CATL Summary: "Ningwang" Holds Profit Margin Steadily, New Battery Technology and Overseas Market Progress Smoothly

Management Remarks

Business Situation:

This year, the company has achieved rapid growth in performance by increasing research and development investment and innovation, continuously launching industry-leading product solutions and services.
In the first half of the year, the company achieved a total operating income of 189.2 billion yuan, a year-on-year increase of 67.5%. The net profit attributable to shareholders was 20.72 billion yuan, a year-on-year increase of 153.6%.
Among them, the total revenue in the second quarter was 100.21 billion yuan, a year-on-year increase of 55.9%. The net profit was 10.89 billion yuan, a year-on-year increase of 63.2%.
Research and development investment continued to increase in the first half of the year, reaching 9.85 billion yuan, with a comprehensive gross profit margin of 21.6%, and stable profitability.
Operating cash flow was strong, reaching 37 billion yuan, with abundant cash reserves and a year-end monetary capital of 219.6 billion yuan.

Industry Situation:

Power Batteries

In terms of power development in the new energy industry, with the continuous introduction of high-quality new energy vehicle models and increasing consumer recognition, countries around the world are paying increasing attention to the new energy vehicle market, and the global penetration rate of new energy vehicles continues to rise.
According to data from the China Association of Automobile Manufacturers, the domestic penetration rate reached 28.3% in the first half of the year. Data from the European Automobile Manufacturers Association shows that the penetration rate in Europe in the first half of the year was 21.5%. Data from the U.S. Automotive Innovation Alliance shows that the penetration rate in the first quarter in the United States increased to 8.6%.
The growth of new energy vehicles has driven the rapid growth of power battery demand. According to SN E data, the global power battery usage in the first five months of 2023 was 237.69 GWh, a year-on-year increase of 52.3%.

Energy Storage Batteries

In terms of energy storage, several provinces in China have issued policies to strengthen support, and the number of shared energy storage demonstration provinces continues to increase. Auxiliary service fees are included in the electricity prices for industrial and commercial users, leading to rapid growth in energy storage demand.
In overseas markets, the United States has clarified the details of energy storage investment tax refund policies, significantly improving economic viability. The European Electricity Market Reform Act promotes the inclusion of energy storage in the energy planning of EU countries, stimulating demand growth.

Implementation of Innovative Products

In terms of power batteries, the company's Kirin battery has achieved mass production and installation, enabling new energy vehicles to achieve continuous range of over 1000 kilometers. The 4C Kirin battery has been successfully implemented in the first Ideal vehicle, and the sodium-ion battery will be implemented in the first Chery vehicle. The M3P battery is expected to achieve mass production and delivery within the year. A brand-new solid-state battery has been released, with a single-cell energy density of up to 500 watt-hours per kilogram. The vehicle-grade version is expected to have mass production capability within the year, and application development in civilian electric passenger aircraft is underway.
In terms of energy storage, the company's energy products continue to be shipped in large quantities and upgraded. For example, the energy one plus has further improved energy density and discharging efficiency compared to the previous generation. The company has launched the "Zero Auxiliary Source" integrated solar energy storage solution, promoting the application of energy storage products with advantages such as long lifespan, high safety, and high efficiency.Continuous Increase in Overseas Market Share
In the first half of the year, the company's overseas revenue accounted for 35.5%, a significant increase from 23.4% in 2022. According to SNE data, the company's market share of overseas dynamic batteries usage reached 27.3% from January to May 2023, an increase of 6.9 percentage points compared to the same period last year. Among them, the market share in May was 28.9%, ranking first for two consecutive months. The company's market share in the European power battery market from January to May was 34.5%, a significant increase of 9.3% year-on-year. In May, the market share in Europe was 36.8%, also ranking first for two consecutive months.

Sustainable Development

The company has released a zero-carbon strategy, aiming to achieve core operational carbon neutrality by 2025 and upstream value chain carbon neutrality by 2035. It is committed to becoming the world's first battery industry leader to achieve zero carbon and promote the green and low-carbon transformation of the industry.

