Wet separator and PVDF capacity constraints will likely lead to a significant shortfall in battery shipments in 2022. Dry separators should be used to mitigate the supply chain strain.

Electrolytes will be oversupplied. We initiate on Senior at OW and Tinci at UW. We upgrade Easpring to EW.

Component supply limiting battery shipments? In this report, we deconstruct the electric vehicle (EV) battery supply chain strain and find the potential bottlenecks. The battery supply chain amid COVID-19 is too constrained to meet the robust demand in 2022, in our view, leading to a significant shortfall versus battery production plans. We calculate global wet separator supply will likely result in only ~380GWh of battery volume in 2022 versus existing battery capacity of 575GWh from battery majors. The cathode adhesive polyvinylidene difluoride (PVDF) could also be undersupplied depending on how fast ordinarygrade capacity will be able to switch to battery-grade PVDF capacity. We believe the ultimate battery shipment volume will be determined by the extent of the mitigation of the two materials' supply strain.

Potential resurgence of dry separators. Dry type separators were used in lithium iron phosphate (LFP) batteries before 2018 and then substituted by wet separators. To mitigate the supply chain strain in 2022 and beyond, we expect LFP battery makers to switch back to use more dry separators due to the following advantages over the wet type: 1) shorter construction cycle and less capital intensity, 2) equipment supply being less constrained and 3) cheaper production cost and less energy intensity. We see dry separators as a later-cycle play on the LFP battery renaissance in 2022.

Initiating on Shenzhen Senior at OW. Senior is China's leading dry separator producer and has proven wet type capabilities with penetration to global battery majors. Shares of dry separator names could re-rate as the total addressable market (TAM) in EV batteries expands. We prefer Senior over Yunnan Energy due to: 1) market share gain in wet type, 2) renaissance of dry separator in LFP batteries, and 3) improving margin due to improving global mix.