CATL's Ningde era：Has the Low Point Passed, Is Dawn Near?

On the evening of April 15, 2024, CATL announced its performance for the first quarter of 2024. Let's look at the key points:

1. Revenue below expectations, but unit price stable: In the first quarter, CATL's revenue was 79.8 billion, a year-on-year decrease of 10%, below the market's expectation of 81.2 billion. However, Dolphin believes that CATL successfully stabilized the shipment unit price of batteries this quarter, performing better than market expectations in terms of both volume and price decline.

2. Gross profit margin rebounds despite low sales: In the first quarter, CATL's gross profit margin continued to increase to 26.4% despite the low shipment volume, exceeding the market's expectation of 25.4%.

3. Significant reduction in asset impairment: Asset impairment this quarter was only 5 billion, a significant decrease from 30 billion in the fourth quarter of last year. With the stabilization of lithium carbonate prices, the risk of asset impairment has been largely eliminated.

4. Active destocking phase completed: Inventory this quarter was 44 billion RMB, a 3% decrease from 45.4 billion at the end of last year, indicating that CATL's active destocking phase has basically come to an end.

Dolphin's overall view:

From the first quarter performance, CATL has delivered a decent performance. Although revenue is still below market expectations, the gross profit margin has shown improvement despite the low shipment volume in the first quarter, reaching 26.4%.

Behind the slowdown in revenue, on one hand, due to the slowdown in battery shipments, the expected shipment volume this quarter is around 85Gwh, a 30% decrease from the previous quarter. However, the revenue only decreased by 25%. Dolphin predicts that CATL has successfully stabilized the battery shipment unit price this quarter, performing better than market expectations in terms of both volume and price decline (market expected price to drop to 7 cents/Wh). This is mainly due to a significant reduction in sales rebates recorded in the fourth quarter of last year, which lowered the unit price. Sales rebates are currently at a low level this quarter.

Furthermore, the significant reduction in asset impairment this quarter is consistent with Dolphin's previous assessment. As the impairment in 2023 was mainly related to lithium carbonate assets, the impairment followed the fluctuations in lithium carbonate prices. In the first quarter, lithium carbonate prices stabilized at around 100,000 RMB, reducing the risk of natural depreciation.

In terms of actual financial leverage and core operating profit considering the impact of asset impairment, the core operating profit margin increased by 2% to 12.1% this quarter, mainly due to the improvement in gross profit margin and the significant reduction in asset impairment.

In this scenario, entering the new year, factors such as the high sequential decline in electric vehicle sales, renegotiation of battery supply prices, and the possibility of CATL lowering prices to clear the industry may put pressure on CATL's short-term performance. However, with CATL's strong Alpha capability, Dolphin believes that its valuation inflection point may come earlier:

1. Overall, entering 2024, with stabilized lithium carbonate prices, the elimination of asset impairment risks, and the completion of active destocking, CATL has sufficient ability to control gross profit margins, scale effects, and brand effects. By increasing production capacity utilization, further escalating the price war in iron-lithium common production capacity, and giving a final blow to some struggling second and third-tier players in the domestic battery industry, CATL can accelerate the clearance of production capacity in the domestic battery industry
2. Incremental growth in overseas business:

In Europe, as subsidies gradually decline and penetration rates approach challenging cost-effective price ranges, Ningwang uses iron lithium batteries to seize market share from Korean battery manufacturers with low-cost and high-quality advantages (Korean battery manufacturers mainly produce NCM batteries, while LFP battery mass production is expected to wait until 25 years);

In regions like the United States that are subject to policy restrictions, Ningwang can cooperate through the LRS (technology licensing) model, although the scale of revenue may decrease, capital expenditure is reduced, and technology licensing has high gross margin advantages.

1. In the situation where performance has not yet been cleared, Ningwang itself has super strong cash generation capabilities: Ningwang itself has a super strong operating receivables capability - the 10.5 billion attributable profit corresponds to a net operating cash flow of 28.4 billion in the same period.

With domestic expansion coming to an end and overseas factory construction not happening overnight, capital expenditure is reduced - from a peak of 60 billion in 2022 to just over 40 billion in 2023; at the same time, capital expenditure efficiency is improved, as process improvements (introduction of a 10Gwh production line) lead to a significant decline in unit capital expenditure required to build the same capacity, unit depreciation expenses are also expected to decline, leading to the release of future profit margins.

