Caught in a pincer attack, CATL "falls into the trap"

On the evening of July 26, 2024, CATL announced its performance for the second quarter of 2024. Let's look at the key points:

1. Revenue below expectations, mainly due to a significant decline in battery unit price: In the second quarter, CATL's revenue was 87 billion, a 13% year-on-year decrease, lower than the market's expected 95.1 billion. Dolphin believes that this is mainly due to a significant decline in the battery unit price, which differs from the market's expectation of battery prices stabilizing after lithium carbonate prices stabilize. This quarter, the battery unit price was significantly lower than market expectations.

2. Capacity utilization continues to decrease, with inventory slightly increasing: The price reduction by CATL did not achieve the expected increase in capacity utilization to clear inventory, leading to a decrease in capacity utilization from 70% in 2023 to around 65% in the first half of 2024. The increase in inventory was mainly due to a high increase in inventory goods.

3. Asset impairment increased this quarter: Due to the significant decline in battery unit price this quarter, the provision for impairment of finished goods in inventory increased. Asset impairment losses this quarter increased from 5 billion in the previous quarter to 14 billion.

4. Gross profit margin remains stable despite the decline in unit price: The gross profit margin for the second quarter was 26.6%, basically in line with the market's expected 26.8%. On one hand, this quarter's shipment volume increased, releasing some economies of scale. On the other hand, it also reflects CATL shifting the impact of price reductions to upstream suppliers, demonstrating CATL's strong bargaining power in the industry chain.

5. Strict control over operating expenses, leading to an increase in net profit attributable to shareholders: Despite falling short on the revenue side, strict control over operating expenses led to a decrease in the total operating expense ratio from 12.6% in the previous quarter to 11.4% in this quarter, resulting in profit release.

Dolphin's overall view:

Looking at CATL's performance in the second quarter, revenue significantly missed market expectations, while the gross profit margin was basically in line with market expectations.

The revenue miss was mainly due to a significant decline in battery unit price. The market expected the battery shipment volume in the second quarter to be around 110-120 GWh, with the unit price ranging from 0.58 yuan/Wh to 0.63 yuan/Wh, a decrease of 16%-23% from the first quarter's 0.76 yuan/Wh. The market expected the battery unit price to be around 0.72 yuan/Wh as lithium carbonate prices stabilize, but this quarter, the battery unit price was significantly lower than market expectations.

Due to the significant decline in unit price this quarter, the provision for impairment of finished goods in inventory increased, leading to an asset impairment loss of 14 billion this quarter, up from 5 billion in the previous quarter.

However, the problem lies in the fact that the significant decline in battery unit price did not come with a significant decrease in inventory, and capacity utilization also decreased:

1) Inventory continues to increase, from 440 billion in the previous quarter to 481 billion this quarter, mainly due to a high increase in inventory goods, while shipped goods show a declining trend

2) At the same time, looking at the company's capacity utilization rate in the first half of the year, the battery's capacity utilization rate dropped from 70% in 2023 to around 65% in the first half of 2024.

3) CATL's market share in the second quarter continues to decline, with a significant price reduction failing to successfully capture market share from second and third-tier battery manufacturers.

However, there are some bright spots in this quarter's performance:

1) Despite a significant decline in unit price, CATL's gross profit margin remained stable this quarter, with a gross profit margin of 26.6% in the second quarter, basically in line with the market's expectation of 26.8%. Compared to the second half of 23, both domestic and overseas gross profit margins continued to increase quarter-on-quarter.

2) Operating expenses are relatively well controlled, all lower than market expectations. Although revenue fell short of expectations, net profit attributable to shareholders exceeded market expectations.

Currently, the market's concerns about CATL mainly include the following points:

1) The forecast for 2024 is still a big year for hybrid vehicles. Due to the generally lower energy density of hybrid vehicles compared to pure electric vehicles, there are concerns that the overall demand for batteries will continue to slow down. In the long term, if the growth of hybrid models continues to outpace pure electric models, there are concerns that the overall market space for power batteries will decrease.

2) CATL already has a high market share in China, and the industry is still in a situation of oversupply. The market is concerned that under the price war of battery cells, CATL's domestic market share will show a downward trend, leading to concerns about future growth space and profit stability.

3) Pessimistic policy expectations in the United States and Europe raise concerns about a slowdown in overseas demand, leading to a decline in CATL's overseas market share.