Q&A

1. The inventory in the financial report has decreased to 48.9 billion in the first half of the year. Considering the overseas demand strategy, has the inventory reached its limit? Inventory outlook?

Inventory management has been implemented since the second half of 2022, adjusting the procurement and inventory levels according to seasonal changes.
As of the end of June 2023, the book value of inventory was 48.9 billion, consisting of main raw materials/inventory goods/issued goods, a decrease of 35%-36% compared to the end of 2022. This has resulted in more effective inventory management and further improvement in inventory turnover.
The overall inventory level corresponds to the sales level, and sales will increase in the second half of the year. The proportion of inventory to sales is well controlled.

2. With intense competition among domestic automakers, such as Xpeng Motors having many suppliers, what is the outlook for domestic market share and pricing arrangements?

Looking at different regions, the domestic market share has slightly decreased due to the increase in BYD's market share.
However, the growth rate of overseas market share remains stable, with Europe ranking first and the United States second. The market recognition benefits from the designated acquisition by overseas leading automakers.
The domestic market share is relatively stable, accounting for over 60%. The long-term market share depends on the advantage of technological cost. The company has made good progress in the layout of technological research and development resources, steadily increasing sustainable market share.
Market competition is not solely based on price but also on product technology and comprehensive services. In terms of pricing, preferential lithium ore rebates are offered to important strategic customers.

3. Progress in cooperation with Ford?

It is progressing smoothly.

4. Regarding the layout of 4C fast charging? What is the expected market share of 4C next year?

4C Kirin - First launched with Ideal, it has received positive market feedback and has high demand for fast charging. We are currently in discussions with more customers.
4C not only focuses on the battery end but also requires high-voltage fast charging structure in vehicle architecture. It takes time for car manufacturers to design and announce their plans. Over time, more and more car manufacturers are willing to use fast charging as a differentiation.

5. Profitability - 2Q comprehensive gross profit margin has improved, which is relatively rare in the industry. Is it due to a significant increase in gross profit margin in a specific business or a structural reason? What is the outlook for the gross profit margin of power/energy storage batteries in the second half of the year?

2Q gross margin slightly improved due to product structure. Some high-margin projects had higher shipments in 2Q, and the linear forecast indicates stable gross margin for 3Q/4Q. The fluctuation in monthly gross margin is due to changes in shipment structure, but the large shipment volume does not have a significant impact on gross margin, making it relatively stable.
The unit cost of $CATL.CN has been reduced, resulting in a slight increase in gross margin. The gross margin outlook is stable.

6. No pressure on prices? Price linkage changes?

Prices are not the solution to market competition. Currently, a metal linkage pricing system is used.

7. Progress on manganese iron lithium and next year's shipment expectations? Progress on sodium batteries and M3P and other new technologies?

Customers' announcements and adoption are ongoing. Some heavyweight customers are using the products, but the specific sales volume for each model is uncertain. Sodium batteries, M3P, and solid-state customers are interested, and they can all be mass-produced this year. Currently, in the market situation, car manufacturers are looking for differentiated solutions, and the company can provide a complete set of products for segmented markets. The sales volume depends on the pace of the car companies.
The company is also iterating its products. It is not only about launching new technologies ahead of time but also about cost competitiveness and comprehensive performance. It is difficult to determine the degree of leadership, but the company is the fastest supplier in the industry to introduce new technologies. However, specific validation from the market is still needed.

8. Changes in business/product categories, no other businesses, how does it correspond to last year's segmentation?

The disclosure of materials/battery mineral resources began in last year's annual report. The reason why it is not seen in this year's semi-annual report is that the semi-annual report requires the disclosure of businesses accounting for more than 10%. Other businesses have decreased in proportion.

9. The capacity utilization rate has dropped slightly. In the past, it was over 80%, but now it is only over 60%. Does it have a negative impact on gross margin? Is the expansion of production capacity slowing down?

The first half of the year is relatively off-peak, so the capacity utilization rate will be slightly lower.
In the past, the capacity reserve was sufficient, and after the new production line came out, the cost would continue to decrease in the second half of the year due to the "super pull line." The speed of the super pull line is three times that of traditional lines, which is beneficial for future manufacturing costs. The cost will further decrease. However, it currently has an impact on manufacturing expenses in 1H22, but the impact is not significant, and it will consolidate its long-term competitive advantage.

