"Trillion" Prince Ning is really going to rise this time?
On the evening of October 18, 2024, CATL announced its performance for the third quarter of 2024. Let's look at the key points:
1) Battery unit price slightly decreased, but gross margin greatly exceeded expectations: Although the battery unit price slightly decreased this quarter, Dolphin believes it is due to the normal fluctuations in lithium carbonate prices, which are still in a downward cycle, and is consistent with the market's trend in battery prices.
The outstanding performance this quarter lies in the gross margin significantly exceeding expectations, mainly attributed to the pricing power of CATL, as well as CATL's strategic choice in a market where supply exceeds demand.
2) Shipments increased by 15% quarter-on-quarter, maintaining market share: This quarter, total shipments were approximately 126.5 GWh, a 15% increase from the previous quarter. The increase in shipments of power batteries is partly due to the growth in sales of new energy vehicles in China in the third quarter, leading to improved demand for power batteries. Additionally, CATL's steady increase in market share for power batteries domestically contributed to the rise in shipments. The increase in energy storage battery shipments is driven by strong overseas demand for large-scale energy storage, but attention is needed on the policy side (whether there will be tariffs on energy storage batteries exported to the United States after the election).
3) High increase in asset impairment, mainly due to cautious provisions related to the decline in lithium carbonate prices: Asset impairment in this quarter was 4.7 billion, of which about 4.5 billion came from impairment of mineral assets/mining rights related to lithium carbonate prices, with only 200 million related to inventory impairment. Adding back this portion of asset impairment, CATL's net profit attributable to shareholders exceeded 17 billion yuan for the quarter, significantly surpassing market expectations in terms of profitability.
4) Inventory increased significantly, but considering capacity utilization and capital expenditure, it is judged to be a proactive preparation for strong downstream demand: Although inventory increased by 15% this quarter, with the majority of the increase in finished goods and goods in transit, combined with the quarter-on-quarter increase in capacity utilization (high production volume) and steady progress in capacity expansion, all indicate an improvement in downstream demand for CATL batteries. CATL's proactive inventory buildup is in preparation for the strong demand season in the fourth quarter.
Dolphin's overall view:
Overall, CATL delivered a good performance this time. Although the unit price slightly decreased, mainly due to the normal fluctuations in lithium carbonate prices, the gross margin significantly exceeded expectations, reaching 31.2%, also setting a new historical high!
Dolphin believes that the reason for the significant overperformance in gross margin lies in CATL's strong industrial pricing power and its strategic choices:
CATL did not lower its gross margin levels to set a lower price compared to competitors (especially for low-end batteries) to quickly gain market share and eliminate outdated capacity. Instead, CATL focuses more on creating differentiated product attributes through high R&D investment to obtain pricing power, continuously increasing the proportion of mid-to-high-end batteries in the product mix, steadily expanding market share, while maintaining gross margin and profit margin levels
And regardless of the actual known results - Ningwang's domestic power battery installed capacity market share is steadily increasing, or from the prior indicators - Ningwang's third-quarter capacity utilization rate has increased month-on-month - behind this is the high growth in third-quarter production, with some inventory backlog (inventory indicators also showing high growth), used to cope with the high growth market demand in the fourth quarter), as well as Ningwang's accelerated capacity expansion (capital expenditure increased month-on-month), all confirming the improvement in downstream demand and Ningwang's successful strategic choices (steadily increasing market share, while maintaining or even increasing profit margins).
The main text is as follows:
I. Overall Performance: Slight decline in unit price in the third quarter, but record high gross profit margin!
In the third quarter of 2024, quarterly revenue was 92.3 billion, a 12.5% year-on-year decline, but the main reason for the year-on-year decline is that under the price linkage mechanism, the downward transmission of raw material lithium carbonate prices to the battery end led to a decline in unit price, while actual shipments still increased by 27% year-on-year, so Dolphin focuses on the changes month-on-month.
