CATL: Focusing on Energy Storage and Overseas Expansion to Ensure Steady Gross Margin (Summary)

Below is a summary of the financial report conference call for the first quarter of CATL. For the interpretation of the financial report, please click "CATL’s Perfect Reversal Expectations? A Strong Financial Foundation is Key".

I. Company operating performance:

1. Q1 comprehensive gross profit margin was 21.3%, and profitability remained relatively stable. Inventory at the end of the quarter declined to 64 billion yuan; operating cash flow was close to 21 billion yuan. At the end of the quarter, monetary funds reached 210.4 billion yuan, providing abundant cash reserves.
2. Continuous innovation in products. The company continuously promotes the industrialization of new fossil system products such as sodium-ion batteries, M3P, and condensed peptides, launches the third-generation CTP product Kirin battery, CTC structural innovation power products, and promotes research and development and applications of energy storage products with higher safety levels, continuously enhancing product competitiveness.

II. Q&A with analysts:

Q1: What are the advantages and competitive status of the company in the overseas and energy storage markets?

A1: Overseas and energy storage are indeed our two key areas. On the one hand, the growth rate of energy storage itself is also very fast. As you can see, the growth rate of our energy storage business is quite fast this year, and the market share is also high.

Regarding overseas, we saw that our share in Europe reached 31% (as of the first two months of this year), and our share in North America also reached 16%, and our market share overseas is still increasing. It can also be seen as a result of our fixed-point delivery to overseas automakers last time. With the launch and sales of overseas models by this overseas automaker, our share has continued to increase, and our competitive advantage will become increasingly apparent. Its characteristics lie not only in the landing of production capacity but also in the progress of the entire supply chain or technology. Customers also see the advantages and technological advantages of our products, so they will use us more and more, so I think there is still a lot of room for future development overseas.

Regarding energy storage, both in the United States and Europe, whether it is household or large-scale storage, things are moving fast and faster than in the domestic market. So we are not only focusing on large-scale storage, but also on mid-sized batteries and home energy storage, targeting specific segments of the market.

Q2: What new technologies can we look forward to in the future? What are the specific production and progress schedules?

A2: Our Kirin battery has already been put into mass production and landed, and it has been well recognized by our customer Ji Ke 009.

Sodium-ion and M3P will also be launched this year. Sodium-ion has partnered with Chery, and there will be some new customers that will land one after another.

In addition to Ji Ke 009, our Kirin 4C has also received excellent recognition and will be launched on purely electric vehicles in the future. The solid-state battery has mass production capability and is currently being tested in high-end fields. It will also be tested in high-end vehicle models in the future.

Q3: What is the production and sales volume of batteries in 23Q1, and what is the proportion of power storage?

A3: The production and sales of 23Q1 are both at a level of 70GWh+. The proportion of power storage is around 20% and is gradually increasing.

Q4: What caused the decrease of 12.6 billion in inventory in 23Q1? Is it due to higher confirmed sales than production?

A4: It's not entirely accurate to say that, but objectively speaking, due to the market situation, we also had to control the production in the first quarter. We had 70GWh of inventory at the end of last year, so this year, we also had to digest last year's inventory and in-transit goods. Therefore, our production volume in the first quarter of this year will be slightly lower than sales. Some inventory was consumed in Q1.

Q5: What is the reason for Lishen not participating in the capital increase of Ningbo Populux and what is the collaboration with Lishen?

A5: The collaboration with Lishen is good. Not participating in the capital increase is his own strategic decision, and the company's collaboration with him is excellent. We also participated in Lishen's Hong Kong stock placement as a cornerstone investor.

Q6: What is the outlook for production and sales in Q2? How about the unit gross profit?

A6: We feel that the situation is gradually improving as we look at the first two weeks of April. Perhaps many of the enthusiasm in the capital market is focused on AI, but we see that the real economy, including the atmosphere of this auto show, is still very strong. Many automakers have also launched many new models, so we think that the new energy vehicle market will gradually improve this year, and I don't think it's as pessimistic as everyone imagines. Once market demand picks up, the corresponding production will also increase.

In terms of gross profit margin, I don't think Q1 and Q4 are comparable because this industry still has some positive features. But overall, we should still say that the gross profit margin is at a relatively stable level compared to the entire year of last year, and the situation is better. There has been an improvement in the first two weeks of April, and it will continue to get better.

Q8: What will be the pricing strategy in the future? Will pricing changes lag behind material price changes?

A8: We think the gross profit is still relatively stable. The gross profit margin is a formula issue, and I think there may even be a better number calculated. First of all, as mentioned earlier, as the scale grows, the amortization of manufacturing costs will be even more optimistic than people think.

Secondly, the lithium mine rebate plan was originally a commercial plan that was shared with customers. When we released it, the price was 500,000 yuan, so we made a 200,000 yuan arrangement. In fact, many customers really wanted to do it together at that time. As the lithium price fell rapidly, we and our customers continued to negotiate and find a win-win solution. Q8: How do you judge the annual growth rate?

