CATL: While automakers cry, battery companies laugh, how far can we go with such profits?

On the evening of March 9th, 2023, CATL announced its 2022 annual performance results. The key information is as follows:

1. CATL’s revenue in 2022 was 328.6 billion yuan, lower than the market expectation of 333.4 billion yuan, mainly due to lower-than-expected revenue in the fourth quarter. If further examined, it should be mainly due to the slightly lower-than-expected sales of power batteries (100GWh) in the fourth quarter. Most expectations put this number at or above 105GWh.

2. As the net profit of the parent company has already been disclosed, the actual annual net profit of 30.7 billion yuan is close to the upper level of the previous performance forecast. Breaking it down, in the context of high lithium ore prices in the fourth quarter and the fact that most new energy players lose money when selling cars, CATL was able to stand out on its own, which is the key reason for exceeding profit expectations. This is mainly due to the increase in profit margin contributed by the improvement in gross profit margin.

3. As for cost rates, except for the obvious dilution effect brought by the increased research and development expenses due to the income growth, sales and administration expenses in the fourth quarter were not very obvious. Furthermore, if we look at CATL’s business expansion, expenses such as logistics/back-office fees have obviously exceeded the income growth. We can pay attention to whether there is room for improvement later.

4. The worrisome issue in 2023—Market share vs. Profit margin: By the end of 2022, the cumulative production capacity and under-construction capacity of CATL had reached 54 billion yuan. Based on the relationship between capacity, production, and sales volume in the past two years, it is estimated that CATL's lithium battery sales volume in 2023 can reach around 450GWh; with the capacity bottleneck alleviated, coupled with the space available to BYD and second-tier battery brands in the second battery factory supply, CATL's domestic market share in 2023 is likely to gradually remain stable.

5. Outlook for the first quarter: "No expectations" in one sentence. It is a fact that the sales volume of new energy vehicles has declined in January and February, and even fuel vehicles, whose survival situation is worse, cannot stand their ground and enter the ranks of price reduction. This will affect the short-term recovery of sales of new energy vehicles, and thus drag down the shipment of power batteries.

Overall Viewpoint of the Analyst: Through the year-end performance forecast, CATL has already announced its impressive net profit in the fourth quarter, which has created a profit guarantee. The key to this financial report is to see the quality of excess profits and whether the excess comes from revenue or profit margins.

From the results, the profitability quality is indeed good, mainly derived from the improvement of gross profit margins. With its industry chain position, CATL transfers the upward cost pressure of battery materials to upstream and downstream. While most pure EV OEMs are losing money selling cars, CATL's gross profit margin is stable and has even increased.

But the question is whether such marginal increment can be included in the future performance expectations. Although the "lithium ore rebate" offered by CATL can guide lithium ore prices downward, it is obviously also an indication that, in the context of the capacity bottleneck being opened, the competition has begun to move towards gaining market share. And, at the beginning of this year, the subsidy exit, weakening demand, and supply release formed a trilogy. Tesla's aggressive price reduction did not bring much increase to the overall market, but clearly squeezed the delivery volume of domestic new energy counterparts, while also leading to more tragic price cuts for fuel vehicles.

Under the logic of weak overall demand, perhaps a rapid decline in lithium ore prices can reduce the pressure on price warfare to some extent, but the supply release + weakening demand will double hit. Even if the predicted winner is Ning Wang, the bloodshed process will significantly reduce the gross profit margin visibility.

Moreover, the market is currently offering prices for Ning Wang's 2023 revenue and net profit margin that are significantly higher than those for 2022. A possible directional strategy adjustment has not been fully priced in for Ning Wang's 2023: from maintaining gross profit margins during the supply shortage to maintaining market share during the supply release.

The following is the text:

First, the host manufacturer cannot withstand the pressure of lithium prices? Ning Wang relies on sequential pricing to go it alone.

Overall: In 2022, the full-year revenue was CNY 328.6 billion, which is slightly lower than the market's consensus estimate of CNY 333.3 billion; of course, since Ning Wang announced its stunning full-year net profit of CNY 29.1-31.5 billion in early January this year, a strong net profit foundation means that lower revenue only indicates a good performance in terms of profit margin.

