL is an Australian success story having become one of the world’s leading pharmaceutical companies. Its dividends are tiny relative to share price as it has long reinvested in growing its business which is mainly centred in North America and Europe. Since earnings are mostly foreign earned its dividends are unfranked.

Readers must do their own research and seek advice as necessary.

Long term holders must check their capital gains tax liability before contemplating a sell down.

Comparing international share ETFs Why it makes no sense to swap. 

The Van Eck MSCI, international quality ETF (QUAL) has compound annual growth of 13.99% since first listing on 31October 1994 and measured to close of 16 August 2024.

The Vanguard US total markets fund (VTS)and the Blackstone Standard and Poors 500 fund (IVV) invested in the top 500 stocks listed on the New York Stock Exchange and NASDAQ have almost identical compound growth when measured over the identical period. VTS has growth of 13.62% per annum and IVV growth of 14.07% per annum each measured from close of 31 October 2014 to close of 16 August 2024. The latter two have lower management expense ratios than Qual.

The three ETFs will have closely related investments. It makes no sense to sell one of the above three to buy another since long term capital growth, measured from a common date, is near identical thereby incurring transaction cost and exposing you and your fund to capital gains tax unless it is an SMSF wholly in pension mode.

These three ETFs are widely invested with many major US companies being global in their operations and hence each provides huge investment diversification. There is a substantial overlap between the three.

Nor is it advisable to reduce the holding of either of the three to purchase direct shares in a company producing substantially lower growth.

We own IVV and VTS in our SMSF.

How bad is China’s economy?

We know from previous data that youth unemployment became so bad that the Chinese authorities stopped issuing the numbers. Since there have been no recent announcements it is likely that the situation has not improved. To date there is no sign that the Chinese property disaster is being fixed. Vast numbers of Chinese who paid up front for units in tall towers on which building has ceased are stuck in investor wilderness with no solution in sight. Those with savings are reluctant to spend leading to a deflationary trap where savings rates are so high that interest cuts stop working. Local governments dependent on selling land to developers are facing huge deficits. Meanwhile Chinese steel production is falling, reflecting a slow-down in major construction projects. This is bad news for Australian iron ore producers. Overlaying all of this is the low birthrate meaning that the population is ageing and declining in numbers.

Despite the huge build-up of the Chinese defence force known as the Peoples Liberation Army (PLA) it is unlikely that China will risk an open conflict over Taiwan with potentially massive economic dislocation, even if the US and its allies choose to stay out of the conflict. Taiwan is well armed, substantially with US supplied weapons, and the sea gap as well as the inhospitable terrain of much of Taiwan create substantial difficulties for an invader.

China’s real economic solution involves providing political and economic freedom to its population which would result in a substantial jump in productivity. This is unlikely under its current leadership. China’s broken economy is largely self-inflicted.

Chinese falling steel production is causing iron ore prices to fall leading to significantly lower Australian Government revenue.

Hydrogen Energy Fantasy. 

Since 1766 when Henry Cavendish produced inflammable air in his laboratory technologists have been unable to produce, condense and transport Hydrogen at a cost which is cheaper than competing technologies. The collapse of the business case for Hydrogen with Andrew Forrest’s indefinite postponement of Fortescue Metals’ plan to produce it in commercial quantities at competitive cost further demonstrates the falsity of Energy Minister Bowen’s claim that renewable energy is cheap. All those major power lines, wind turbines and solar arrays have substantial capital cost as they must be periodically maintained and replaced.

The profit motive eventually forces entrepreneurs to stop investing when it becomes apparent that producing commercial quantities of Hydrogen, compressing, transporting, distributing and using it is to embark further on a loss-making activity.

We must have a cost competitive reliable energy mix. 

Inevitably wind and solar will be a significant energy source in the future but so must be a number of other energy sources including nuclear which supplies electricity to 32 countries and of course gas.

Australia is at serious risk of destroying large segments of Australian industry if we cannot provide it with reliable electricity at affordable cost.

Website.

More information is available at my website grahammiddleton.com 

The Delany Foundation.

Those who get significant benefit from my newsletters/website are asked to donate to the Delany Foundation. Donations are tax deductible. As most of the foundations administration is performed by volunteers, mainly old boys from Patrician Brothers schools, almost all money donated is applied to its worthy work.

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Graham Middleton

For archive of articles including ones by Graham Middleton go to website at grahammiddleton.com. Watch for detailed article on Dental Practice valuation in two parts appearing shortly.

General advice and need to confirm.

As I sold out of an accounting and financial services group, of which I had been a founding partner, on 30 June 2020 I am no longer licensed. The above is general advice and should be confirmed with a currently licensed investment adviser. One I would recommend to you is Campbell Thompson at Ord Minette who is both courteous and experienced. His number is 0407 839 229. His assistant Simone Shelton 0402 085 892 is a helpful person also. If you are after simple transaction advice, they are ideal. I use them but have absolutely no financial interest in any services that they provide to others.

My Financial interest. 

I have no financial interest in the advice I provided and seek no fee. I am secure financially and I seek no personal remuneration. If you find it worthwhile you are able to acknowledge it by making a tax-deductible donation to the registered charity which I support, the Delany Foundation who, I am confident, will apply it to worthy use.

Financial Success for Dentists 

Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:

·       Understand key practice valuation criteria.

·       Learn how some dentists inadvertently reduce the value of their practice by $500,000

·       Avoid long term errors when purchasing your practice.

There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.

I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.

A complete and comprehensive career guide for mature and aspiring dentists.

Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.

—Merv Saultry, Founder Dental Innovations Network 

To Obtain a Copy:

·       Go to the Delany Foundation website at http://www.delanyfoundation.org.au

·       Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.

·       Email graham.george.middleton@gmail.com confirming that your donation has been made, as well as your name and mail address

·       A copy of the book will be mailed directly to you

All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.

The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.

Please Pass On 

If you like these newsletters, please pass them on to colleagues. Past newsletters and articles in Australasian Dental magazine on business issues are at grahammiddleton.com. I can be contacted directly by email at graham.george.middleton@gmail.com and by mail at Graham Middleton, 37 Charteris Drive, Ivanhoe East, VIC 3079.