Revenue in the third quarter increased by 6% month-on-month, mainly due to the increase in battery shipments (a 15% increase in shipments), and in terms of the battery prices that the market is most concerned about, this quarter's battery unit price (including power and energy storage) was 0.63 yuan/wh, only a 4% decrease from the 0.66 yuan/wh in the second quarter, with a small decrease. Due to the relatively stable shipment structure of Ningwang this quarter, Dolphin's basic judgment is that the downward trend in battery prices this quarter is a normal fluctuation following the downward trend of raw material lithium carbonate prices, which also basically aligns with the current market trend of battery prices.
However, what is particularly impressive in terms of performance this quarter is that Ningwang's gross profit margin reached a new high! In the third quarter, Ningwang's overall gross profit margin was 31.2%, an increase of nearly 5% compared to the previous quarter. Ningde Times' explanation for this performance is:
The increase in gross profit margin this quarter is mainly due to Ningwang's consistent unit gross profit stability, but as unit prices decline, the overall gross profit margin is actually increasing (gross profit margin = unit gross profit / unit price). This is also what Dolphin has observed since 2023, despite the significant decline in upstream raw material lithium carbonate prices, Ningwang's unit gross profit has been maintained at around 0.22 yuan/wh, basically not fluctuating with the fluctuation of upstream raw material prices.
Behind the maintenance of stable unit gross profit, Dolphin believes it mainly comes from Ningwang's strong industrial bargaining power:
a. As Ningwang disclosed that the proportion of BOM in production costs accounts for 80% of sales costs, and the scale effect from the production end due to the increase in shipments (mainly corresponding to the reduction in unit depreciation/amortization) has a very small impact on the cost side (less than 1% this quarter), so the focus on the cost side still comes from the procurement prices from upstream
b. As for downstream car companies, the embodiment of Ningwang's bargaining power is more from the importance of batteries to the entire vehicle - whether consumers consider batteries as a core factor affecting their purchasing decisions (which is also the reason why Ningwang introduced CATL Inside to the consumer end), and how much differentiation Ningwang's provided batteries have, in order to gain a higher battery premium ability compared to competitors.
Currently, Ningwang's battery unit price is still significantly higher than its competitors in the case of severe oversupply of batteries, which also indirectly reflects that Ningwang's battery products still have a certain degree of differentiation due to high R&D investment.
With a gross margin of over 30%, it also reflects Ningwang's strategic choice: not to quickly seize market share by compressing its own gross margin level to set a lower price compared to competitors (especially for low-end batteries), clearing out outdated production capacity, but rather focusing on creating product differentiation through high R&D investment to gain premium ability (such as Kirin batteries/Shenxing batteries), and continuously increasing the shipment proportion of mid-to-high-end batteries in the product structure (as disclosed in the conference call, Kirin/Shenxing batteries accounted for 30-40% this year and will account for 70-80% next year), steadily expanding market share, while maintaining gross margin and profit margin levels.
II. Shipments increased by 15% month-on-month, market share basically maintained
Looking at the shipments for this quarter, a total of approximately 126.5 GWh were shipped in the third quarter, an increase of 15% compared to the previous quarter, with approximately 95 GWh of power batteries and 32 GWh of energy storage batteries shipped, maintaining a similar proportion to the previous quarter.
In terms of Ningwang's market share of power battery installations, CATL's market share in China steadily increased to 45% in the third quarter, mainly due to the rebound in Ningwang's market share of mid-to-high-end ternary lithium batteries (from 65% in the second quarter to 69.5% in the third quarter), taking away some market share from second and third-tier manufacturers, while the market share of lithium iron phosphate batteries remained basically the same as the previous quarter.
Looking at the global market share of installed batteries, Ningwang's global market share declined in July and August, mainly due to the decrease in overseas installations, more constrained by the hindered increase in overseas penetration of electric vehicles (USA/Europe) and policy impacts (USA imposing tariffs on power batteries/Europe imposing tariffs on Chinese new energy vehicles)
From the shipment performance of Ningwang's energy storage batteries, the demand growth rate of energy storage batteries continues to outpace the demand growth rate of power batteries (the proportion of energy storage batteries in Ningwang's product structure has increased from the original 20% to 25% in the third quarter). The main source of this growth still lies in the strong demand from overseas large energy storage, but attention needs to be paid to changes in US policy (whether there will be additional tariffs on Chinese exports of energy storage batteries to the US after the US election).