10. Overseas business revenue has doubled. How is the progress of the German factory and the Hungarian factory in terms of mineral resource layout?

The German factory started production last year and is gradually ramping up its capacity. The Hungarian project is progressing smoothly but on a larger scale, so it will take time.

11. Mineral resources - Progress of the Jiangxi mine and the range of lithium carbonate conversion?

At the end of last year and the beginning of this year, the equity of the Sichuan project was acquired. The Yichun project is steadily progressing and has been completed, and it will be put into operation soon.

12. Rebate situation for lithium mines?

Some customers have signed agreements, and communication with other customers is ongoing. The progress is smooth.13. 1H Shipment Volume - Power/Energy Storage Batteries?
Over 170GW, starting from 8/2.

14. Regarding the U.S. market, there is a lack of battery material production capacity. How do we view the necessity of the U.S. market? What are the problems and bottlenecks faced by the U.S. market? When can the U.S. market be opened?

The U.S. IRA policy aims to attract the industry chain to the U.S., but it is not as easy as it seems. The establishment of Korean factories in the U.S. has also faced difficulties due to high and complex costs in the U.S.
The progress of the innovative model discussed with Ford is smooth, but it involves aspects such as production, supply chain, and personnel. The progress so far has exceeded the company's expectations.

15. Volkswagen Guoxuan's factory construction, a similar plan?

Many companies in the U.S. are discussing cooperation models as there is no advanced power battery production capacity in the U.S. First secure Ford, then expand to others. Many customers have a strong willingness towards Ningde.

16. Will the landing of the material system lead to an increase in gross profit per watt-hour?

Innovative product technology upgrades result in differentiated capabilities, not just gross profit margins. The gross profit margin of differentiated products is higher than that of Volkswagen, but it is difficult to quantify.

17. In May and June, Ningde has been the closest in the robot industry chain. Is the supply to the customer side or the robot side? Rumors say that Panasonic is used instead of Ningde?

What is the situation with downstream customer orders?

The progress of robots, whether in China or overseas, is very fast and involves sensitive customer confidentiality.
The market space is vast. Tesla used Panasonic before, LG, and now Ningde is the largest supplier, providing cost-effective products.

18. The capacity utilization rate in the first half of the year was a little over 60%. We have more capacity to supply the market. Is there an expected range for the capacity utilization rate? A more aggressive goal to capture market share?

The capacity utilization rate in the first half of the year was low but still reasonable. As the market recovers and grows, the capacity utilization rate will increase in the second half of the year. Manufacturing costs do not account for a large proportion, and overall market competition strategies need to be considered.
The company's current market share is not low, accounting for 36.3% of the global market. Whether to be more aggressive depends on strategic choices.

19. The European market is an important battleground. Are there major issues with the upstream material supply chain? How can we transfer the advantages of the local supply chain to Europe?

The company has a clear layout of production capacity in Europe, and many Chinese companies have invested in upstream materials in Europe. Many partners have established factories, and the company can meet the timeline requirements for localization in Europe.
The European Union has put forward requirements for localizing the industry chain, and in the future, there will be advantages in the localized supply chain for a considerable portion of supplies in Europe.

20. Capacity construction - YoY decrease in cash flow fixed asset investment? Has the investment peak passed?

The investment has slightly decreased in absolute terms, but the investment efficiency has improved. This is because the development of super assembly lines has driven down the unit investment cost, making the investment more efficient and providing a considerable capacity. However, the total investment amount is decreasing.

21. In the financial report, there was an income of 1.1 billion from financial expenses and exchange gains/losses in 2Q. Is this due to seasonal factors? Will future earnings continue in subsequent quarters?

Financial expenses - exchange gains and losses + bank interest income. The former is affected by foreign currency, but the company has a management plan for foreign currency, which smooths the benefits and makes forward exchange arrangements, so there will not be large fluctuations. Other normal bank interest income is relatively stable.
In the long run, financial expenses and income will not fluctuate greatly.