Currently, Ningwang's PE in 2024 is around 18 times, still not considered expensive. Therefore, compared to 2023, as a beta stock that follows the trend of lithium carbonate prices, Dolphin believes that in 2024, attention should be paid to Ningwang's reversal opportunities.

Below is the main text:

1. Overall Performance: Revenue slightly below expectations, but gross margin continues to exceed expectations

1) Revenue slightly below expectations:

In the first quarter of 2024, quarterly revenue was 79.8 billion, a year-on-year decrease of 10%, slightly below the seller's expectation of 81.2 billion. Revenue performance was slightly below market expectations, with a slowdown in growth.

Behind the revenue slowdown, on the one hand, due to the slowdown in battery shipments, the market expected shipments of around 85Gwh this quarter, a 30% decrease from the previous quarter, but revenue only decreased by 25%. Dolphin expects that Ningwang has still successfully stabilized the battery shipment unit price this quarter, outperforming market expectations in terms of volume and price declines.

The market believes that due to Ningwang's slower pace of annual negotiations with downstream automakers compared to second and third-tier battery manufacturers, major customer negotiations for annual reductions are mostly finalized after the Spring Festival, leading to a continued downward trend in the unit price of power batteries in the first quarter. However, in the first quarter, the significant reduction in the provision of sales rebates offset this factor.

In the fourth quarter of last year, Ningwang provisioned approximately 12 billion in sales rebates, as a reduction on the revenue side, leading to a decrease in the unit price of power batteries from 1 yuan/Wh to 0.79 yuan/Wh. This quarter, the expected liabilities (including provision for after-sales service fees + sales rebates) only increased by 5.7 billion, with the provision for sales rebates in the current period at most around 3 billion, a significant decrease compared to the fourth quarter of last year, ultimately allowing Ningwang to successfully stabilize the unit price of batteries this quarter2) But the gross margin continues to exceed expectations, and the risk of asset impairment has been basically cleared

In this quarter, despite the low sales volume in the off-season, the gross margin continued to increase to 26.4%, surpassing the market's expectation of 25.4%. Dolphin believes that this is mainly related to the stabilization of unit prices, and even a slight increase due to the significant reduction in sales rebates caused by the decrease in shipment volume this quarter.

With such gross margin and unit prices, it also means that Ning Wang has sufficient control over gross margin, as the price war in the iron-lithium industry intensifies and accelerates the clearance of domestic battery industry capacity. Currently, Ning Wang's battery unit price is still far above the market's ternary 5 cents and iron-lithium 4 cents price levels, leaving a lot of room for price reduction.

From the perspective of entering a US GAAP standard (including impairment in cost), the gross margin for this quarter increased by 2.6% to 25.4% compared to the previous quarter. This is due to a significant reduction in asset impairment, decreasing from 30 billion in the fourth quarter of last year to 5 billion this quarter. Since last year's impairment was mainly related to lithium carbonate assets, the impairment basically followed the fluctuation of lithium carbonate prices. As lithium carbonate prices have stabilized at around 100,000 RMB in the first quarter, the risk of impairment due to natural lithium carbonate price declines has been basically cleared.

3) Proactively reducing inventory

Ning Wang's inventory this quarter is 44 billion RMB, a 3% decrease compared to the end of last year's 45.4 billion RMB. However, due to the average price of lithium carbonate dropping from 140,000 RMB in the fourth quarter of last year to 110,000 RMB in the first quarter, and with a significant amount of "inventory goods" (finished products) in inventory, Dolphin judges that the inventory volume has slightly increased compared to the end of last year, mainly due to the decrease in off-season shipments in the first quarter.

However, around 70 GWh is already a relatively stable inventory level, which is enough to support 2-3 months of shipments without any production. From the perspective of GWh volume, it is difficult for Ning Wang's inventory to decrease further, and the phase of proactive inventory reduction has come to an end.

4) Market share continues to increase in the first quarter

In the first quarter, affected by the Spring Festival holiday and the new car off-season, the sales volume of new energy vehicles and the installation volume of power batteries both decreased by around 35% compared to the previous quarter. However, with Ning Wang maintaining stable unit prices without actively reducing prices, the market share has still rebounded. It increased by 4.7% from 43.8% in the fourth quarter of last year to 48.4% in the first quarter of this yearIn terms of the overall situation this year, although Dolphin Jun predicts that this year will still be a big year for hybrid vehicles, the growth rate of low-capacity hybrid vehicles is still higher than that of pure electric vehicles, and the growth rate of new energy vehicle sales is also showing a slowdown.