In fact, the total net profit for the year was CNY 30.7 billion, which is close to the upper end of the forecast. The truly marginal incremental information: the fourth-quarter revenue was CNY 118.3 billion, a year-on-year increase of 107%; the net profit was CNY 13.1 billion, a year-on-year increase of 61%; this means that the overall performance of the fourth quarter was mediocre in terms of revenue performance but exceeded expectations in terms of profit margin, releasing additional profits.

Breaking down the source of the better-than-expected profit margin reveals that the lifting of the profit margin mainly stems from the lifting of the gross profit margin. Previously, the company explained the decline in the third quarter's gross margin rate, saying that the cost of power batteries has been traced back according to the vehicle model, and last year's overall adoption of a sequential pricing mechanism has brought additional gross margin rate recovery, therefore, the third quarter's gross margin rate was normal.

These two factors-high lithium prices and the company's previous guidance-are probably the key reasons why the market generally estimated the fourth quarter based on the third quarter as a reference. But clearly, the fourth quarter was not like that. The core profit margin rate in the fourth quarter (only considering the three expenses, not the interest expense caused by the choice of financing structure) was four percentage points higher than that in the previous quarter, and even higher than that in the second quarter.

Although the price of carbonate lithium in the fourth quarter once surged to CNY 560,000/ton, the price-linkage mechanism smoothly transmitted the pressure of the price increase of carbonate lithium to the entire vehicle factory. For the electric vehicle host manufacturers that Dolphin cares about, such as Nio, the profit margin rate is directly flat. On the three major expense ratios, except for the R&D expense ratio which was significantly offset by the increase in revenue, the leverage effect on the management and sales expense ratios was not very noticeable in the short term in Q4.

But based on the detailed breakdown of the annual three expenses, Dolphin is surprised that the logistics/office expenses with a cost contribution of more than 10%, which should release operating leverage and can grow rapidly. In 2022, it increased by 165% year-on-year, surpassing the 150%+ growth rate of the same period's revenue.

This may be related to the company's rapid expansion, but according to media reports, Ningde began to reduce costs and increase efficiency in 2023, requiring employees to take mandatory weekends off and not work overtime. After the growth slows down in 2023, it is worth paying attention to the cost reduction space of Ningde in sales and management expenses.

In addition, in the last two quarters, due to the significant appreciation of the US dollar, the company has nearly RMB 160 billion cash and cash equivalents containing foreign currencies. Both interest income and exchange gain were significant, resulting in finance costs being actual finance earnings in these two quarters. In Q4, the net profit was RMB 1 billion, but it was non-operational earnings and did not provide significant assistance to the long-term expectations of the capital market.

Secondly, although the gross profit margin has been mentioned, the follow-up is still a question mark.

The most critical information conveyed in this financial report is that Ning Wang used his industrial position to maintain the company's profitability as scheduled in the entire industrial chain, but how to perform next is a more critical issue. Dolphin observes this problem from two aspects:

1. NIO said in the recent Q4 earnings conference call: "We have communicated with upstream companies and learned that lithium demand will not be as greatly exceeded as last year. The price of lithium carbonate in Q4 is expected to drop to RMB 200,000."

2. Ning Wang's "knack" - lithium mine rebate: provide a settlement price of RMB 200,000 for lithium mines to key strategic customers to lock in the procurement volume of Ning Wang batteries.

Looking at these two issues together: On the one hand, after the slowdown in new energy vehicle sales this year, the natural slowdown in power battery installations has led to a drop in lithium mine prices, while on the other hand, Ning Wang has the confidence to make short-term concessions with the imminent launch of the Yichang lithium mine, which has affected the market's profit margin expectations for Ning Wang.

Batteries are almost the most core component of electric vehicles, and supply chain security is of utmost importance. The determination of automakers to introduce secondary battery suppliers is relatively high, but the three-year view of lithium mine prices is not clear, and prices may drop below RMB 200,000. Therefore, many automakers have a lukewarm response to this rebate policy.

In fact, in Dolphin's view, under the weakening demand for car purchases at the beginning of the year, Ning Wang's RMB 200,000 lithium mine prices set early on for the downward expectations of lithium mine prices to a certain extent undermines speculative behavior, causing the lithium mine price to decline ahead of time. According to media reports, some domestic traders who hoarded goods and speculated began to dump their holdings, hitting the speculative mentality of raising prices for overseas lithium mine auctions.