A8: The penetration rate of new energy vehicles itself is already over 30%. It can be said that this trend is very clear - basically, oil-powered cars will slowly have to exit the market. Whether the growth rate will finally be 50%, 55%, or 60% for the year or 9 million or 8.5 million, I think from our perspective, this is not a very short-term concern, but we will always track the market situation to do our production scheduling, including communication with customers and related strategies. However, I think the overall trend is very clear.

The second is energy storage. In fact, energy storage growth is still expected to be higher than power from the current perspective, because the market size is smaller, it will be higher, and will last for a period of time.

Q9: What is the proportion of other business income in Q1? What is the proportion of profit?

A9: The proportion of other business income this year has indeed decreased. Looking at other business income for this year, I think it is basically the same as last year's full-year, but the proportion of revenue or gross profit has indeed declined. In addition, the lithium carbonate price mentioned earlier surprised me a bit, and I didn't expect it to drop so quickly. Other income in Q1 accounted for a decrease of about 2 percentage points; gross profit margin decreased, and gross profit margin remained stable.

Q10: What are the expectations for lithium carbonate prices and destocking strategies? Will inventory be restocked quickly?

A10: With the rise in demand, I think the process of increasing inventory will still exist, and as this demand continues, it may cause prices to stabilize at a certain level, even without excluding certain callbacks. Short-term fluctuations are too large, but in the long run, they will return to a reasonable value level.

Q11: Battery production capacity is sufficient. How do you view the pricing power of car-end customers and battery manufacturers in the future?

A11: What determines the success or failure of a company is not production capacity, but technology, safety, and quality. Downstream, we gradually see the rise of strong brands. This year, whether it is domestic new forces, independent brands, or traditional large factories, all attach increasingly importance to electric vehicles. I think the future competition in this area will indeed become more fierce, so the trend pattern is something we will wait to be seen. The company will work hard to do its own thing and provide good customer support.

Q12: Was the actual price for 23Q1 stable compared to the previous quarter?

A12: Prices for Q1 were adjusted based on changes in material prices, but overall they were relatively stable.

Q13: What is the progress and output of the Fengxin Era Mica Mine in Jiangxi Province? How much lithium carbonate equivalent can it contribute this year?

A13: The progress is smooth, and it will gradually be put into production in the middle of the year. The mica mine has a relatively low grade, so the company uses it as a reserve. If the price of lithium is high, it will be developed more, and if the lithium price is low, it will be developed less. Objectively speaking, the cost of mining is not too high for us, so how much will be produced this year also depends on the situation this year, but I think there is no problem with production capacity. A14: The government subsidies provide rewards for the construction of various bases, and are strictly amortized according to accounting policies on time.

Q1: Some equity investments were disposed of, resulting in higher returns on investment than costs.

Q15: Will you consider layout upstream resources in the future?

A15: To be honest, we didn't originally want to do it ourselves because lithium has brought too much pressure to everyone. Therefore, we will continue to do some lithium resource layout, but with certain choices for locations with better cost percentiles.

However, for some material ends, we are already involved in some cooperation. I think the expansion rate of the material end itself is very fast. We can see that due to the threshold or bottleneck of the material expansion not being very high, this aspect has relatively fast elasticity. Therefore, we may be a little more cautious in this area.

Q16: Considering the pressure faced by upstream materials, what was the source of Q1's net operating cash flow of more than RMB 20 billion?

A16: Q1 of last year was also positive. The main addition this year is to collect money from Q4 of last year, because Q4 of last year sold particularly well. Payment is made for Q1 and Q2 of this year. Therefore, this is a rhythm of more collection and less payment. The cash flow came out like this, and it doesn't need to be excessively amplified. I think this is normal.

Q17: With RMB 200 billion in hand, will you participate in industrial chain companies' private placements?

A17: 1) To reserve resources for future investment, investment in resources and overseas bases, etc.; 2) Moderate retention of relatively abundant cash means more choices and improves our ability to respond to risks; 3) Investment will not be considered for supply chains with low thresholds and weak competitiveness.

Q18: The company is currently the second largest shareholder of Luoyang Molybdenum. Will it seek to increase its shareholding in the future? What is the difference between Luoyang's production capacity and other production capacities? What is the risk of the RMB 10 billion guarantee for Guohong?

A18: The Company does not pursue the position of controlling shareholder of Luoyang Molybdenum. The Luoyang plant is still in the early stages of construction, and the specific product types have not been determined. It will be considered once the equipment selection is finalized. Providing a RMB 10 billion guarantee for Guohong is not a lot. It is to ensure the smooth transition of its debt. Currently, Guohong's credit rating has been upgraded, and it is a state-owned enterprise, with controllable risks.

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