22. 1Q investment income of 1.527 billion, 2Q-110 million, a larger loss? Previously, investment income profit was 5-10 billion per quarter, which upstream sector is under pressure?

The investment income in the first half of the year fluctuated normally due to the sale of some equity. The quarterly fluctuations are normal. It is recommended to look at the trend over a longer period of time.

23. The domestic and foreign gross profit margin levels are getting closer. In the past, the overseas profit-making ability has improved more than the domestic one. Is it due to the temporary disturbance of overseas lithium carbonate prices? Will the long-term profit-making ability be similar between domestic and foreign markets?

Overseas shipments account for 36% of the total. As for whether the domestic or overseas gross profit margin is higher, it needs to be determined based on different projects. Currently, there are fewer overseas projects, but if the number continues to increase, the domestic and foreign profit margins will eventually converge to the same level. Under similar scale conditions, the profit-making ability will be closer.

24. Financial - asset impairment losses of 1Q-1 billion, 2Q-900 million, can you break it down?

Impairment of inventory/fixed assets, with inventory accounting for the majority. The impairment of inventory is about tens of billions, and there will be some minor impairments in 1Q and 2Q, with the remaining part being impairment of fixed assets.

25. What are the four major innovative technologies? Can you share the progress of innovative technologies?

Condensed state/Qilin/M3P/sodium-ion batteries. Those that have been implemented, announced by customers, jointly developed with customers, and of interest are all being pushed forward. Different solutions are available for different market segments.
R&D investment in the first half of the year was 10 billion, a YoY increase of 77%, which is the source of innovation-driven growth.

26. If the localization in Europe progresses smoothly, what will be the proportion of mid-term localization/China's production and export to Europe?

The proportion is not dynamic. The German factory is currently ramping up production and cannot meet customer demand for the time being. Currently, most of the products are shipped from China to Europe for delivery. China is the main source of local shipments in Europe.
However, as the European market ramps up, it will take a certain period of time for local production to be established. After that, the proportion of local shipments in Europe will increase. The penetration rate in the European market is currently 27%-28%, and the electrification rate is growing rapidly.

27. The profit margins of European factories and domestic ones are converging to the median. Can the profit margins be based on the profits of Japanese and Korean companies in Europe and the United States? The competition landscape in the European market is good, and prices are higher, but the ESG requirements for batteries have increased compliance costs. What is the impact on profit margins?

The profit margins overseas are quite good, and it is unfair to talk about profit margins during the production ramp-up phase.
Overseas faces higher labor and logistics costs. Although the prices are relatively higher, the profit level will be narrowed. In the long run, the gross profit margin will be similar to that of the domestic market.
Europe is willing to pay a premium for localization. Currently, the cost and operational efficiency are much better than those of Japanese, Korean, and LG factories. The gross profit margin in Europe is reasonable. Although the cost in Europe cannot be compared with that in China, the company is competitive in terms of cost in Europe compared to other companies.28. Xinjiang Issue?
Companies are gradually divesting their equity, and it can be said that they are quite determined. There is no equity connection between the acquirer and the company.

29. Deducting 8 percentage points of the mining end gross margin rate in 2Q, the profit margin is relatively low. How is the profitability of overseas Bolivia mining rights broken down?

Our own mines have not officially started production yet, but they will gradually contribute to performance and profits as they start production in the near future. The qualifications are also good.
However, the current lower gross margin is due to the decline in the nickel-iron project, as the nickel-iron prices have dropped more, resulting in lower returns compared to last year. Previously, this mining project was not listed separately. It was listed separately in the first half of the year, but the data for the lithium salt project has not been included yet.

30. Europe - The company's market share in Europe is rising rapidly. Currently, the ACC project is progressing the fastest and will be energized in September, with production by the end of the year. What is the company's strategy after the core European major customers' own battery factories are put into operation?

Many European OEMs are investing in or building their own battery factories, mainly based on cost competitiveness. The company's gross margin in Europe will be very competitive. Although the cost cannot be compared with domestic manufacturers, it still has advantages compared to European counterparts such as ACC and Northvolt.