At least from the results, the effect is approaching regardless of whether a host factory has signed the agreement with Ning Wang: After the news was revealed, the trading price of lithium mines quickly fell, from 450,000 in early February to 360,000 now, mainly because some upstream material suppliers began to reduce their prices.

In the entire industry chain in China, the output of lithium mines is mainly in Australia, and the production capacity and shipments of batteries and electric vehicles are in China. Rapid decline in the price of lithium mines is actually beneficial to the repair of domestic industrial chain profits, at least when the price of lithium mines drops, a price war will not be too hurtful.

However, even if the price of lithium carbonate drops, it does not have much effect on Ningde Times in the first quarter. It has been locking in prices with a long procurement period. The price of lithium carbonate in the first quarter dropped from 560,000 to the current 360,000, and Ningde cannot benefit.

How the follow-up gross profit margin will be after the first quarter is still a difficult question to judge: Although after the price drop of lithium mines, the cost of electric vehicle manufacturers' price war will be lower, the industry carries an obvious butterfly effect - after Tesla's price reduction and subsidy exit, sales plummeted, and domestic joint venture brands of gasoline vehicles also began to throw into the price war mode, further increasing this year's competition expectations.

On the chain of domestic batteries, with the gradual release of industry capacity, Ning Wang's market share anxiety should become increasingly obvious: In the field of power batteries, Ning Wang's shipments still occupy a considerable portion, but the market share of main competitor BYD batteries continues to rise and will have external supply in the future. Meanwhile, some "strategic" customers in Ning Wang's view are almost determined to introduce secondary supply.

In the current situation where Ning Wang's own capacity is also being released (the existing production capacity in 2022 is close to 39GWh, and there is also more than 150GWh production capacity under construction. The capacity utilization rate is currently at a reasonable level of 83%), Ningde Times does indeed have stronger motivation to maintain its market share this year rather than profitability logic under supply last year.

If the overall idea for 2023 is to maintain market share, sacrificing a certain gross profit margin is a normal choice, and based on the current unanimous market expectations: In 2023, revenue is expected to reach 450 billion Chinese yuan, with a net profit of 45 billion and a profit margin of 10%, exceeding 9.4% in 2022. It seems that the scenario of defending Ning Wang's domestic market share has not been considered yet. **

Looking back to the company's gross margin reorganization in 2022, the power battery business, which accounts for 70% of the company's revenue contribution, has the most significant decline. Its gross profit margin dropped from 22% directly to 15%, down 5 percentage points, mainly due to the too low gross margin in the first quarter of last year.

In fact, energy storage is also a lithium battery, and the cost structure is basically the same as that of the power battery. However, in terms of cost conduction, due to the project-based structure, the conduction is not as fast as that of the single vehicle, so the gross profit margin decline is even faster in the short term.

Third, overseas market: the horn of attack sounded for a long time

Ning Wang is quite competitive in the domestic market, but currently, the overseas market is basically unbeatable. According to SNE Suju, Ningde Era's global power battery shipments increased by one level in the fourth quarter, surpassing 40% for the first time.

Under the situation where the domestic market share is basically stable, the rapid increase in market share is mainly due to the rapid increase in market share among overseas customers. The overseas market share has gone from 22% in the third quarter to almost 30%.

Since 2022, in addition to its original customer Tesla, the company has also signed contracts with many overseas large customers, such as Ford, BMW, and Toyota, planning about 140GWh in Europe and Indonesia.

Among them, the company has a comprehensive strategic cooperation with Ford. It will build a plant with Ford in the United States (which still needs domestic regulatory approval), Ford owns 100% equity, and Ningde Era is the actual operator of the plant and owns the battery manufacturing technology. At the same time, from 2023, the company will supply LFP battery packs to North American Ford.

Corresponding to the second half of 2022, Ningde Era's overseas revenue doubled (including energy storage) compared to the first half of the year, and the contribution rate of overseas markets to revenue directly increased by five percentage points.

Moreover, compared with the domestic market, the gross profit margin of overseas customer business has always been higher. In the second half of 2022, the gross profit margin of overseas business was 24%, while that of the domestic market was 23%.

** Section 4. The first curve power battery: No more capacity bottleneck, market share becomes increasingly important

As disclosed by the company, the sales volume of lithium batteries in 2022 is 289 GWh (of which the fourth quarter is 100 GWh, which is basically in line with market expectations); the sales volume of power batteries is 242 GWh, a year-on-year increase of nearly 110%.