III. Inventory growth is high, but capacity utilization is also increasing - reflecting improvement in downstream demand
After the disclosure of Ningwang's third-quarter performance, there are still some "concerns" in key indicators, but Ningwang has provided reasonable explanations:
① Most critical: High increase in asset impairment - mainly due to cautious provision for the decline in lithium carbonate prices
In the third quarter, Ningwang again recognized an asset impairment loss of 4.7 billion, a magnitude even higher than that of the fourth quarter of last year. The market is most concerned about the high increase in inventory impairment, especially the high increase in impairment of finished goods/in-transit goods inventory - reflecting the possibility of further significant price declines in batteries.
In terms of the actual situation this quarter, of the 47 billion asset impairment loss, only 230 million came from provisions for inventory write-downs, while the remaining approximately 45 billion came from long-term asset impairments (fixed assets/construction in progress related to lithium mine resources, intangible assets - mining rights), and these long-term asset impairments are related to mineral resource assets, in other words, assets directly linked to lithium carbonate prices upstream.
The company's explanation is based on the principle of prudence, and the impairment in the third quarter this year is based on a lithium carbonate price of 70,000 yuan/ton (compared to the company's calculation based on a price of 150,000 yuan/ton in the fourth quarter of last year).
As the space for further decline in lithium carbonate prices is limited, it is expected that the impairment of long-term assets related to lithium carbonate in subsequent quarters will also basically decline, with little impact on the financial statements in the future.
If this portion of the asset impairment loss is added back this quarter, the quarterly net profit attributable to shareholders would exceed 17 billion yuan, exceeding market expectations, mainly due to the improvement in Ningwang's gross profit margin.
② Inventory growth is high, while capacity utilization is also increasing - reflecting improvement in downstream demand
In the third quarter, Ningde Times' inventory was 55.2 billion, a 15% increase from the previous quarter's 48.1 billion, and Ningwang explained that this was due to full downstream demand, the company's proactive inventory preparation, and the inventory structure consisting more of finished goods and goods in transit, in preparation for the peak season demand in the fourth quarter.
Combined with the saturation of production capacity in the third quarter (output/actual production capacity), which increased by about 10% compared to the second quarter (production capacity utilization rate of about 80% in the third quarter), as well as a capital expenditure of 7.4 billion yuan this quarter, a 10% increase from the previous quarter, indicating that capacity expansion is steadily progressing - all indicating that downstream demand for Ningwang's batteries is starting to improve, which is a positive signal
③ Expected Increase in Liabilities
It is estimated that the liabilities for this quarter will be 65.4 billion, an increase of 6.2 billion compared to the previous quarter. It is expected that 3 billion will be for warranty deposits and 3.2 billion for sales rebates. The increase in warranty deposits is due to the need for more sales and operations for overseas battery products, resulting in a corresponding increase in warranty deposits. The sales rebates (as a deduction on the income side) are funds returned to downstream customers by the company based on a price linkage mechanism. Due to the continued decline in lithium carbonate prices, the provision for sales rebates is expected to increase.
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Summary of financial report conference call on August 24, 2022: "Battery Profit in the Second Half of the Year Will Not Be Worse Than the Second Quarter"
Overview of the power battery sector on May 20, 2022: "The Collapse of New Energy, Are We at a Divergence in Investment?"
Financial report review on April 30, 2022: "Performance Thunder Strikes as Scheduled, Is the Era of the King of Ning Coming to an End?"
Financial report conference call on April 30, 2022: "The King of Ning is Unconcerned About Performance Thunder, Market Share and Customer Structure are the Core Observational Indicators"
Financial Report Review on April 22, 2022: "Loose sentiment kills valuation, Ningde Times welcomes dual considerations of profit and confidence"
Financial Report Review on October 28, 2021: "Facing the excellence of Ningde Times, should we still fear valuation?"
Financial Report Review on August 25, 2021: "Ningde Times: Investment is not just a distant story, but also current performance"
Company In-depth Analysis on July 14, 2021: "Ningde Times (Part 2): Is faith building a 'rigid foam'?"
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Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure
