Ningwang: Is a perfect comeback expected? Having a strong foundation is the key.

Ningde Times: Is Wealth the Key to Perfect Reversal?

On the evening of April 20, 2023, Ningde Times released its Q1 2023 financial report. Compared with the generally pessimistic market expectations, Ningde Times can be said to have achieved a "perfect reversal":

1. In Q1, Ningde Times' revenue was 89 billion yuan, a year-on-year increase of 83%, and its net profit attributable to its parent company was 9.8 billion yuan, a year-on-year increase of nearly six times. However, the explosive growth on a year-on-year basis is largely due to the low base caused by the high rise of lithium mines and the implementation of metal price increase linkage mechanism last year.

2. If we look at it from a quarter-on-quarter perspective, Ningde Times still performs well: Revenue fell by 25% quarter-on-quarter, but based on the company's communication that Q1 shipments were over 70 GWh (which means a quarter-on-quarter decline of 25%-30%), it is implied that the single-unit price of power batteries did not drop due to the collapse of lithium carbonate prices under the metal linkage pricing mechanism.

3. Even more impressive is the firm profit performance: Gross profit margin was 21.3%, which is slightly lower than Q4's 22.6%, but the decline is not obvious, especially considering that there is still a considerable amount of lithium battery material income with a significant decline in unit price in Q1's revenue.

4. The inventory value is not exaggerated: There were concerns that with a lot of inventory in the previous quarter, the market was worried that the asset impairment might be severe as the price of lithium carbonate fell heavily. However, the actual impairment was 1.1 billion yuan, only accounting for 1% of revenue, which is less than that of Q4.

5. The three expenses are stable: R&D expenses increase rigidly, while administrative and sales expenses vary with revenue. However, overall trends show dilution effects due to fast revenue growth, and Q1's overall performance is not significantly different from that of the past.

6. As there are many main-related factors in net profit attributable to shareholders, such as investments and subsidies, Dolphin calculated an independent profit indicator - the core operating profit (revenue - taxes and surcharges - three expenses - asset/credit impairment), which was 8.5 billion yuan, with a profit margin of 9.6%. The difference from Q4's 10.4% is not significant.

This performance is almost perfect, but Dolphin's core question is how this perfect performance was achieved and how sustainable it is. After all, according to third-party statistics on Q1 sales, Ningde Times' data does not look so perfect:

In Q1, its domestic market share of power batteries fell by nearly five percentage points to 44.4%, and the industry's growth rate was only 28%, corresponding to a quarter-on-quarter sales growth rate of 40% for Ningde Times. Moreover, according to SNE's statistics on global power battery shipments, Ningde Times' market share in the first two months of this year has declined by more than 6 percentage points compared with Q4 last year.

So how did Ningde Times exceed expectations? Dolphin speculates that there may be two major reasons:

(1) Inventory Appears to Be Realized Income?

1. Has the inventory been issued? Based on the company's communication and sharing, they specifically consumed inventory in the first quarter, controlled production capacity utilization, and had 76.7 billion inventory in the fourth quarter, which dropped to 64 billion in the first quarter.

It can be observed from the inventory that the proportion of goods issued in the fourth quarter reached 29.3 billion, which accounted for nearly 35% of the first quarter's revenue of 89 billion, and this part of the inventory was most likely settled at lithium carbonate prices in the fourth quarter.

1. Has the inventory been invoiced? The second largest type of inventory in stock should be finished products that are ready for sale, although they are still in warehouses of Ningwang, it is not ruled out the possibility that some of them have just come off the production line, have been invoiced, and the settlement price has already been fixed.

2. Moreover, it can be further seen from the inventory structure that the main raw materials corresponding to lithium carbonate are the real assets that need to be devalued, and the proportion of raw materials is 4.7 billion, it seems that the amount of advance stocking is not that large.

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(2) Bargaining Power of the Industrial Chain: Ningwang and Client Mainframe Factories usually settle accounts by means of metal linkage pricing. Reference to the price of main raw material like Lithium Carbonate's spot for the previous month, price reductions have a certain delay in transmission; Fund procurement is shortened and priced at monthly prices; At the same time, if the turnover of goods is fast enough, its cycle of collection, production and sales may bridge the gap it creates in settlement differences of raw materials procurement and sale.

Moreover, from the contractual liabilities at the end of the first quarter, after the reduction of inventory, the contractual liabilities were still reaching an all-time high, implying that subsequent orders should not be bad.

Dolphin's view:

In the previous financial report, Dolphin emphasized that Ningwang might reach the strategic adjustment of "from guarding gross margin during the supply shortage to guarding market share during the release of demand-supply" this year, which may accompany the decrease in gross margin visibility.

However, judging from the first-quarter performance of two industry-leading companies, the freezing of downstream mainframes represented by Tesla's gross margin loss was alarming, but the coldness of the battery industry leader seems to be not so apparent. However, is it that the Ningwang time hasn't come yet or that the barriers are too high to arrive?

In Dolphin's opinion, the first-quarter performance of Ningwang mainly conveys two messages:

(1) Ningwang is financially stable, holding a considerable amount of orders and goods in progress with the prices fixed, which makes at least the first quarter's performance of Ningwang not deeply affected; This part of the sustainability is not necessarily strong.

(2) However, Ningwang is still very powerful in terms of industrial chain status.

But the impact is not non-existent. Whether it is the Lithium Mine Rebate that was previously released or the information passed in the telephone conference about adjusting production volume and controlling inventory, it implies that Ningwang's adjustment has already started. And from an industry perspective, the growth rate of domestic power battery shipments has been synchronized with the growth rate of new energy vehicle sales, and may even be lower than the growth rate of new energy vehicle sales because of the increased proportion of low-energy plug-in hybrid vehicles.

In the first quarter, the growth rate of domestic new energy vehicle sales was 30%. Without policy stimulus, the growth rate of power batteries may also be in the range of 30-35%. However, in the first quarter, Ningde's market share in the field of power batteries still declined.

To achieve a growth rate of 45%-50%, it probably means that Ningde's global market share of power batteries must at least keep pace with the industry growth rate, while energy storage batteries must continue to grow rapidly. This is somewhat difficult, but if we discount the company's shipment guidance for the year to 410-420GWh, the corresponding growth rate is still 42%, which is not bad.

But the key issue here is how the unit battery income and unit profit may decrease when there is excess battery production capacity and a decrease in the price of lithium carbonate.

From a valuation perspective, Ningde's PE for 2023 is only 21 times, which seems cheap. However, considering that the impact of short-term inventory in transit has weakened and that the following risks of competition have not been eliminated, Dolphin believes that Ningde's investment value at this stage should still be cautiously evaluated.

For more analysis on Ningde Times by Dolphin, please click the links below:

March 9, 2023 Financial Report Review "Ningde Times: Car Manufacturers Cry, Batteries Laugh, How Far Can You Go With This Kind of Money?" (Chinese)

March 9, 2023 Conference Call Summary "Ningde Times: 'The current gross profit margin is at a reasonable level' (summary)" (Chinese)

October 22, 2022 Financial Report Review "Ningde Times is Popular Amongst Analysts, Next Year Will Test Its True Strength" (Chinese)

October 22, 2022 Conference Call Summary "Lithium prices will fall next year, and the penetration rate of new energy vehicles will be faster than expected" (Chinese) On August 24th, 2022, Financial Report Review "Ningde Times: Minor setbacks are just interludes, YYDS is the main theme".

On August 24th, 2022, minutes of the Financial Report Telephone Conference "The profit of power battery in the second half of the year will not be worse than that in the second quarter".

In May 2022, Power Battery Sector Overview "Collapsing New Energy, Investment Disagreements?".

On April 30th, 2022, Financial Report Review "Performance thunder as expected, is the era of Ning Wang coming to an end?](https://longbridgeapp.com/topics/2459716?channel=t2459716&invite-code=276530)".

On April 30th, 2022, Financial Report Telephone Conference "Ning Wang does not care about performance thunder, market share and customer structure are the core observation indicators".

On April 22nd, 2022, Financial Report Review "Loose morale kills valuation, Ningde Times welcomes the dual examination of profitability and confidence".

On October 28th, 2021, Financial Report Review "When facing YYDS Ningde Times, should we still be in awe of valuation?".

On August 25th, 2021, Financial Report Review "Ningde Times: Investment is not just a distant story, there are also current performance".

On July 14th, 2021, Company Deep Dive "Ningde Times (II): Faith Builds "Rigid Bubble"?". On July 7th, 2021, the company published an in-depth article entitled "Ningde Times (Part 1): Where does the confidence of trillion-dollar market value come from?".

Risk Disclosure and Statement for this Article: Dolphin Research's Disclaimer and General Disclosure