In terms of production capacity, the company's existing capacity has reached 390 GWh, and there is 152 GWh of capacity under construction. This means that by the end of 2023, Ningde will not only complete the construction of all 140 GWh under construction by the end of 2022, but also 80 GWh in the new projects of 2023. Compared with last year's output of 325 GWh, it means that the bottleneck of production capacity in 2023 has become smaller and smaller.

Assuming a similar hypothesis for 2023: 3.9 million existing production capacity + 152 GWh of capacity fully put into production by the end of the year + 80 GWh, then the corresponding inventory production capacity will be at least 620 GWh by the end of 2023.

According to the same capacity utilization rate, the corresponding production volume is at least 520 GWh, so the corresponding sales volume of lithium batteries is expected to reach about 450 GWh, a year-on-year increase of nearly 60%, and the growth rate is still considerable.

In addition, with the growth of power battery installation rate by 110%+ and the rise of battery prices, the revenue of Ningde Times' power battery business in 2022 is close to 240 billion yuan, a year-on-year increase of nearly 160%. The second half of the year is still growing at a high rate despite the high base in the same period last year, with a year-on-year growth rate of 150%.

Section 5. The second curve: Infinite space for energy storage

According to SNE data, the global shipment volume of energy storage batteries in 2022 is 122.2 GWh, a year-on-year increase of 175.2%, and the global market share of Ningde Times has reached 43.4%, an increase of 5.1 percentage points from the same period last year, ranking first in the world for two consecutive years.

The company claims to have sold 47 GWh of energy storage batteries, a year-on-year increase of 181%, exceeding the market average growth rate. It is estimated that the shipment volume in 2023 may reach 80-90 GWh.

Energy storage revenue for the year is 45 billion yuan, a year-on-year increase of 230%. Looking at the first and second half of the year, the growth rate in the second half is significantly stronger than that in the first half. After the lockdown in the first half of the year, Ningde Times started to sprint all the way in the second half, and the revenue growth rate accelerated from 171% in the first half of the year to 261%. Energy storage profit margin has been explained by Dolphin earlier, so it won't be repeated here.

In addition, the company's financial report this year revealed a new battery mineral resource income segment, with revenue of 4.5 billion in 2022, but a gross profit margin of only 12%. However, the key purpose of this part is to ensure self-resource quality and supply, and the revenue is not significant in the long term.

For more Dolphin's analysis on CATL, please click the links below:

October 22, 2022 financial report analysis " Stars flock to worship CATL, next year is the true test of love"

October 22, 2022 financial report conference summary "Lithium prices will fall next year, and the penetration rate of new energy vehicles will be faster than expected"

August 24, 2022 financial report analysis " CATL: Minor setbacks are just interludes, YYDS is the main theme"

August 24, 2022 financial report conference summary " The profit margin of power batteries in the second half of the year will not be worse than that in the second quarter"

May 20, 2022 power battery segment overview " The collapse of new energy, has the point of investment divergence been reached?"

April 30, 2022 financial report analysis " The performance thunder comes as scheduled, is the era of CATL over?"

April 30, 2022 financial report conference " [CATL is not concerned about performance thunder, market share and customer structure are the core observation indicators](https://longbridgeapp.com/topics/2460152? channel=t2460152&invite-code=276530)》

2022-04-22 Financial Report Comments on "Ningde Times: facing the challenge of declining market sentiment, bringing both profitability and confidence" (https://longbridgeapp.com/topics/2386142)》

2021-10-28 Financial Report Comments on "Facing the impressive performance of Ningde Times, should we still be in awe of its valuation?" (https://longbridgeapp.com/topics/1259347)》

2021-08-25 Financial Report Comments on "Ningde Times: Investment is not just about the future story, but also about the current performance" (https://longbridgeapp.com/topics/1079806)》

2021-07-14 Company Insight on Ningde Times Part 2: "Is belief building a rigid bubble?" (https://longbridgeapp.com/topics/925062)》

2021-07-07 Company Insight on Ningde Times Part 1: "Where does the confidence of a trillion-dollar market value come from?" (https://longbridgeapp.com/topics/913915)》

Risk Disclosure and Statement of this Article: Disclaimer and General Disclosure of Dolphin Investment Research