However, for Ning Wang, the proactive destocking has come to an end, and the risk of asset impairment has been basically cleared. Ning Wang has sufficient capability to increase production capacity utilization, further intensify the price war in the iron-lithium ordinary production capacity, accelerate the clearance of domestic battery industry capacity, and gain more market share:

1. Due to the high base number, BYD's sales growth rate has slowed down, making it difficult to achieve high growth in battery shipments through doubling sales, and the market share is expected to continue to decline;

2. In terms of competition strategy in the domestic market, Ning Wang indeed intends to maintain the high-end and gross profit margin through research and development and product strength, while using price reductions in iron-lithium battery ordinary production capacity to accelerate capacity clearance, increase its market share, seize market share from second-tier battery manufacturers, and provide a "last straw" to some struggling second and third-tier players in the domestic battery industry, accelerating the clearance of domestic battery industry capacity.

Currently, most second-tier battery manufacturers are in a state of loss, with excellent companies only achieving a net profit of 0.02-0.03 yuan/wh, while Ning Wang has successfully maintained a net profit of around 0.1 yuan/wh.

5) The bargaining power of the industrial chain is solid, and the scale of upstream capital occupation has expanded

In the first quarter, Ning Wang's net operating cycle (accounts receivable turnover days + inventory turnover days - accounts payable turnover days) was -42 days, a decrease of 45 days compared to 23 years, indicating a significant improvement in operational efficiency.

This quarter, the accounts payable turnover days have significantly increased, from 123 days last year to 176 days in the first quarter, significantly increasing the capital occupation of upstream suppliers, implying the company's strong bargaining power over the upstream supply chain. With a net operating cycle of -42 days, the company fully operates using interest-free liabilities from suppliers to complete operations, without needing to use the company's own cash.

II. Cost side: Reasonable cost control

Although the growth rate of operating income weakened in the first quarter, the control of the three expenses was relatively reasonable, with the total expense ratio of the three expenses increasing slightly from 12% in the previous quarter to 12.6% in this quarter, lower than market expectations.

In this quarter, there was a significant reduction in sales and administrative expenses, mainly due to a substantial decrease in after-sales comprehensive service fees, which may correspond to the off-season for shipments this quarter.

On the research and development investment side, Ning Wang has always differentiated products through intensive research and development to achieve product premium, building its competitive barriers with leading battery technology.

This quarter, R&D expenses were 4.3 billion, slightly higher than market expectations of 5.1 billion.

The R&D expenses this quarter were mainly used for investing in the Panshi chassis and the new energy storage product "Tianheng". The Panshi chassis has a range breakthrough of over 1000 kilometers, energy consumption of 10.5kWh per 100 kilometers, and safety features that can withstand a frontal collision at 120km/h without exploding, with mass production expected in the second half of 24Industry First: Tri-Energy Integration "Power Domain Control" Solution, Estimated to Increase Battery Pack Value by about 25-30%.

At the same time, a new product "Tianheng" was released in the energy storage sector, achieving zero attenuation in capacity and power in the first five years, with better lifespan performance. The energy density per unit area is increased by 30%, achieving an energy density of 430wh/L, further enhancing the lifespan and safety performance of energy storage products.

Third: Profit Exceeds Market Expectations, Core Profit Margin Increases Month-on-Month

Net profit attributable to the parent company in the first quarter was 10.5 billion yuan, with a profit margin increase of 0.6% to 13.2% month-on-month. However, what Dolphin Jun pays more attention to is a separate column compared to US peers, the operating profit of the core main business (revenue - taxes - three fees - asset & credit impairment).

Looking at the core profit side, the profitability in the first quarter has improved, with the core profit margin increasing from 10.3% in the previous quarter to 12.1% in this quarter. The main reasons for the improvement are the increase in gross profit margin and a significant reduction in asset impairment.

This article ends here.

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Financial Report Review on April 22, 2022: "Scattered minds affect valuation, CATL faces a dual examination of profitability and confidence."

Financial Report Review on October 28, 2021: "Facing CATL's YYDS, should we still fear valuation?"Financial Report Review on August 25, 2021: "Contemporary Amperex Technology: Investment is not just a distant story, but also the current performance"

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Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure