Ningde Times Telephone Meeting: Lithium prices will fall next year and the penetration rate of new energy vehicles will be faster than expected.

On the evening of October 21st, after CATL released its Q3 financial report, Dolphin Analyst followed up with a conference call to summarize the details of the call. Please refer to 《Ning Wang, the star of the stars, will face the real test of love next year》 for interpretation of the financial report.

I. Issues Concerning Profit and Gross Margin:

1）Why did the gross margin decrease slightly in Q3 compared to Q2?

This is because part of Q2 was retroactively adjusted, which will be a one-time event for future adjustments.

2）What was the situation with the energy storage gross margin in H1, and how was it in Q3?

It wasn't very good in H1, and the adjustment mechanism was slow. However, it has now been restored to a level of over ten points, and further repairs will continue. In terms of the energy storage structure, the gross margin is higher for smaller storage volumes, and slightly lower for larger storage volumes.

3）Can the gross margin in Q4 be further improved?

Based on the price adjustment mechanism in H1, Q4 will see further improvements on a quarterly basis, but it also depends on factors such as delivery volume and materials. In general, both power and energy storage are trending towards higher gross margins, and non-core business gross margins are quite high.

4）How do materials other than lithium carbonate contribute to gross margin?

It depends on resources and materials. Financial prices have fluctuated, and capacity will be released on the material side, where there may be supply problems. Lithium carbonate accounts for a higher proportion, while the proportion of other material prices has decreased, and the actual cost has also decreased year-on-year. Prices will also be negotiated with customers, and if materials continue to rise in price, we will also raise prices.

5）Why was there not much growth in profit from interest and foreign exchange gains in Q3, but high growth in shipment volume?

The single Wh gross margin has been significantly repaired, with the gross margin returning to a reasonable level. R&D investment is slightly higher, and the sales expense ratio is not easily reduced due to warranty costs. However, the management expense ratio has significantly decreased, and the overall situation is still good.

II. Revenue Status

2.1) Overseas Business

1）What is the proportion of overseas revenue in Q3, and what is the proportion of USD revenue overseas?

Actually, the difference is not too significant, but overall it is trending upward. Data denominated in USD will be hedged against foreign exchange risk, and corresponding exposure risk is not high.

2）In terms of market share, can you share the impact of the US anti-inflation bill?

The details of implementation and the timing of implementation have not yet been worked out, and the overall assessment indicates that the impact on CATL is relatively limited. The support from US clients for CATL is very strong, and there will be no major changes in growth trends in the US and Europe in the future.

4）What is the order situation and targeted market share in Europe?

The energy storage business has been launched both domestically and overseas, and Europe has a relatively high tolerance for clean energy and prices. Although it is not as optimistic as before due to short-term geopolitical factors, it is expected to grow due to declining electricity prices and new models. According to the contracted agreement with customers, there will be sustained volume increases in the future, but there is no clear guidance on future penetration rates in Europe.

5）What is the order situation for overseas, and which customers are involved? It's hard to say for sure, but the volume of orders from customers is quite optimistic, and the trend shows a clear increase in market share in August. Further improvement is expected in the future.

6) What currency is used to price non-metal prices linked to European customers?

It's not in RMB, but the specific currency used depends on several factors such as USD or EUR. Generally, there is an exchange rate hedging mechanism in place.

2.2) Shipment Volume and New Scenarios

1) What new scenarios will there be in the future?

There will be commercial vehicles, ships, two-wheelers, among others, but the priority is still fulfilling large-scale energy storage supply. Lithium batteries were first used for buses, achieving high penetration rates. Recently, logistics have been highly efficient, and the company is also involved in ships and engineering machinery.

2) Shipment volume: the proportion of power and energy storage, Q4, and next year's trend?

The shipment volume will be disclosed in the annual report, with Q3 being about 90GWh and power/energy storage ratio being around 80:20. The Q4 trend is expected to increase, but there is still uncertainty, with subsidy phasedown at the end of the year, how much growth there will be is related to delivery.

Considering the communication with OEMs, the market penetration rate is optimistic next year. A 30% penetration rate is not unlikely, and it will continue to increase rapidly next year. The energy storage market is currently large.

3) Lithium Mine

1) What is the view on upstream lithium carbonate, and how is the Company progressing?

Currently, there is mainly a supply-demand mismatch, but next year there will be improvement as many projects have emerged. There is an increasing investment into the mining side, with multiple projects in line with the company's expectations. The mining cycle of 3-4 years corresponds to the two pandemics, approval and labor influenced by the last two years of high-priced lithium carbonate.

2) How about self-sufficiency rate of upstream lithium carbonate in the next two years?

Apart from the Jiangxi project, there are also partnerships, equity, and other means of guaranteeing supply.

4) New Technology

1) Progress, technical route, and cost situation of Sodium-ion batteries?

Mass production will begin next year, and clients have been communicating. The first-generation energy density has a gap with LiFePO4, but it is acceptable for some models. The shipment scale depends on the client and the expansion of production capacity and negative profit is relatively fast. The cycle life is inferior to long-life LiFePO4 batteries and is similar to traditional LiFePO4. Its cost is difficult to determine and needs to be determined after mass production.

2) Could you share the progress of the company on the big battery with those of your peers?

Actually, bigger battery capacity isn't always the best approach, but NINGDE TIMES also has reserve on these products, depending on when they can be delivered to clients. NINGDE TIMES also has a superproduction line and a good investment scale for single GWH. Cooperation with Quantum Hi-Tech among others will be relatively smooth, and other clients will come later.

5) Others

1) The authorization of patents in Q3:

In Q3, patents (other business income), the largest portion will still come from ATL, at around USD 150 million per year, which is basically the same as the first half of the year. 2) The reason for the little change in the inventory amount

There has been a change in the inventory structure, and CATL is making optimizations mainly to respond to the fourth quarter delivery demands: Raw materials have been reduced, and there are some finished goods and in-transit goods.

3) The reason for the relatively poor operating cash flow in the third quarter?

The third quarter usually incurs higher costs, with more spending on stocking and procurement. It is recommended to compare it with the annual data.

4) Why is the tax rate lower this quarter?

The income tax is determined according to tax laws and financial policies, and there are differences in the policies chosen by different bases.

5) Why is the interest income growing well?

The main reason is that the financing funds have not been spent, which has contributed to the financial performance.