Slowing growth, CATL continues to prioritize gross profit over market share? (3Q23 earnings conference summary)

Management Remarks

In the first three quarters, the company achieved a total operating revenue of 294.68 billion yuan, a year-on-year increase of 40.1%. The net profit reached 31.15 billion yuan, a year-on-year increase of 77.1%. R&D investment continued to increase, reaching 14.88 billion yuan, and operating cash flow reached 520.7 billion yuan. Among them, the total revenue in the third quarter was 105.43 billion yuan, with a net profit of 10.43 billion yuan and a comprehensive gross profit margin of 22.4%. The profitability is stable, with ample cash reserves, and the end-of-period monetary funds reached 233.8 billion yuan.

Power Battery

According to SN E data, the company's overseas power battery usage market share reached 27% from January to August 2023, a year-on-year increase of 6.9%, with rapid breakthroughs in the European market. The company's market share of power batteries in Europe from January to August reached 34.9%, a significant increase of 8.1% year-on-year. The market share of power batteries in regions outside China, the United States, and Europe reached 27.2% from January to August, a significant increase of 9.8% year-on-year.

Energy Storage Battery

In terms of energy storage batteries, the company continues to launch outdoor systems Ener One and Ener One Plus, which have high charging and discharging efficiency, load-bearing capacity, high integration, and high safety characteristics. In addition to products such as EnerC for all-weather scenarios, the company has also released a more integrated and cost-effective DC-side product, EnerD. At the same time, the company is developing nuclear power exhibition safety energy storage products and establishing its own lithium-ion energy storage system safety assessment outline.

Innovative Product Implementation

With the gradual launch of 70 battery M3P and other products, the company has formed a new generation product matrix that caters to the high-end and mid-to-high-end mass markets. Kirin batteries have been delivered to Xpeng and Li Auto, and Kirin batteries can achieve a charging rate of 5G, which will be launched soon.

During the reporting period, the company released the world's first 4C supercharging battery using lithium iron phosphate, which can be charged in 10 minutes and has a range of 400 kilometers. It will be mass-produced at the end of the year and launched in the first quarter of next year. Currently, Avita, Chery, and other companies have officially announced that they will be equipped with supercharging batteries.

Q&A

1. In response to some domestic price pressures this quarter, besides the new products such as M3P or Shenxing that have been launched, the company is also actively implementing rebates. How do you see the future price trend? Will there still be room for price reductions to ensure market share?

The rebates in the third quarter mainly consider the market competition pressure from the automotive industry. In order to support the long-term and steady development of our partners, deepen cooperation with customers, we have made certain rebate arrangements for this particular automaker and partner, which have had a certain impact on the current period's profit.

The overall profitability of the third quarter is still relatively stable, and the gap with peers has been widening. Considering this, coupled with the volume production of new products, we should have a greater advantage in next year's market competition.

2. The impact of exchange rate fluctuations? At the beginning of the year, we implemented a hedging policy to reduce the impact of foreign exchange fluctuations on the company. The third quarter's financial results are the outcome of this hedging policy, which has also achieved the desired effect of stabilizing operational performance in the long term. We will continue to execute hedging transactions and adjust the hedging ratio based on the amount of foreign exchange received in the current period. At the same time, the company's foreign currency also has overseas uses, which do not have a substantial impact on the company's operations.

3. What is the outlook for future rebate policies and pricing?

Our cooperation with customers is long-term. From a pricing perspective, future competition will still exist and may even be intense to some extent, but price wars may not necessarily be the solution.

4. What is the shipment volume in the third quarter? How about the volumes of power batteries and energy storage batteries?

The shipment volume in the third quarter was 100 GWh, with a MoM increase. Energy storage accounted for approximately 20% of the total.

5. What is the progress and outlook for the European factory in the fourth quarter or next year? How will the company respond to European anti-subsidy policies?

In fact, there will be growth on a MoM basis, but of course, this growth is uncertain. Many policy uncertainties have caused concerns among the public. However, the company remains optimistic about the fourth quarter and next year. The industry's growth rate will not be as fast as last year, but it will be a healthy growth, and the speed will still be relatively fast.

From an overseas perspective, the market share in Europe and other overseas markets is continuously increasing, mainly based on the gradual delivery of orders secured with overseas major companies. In fact, the delivery is still in progress, and with the introduction of new products or increased production capacity, the scale of delivery will continue to grow.

Regarding anti-subsidy policies, we will provide the best solutions to help customers succeed. The company is the only one that has truly established a factory in Europe and can achieve localized supply.

6. Is the company in a destocking phase? Will destocking continue in the fourth quarter?

Currently, the company's inventory control is good, especially in Q3. Although there is some reserve for Q4 deliveries, it has already decreased significantly compared to the mid-year level. We have implemented inventory management and optimization, adjusting according to the season. The overall effect of inventory management this year has been good, and we will continue to stock up in the long term.

There is not much change in the value of inventory on the books, but the prices of raw materials in the third quarter have decreased compared to the second quarter, while the quantity of raw materials has increased in order to meet the demand for Q4 deliveries.

7. Will rebates become a regular occurrence on a quarterly or annual basis in the future? How does the company balance rebates with competing for projects and annual contracts?

Rebates are a common sales policy used to incentivize customers to purchase more. Our relationship with customers is long-term and stable, and as the relationship becomes closer, many future projects are bound not only by price competition. In terms of financial reporting, rebates are considered as a deduction from revenue.

8. What is the progress of the Ford project? What is the outlook for overseas markets?

The Ford project is quite complex, and it is not convenient to comment on it.

The level of trust and recognition from our customers is very high, and we have secured many overseas orders. Therefore, this year, we have obtained many designated orders, which are crucial for future overseas sales and have facilitated the smooth progress of overseas factory construction. Regardless of whether it is the German factory or the Hungarian factory, compared to our competitors, the company has quickly established a presence and achieved mass production in Europe, and has also obtained customer certification. In terms of localization progress, we are actually at the forefront of the industry. Providing customers with better localized products overseas is a competitive advantage.

Speaking of North America as a whole, not limited to just the Ford project, there will be many other projects that will be progressed together in the future, serving localized customers.

9. Is the rebate only applicable to the power battery level? What is the gross profit margin for power and energy storage batteries in the third quarter?

The gross profit situation is relatively stable. The rebate policy is tailored to each customer.

10. Capacity utilization rate?

The announcement in the first half of the year was 62%, and it has increased in the third quarter of 2023, reaching around 70%.

11. Is the main focus of the Shenxing battery to expand market share or increase profits? How is the market share of the Shenxing battery expected to be next year?

More and more customers are considering using Shenxing batteries, but it has not yet reached the formal mass production stage. Fast charging is now an important competitive highlight of new energy vehicles. Under controlled costs, we aim to balance market share and profit margin.

In terms of scale, as more customers and models are introduced, the scale is expected to gradually increase by 2025-2026.

In terms of the cost of Shenxing batteries, compared to traditional lithium iron phosphate batteries, the cost is relatively stable, with only a slight increase. This also means that there will not be a significant change in the selling price. In simple terms, it means increasing quantity without increasing price. We hope that through Shenxing batteries, we can promote technological equality, make good batteries affordable for consumers, and further popularize and lead the fast charging market.

12. Outlook for the European market?

First of all, Europe has a firm commitment to new energy policies and a clear direction. Secondly, the current trend of the US dollar's interest rate hike is expected to stop, and there may even be interest rate cuts starting next year. Therefore, the situation of the US entering a recession is expected to improve, which will actually affect the entire European market. The stable growth of the European market and the active layout of customers in Europe and even globally indicate that the expectations for the European market may be overly pessimistic.

13. Currently, the price of energy storage cells is already around 0.4-0.5 yuan/wh. Will the profit of 0.1 yuan/wh for future energy storage cells continue?

The price war in the energy storage market is quite severe. We are focusing on product innovation and differentiated products, and we do not want to engage in simple price competition with our peers. Relying on price competition is also not sustainable.

In fact, energy storage products have higher requirements for safety, lifespan, and many other qualities. Many strategies are aimed at establishing long-term and stable cooperation with customers. Even the prices of energy storage will eventually adjust. From the perspective of energy storage owners, they will realize that there are significant differences in battery performance after using them for a longer period of time.

Because there is effective competition in the third-party market, our market share remains at a high level of around 50-60%, and there are not many competitors. It should still be relatively stable.

14. The provision of fixed assets of 1 billion, what are the main considerations?

An analysis is conducted every quarter comparing the recoverable amount with the carrying amount.

The efficiency of the PSL Super Pull Line has significantly improved compared to the old production line. The difference between the new and old production lines has been subject to impairment provision.

15. What is the trend of overseas energy storage?

There may be some delays in grid-connected installations in the United States, but this is a deferral of demand rather than its disappearance. The future growth potential remains unchanged, and the demand is still robust.

16. Progress of the Hungarian factory? Overseas layout?

The total planned capacity is 100 GWh. Phase 1, with a capacity of 34 GWh, has already started construction and obtained the necessary government approvals. The project is progressing rapidly and is expected to be completed in about two years. Phase 2 is currently under discussion.

As for localization progress, the localization efforts in Europe will not stop. The ramp-up of production capacity at the German factory is also ongoing.

There are ongoing discussions and plans for other overseas factories.

17. Production and sales situation?

In the third quarter, production slightly exceeded sales, making preparations for a strong performance in the fourth quarter.

18. In terms of upstream suppliers in the supply chain, will the pricing model with suppliers remain the same, or will there be a cost markup?

There have been no significant changes in the supplier aspect, and it is not called a cost markup. We are building a resilient supply chain and working with upstream partners to reduce costs. Different projects may have different approaches.

19. Specific examples of competitive advantages in overseas markets?

Product quality, safety, and performance are all included.

Challenges in overseas markets include local community environmental requirements, recruitment difficulties, energy supply, and visa processing.

20. Situation at the mining end?

The mine in Jiangxi is currently in operation and gradually increasing production. Production will continue to increase next year, but the specific volume will depend on the market conditions for lithium iron phosphate.

21. How do you view the pressure on gross and net profit margins for energy storage?

The profit margin for energy storage is still good. We don't want to engage in a simple price war. We strive to stay ahead in terms of technical indicators and costs. It is more important for our products to meet the needs of users, rather than relying solely on price competition. The safety of energy storage is a very important issue.

22. Progress of composite current collectors?

Composite current collectors are a small part of the materials. We currently hold relevant core patents and have leading capabilities in independent research and production. We may also collaborate with some partners. These composite current collectors contribute to improved safety and have been used in some products. However, they may not completely replace existing materials in the future. Composite aluminum foil has already been applied in the ternary project.

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