In reality:

1) The trend of a big year for hybrids in 2024 is indeed expected to continue. The sales of plug-in hybrids increased by 87% year-on-year in the first half of 2024, while pure electric vehicle sales only increased by 9%. Plug-in hybrids accounted for 41% of the overall sales of new energy vehicles in the first half of 2024, up from 29% in the first half of 2023. It is expected that the overall growth rate of power battery installations this year will still be lower than the growth rate of new energy vehicle sales.

In the long term, if it is confirmed that pure electric vehicles are not the ultimate solution, hybrid models will still account for a high proportion of overall sales. Moreover, in a market where the focus is on fast charging rather than large batteries, the space for increasing the energy density per vehicle is limited. Indeed, the overall market space for power batteries will shrink compared to previous forecasts.

2) For CATL, the significant drop in battery prices this quarter does seem to have been affected by the domestic battery price war. However, fortunately, the gross profit margin and net profit margin remain stable.

However, despite the significant price reduction this quarter, CATL has not seen an increase in market share or capacity utilization rate. The logic of improving its market share has been hindered, as CATL has been using high R&D investment to obtain a pricing premium for batteries. However, with the continuous price war in the downstream automotive industry and greater cost pressures on car manufacturers, there will be stricter control over battery costs (the further rise in the proportion of low-cost LFP batteries can further verify this), weakening CATL's ability to price batteries at a premium.

In the long term, CATL will also face the risk of automotive manufacturers developing their own batteries. Looking at market concentration, the concentration of the power battery market has declined slightly in the first half of 2024, with CR3/CR5/CR10 concentration decreasing by 1.3%/2.2%/0.7%, possibly related to car manufacturers entering the field of self-developed batteries.

Currently, new energy vehicle manufacturers are mainly constrained by the scale of automobile production and the bottleneck of mass production experience, but in the long run, these bottlenecks will be resolved. Apart from BYD, Volkswagen, Geely, Changan, SAIC, GAC, and other automobile manufacturers have production scales that meet the breakeven threshold for self-developed batteries. It is expected that by 2024-2025, they will gradually replace on a small scale.

3) From the perspective of overseas markets:

The penetration rate of new energy vehicles in Europe and the United States is expected to increase slowly in 2024. In the first half of 2024, the penetration rate of new energy vehicles in Europe was 21%, a decrease of 2.8% compared to 23.8% in 2023, mainly affected by the withdrawal of subsidies for new energy vehicles. The penetration rate of new energy vehicles in the United States in the first half of 2024 was 9.3%, a slight increase compared to 2023, indicating a slowdown in demand for power batteries. In 2024, the overall outlook relies more on the outbreak of overseas energy storage batteries.

In May, the United States raised the tariff on power batteries from 7.5% to 25% (effective from August). CATL can only cooperate through the LRS (technology licensing) model, shifting from product sales revenue to licensing revenue. Although this affects the logic of increasing revenue scale and market share in the United States, it avoids the high capital investment of building factories in the early stage (factory capital expenditure is borne by the partner). At the same time, technology licensing has a high gross profit advantage, leading to an increase in profit margin in the later period.

Currently, CATL's PE ratio in 2024 is around 17 times, which is not considered expensive, but the turning point in performance seems to have not arrived yet. The above three points seem to indicate that whether it is external threats (Tesla changing battery suppliers, battery export tariffs) or internal concerns (industry overcapacity, host manufacturers developing and producing batteries themselves), it seems to weaken CATL's logic in the second half of the battery overcapacity battle, actively reducing prices to clear inventory and clean up the battlefield.

The following is the main text:

I. Overall Performance: Revenue significantly below expectations, mainly due to a sharp decline in battery unit price in the second quarter of 2024

1) Revenue significantly below market expectations:

In the second quarter of 2024, quarterly revenue was 87 billion, a 13% year-on-year decrease, while sell-side expectations were around 95.1 billion, with revenue performance significantly below market expectations.

Behind the revenue falling below market expectations is mainly due to the battery unit price being significantly lower than market expectations. Market expectations for battery shipments in this quarter were around 110-120 GWh, with a quarter-on-quarter growth of about 16-26%. The revenue from power + energy storage in the second quarter was approximately 69.7 billion (assuming other business revenue in the first quarter accounts for 10% as provided in the conference call), a 3% decrease from the first quarter.

This translates to a battery unit price of between 0.58 yuan/Wh and 0.63 yuan/Wh this quarter, a decrease of about 16%-23% from 0.76 yuan/Wh in the first quarter. The market believes that with the stabilization of lithium carbonate prices, the expected battery unit price is around 0.72 yuan/Wh, significantly lower than market expectations for this quarter

Dolphin believes that the significant decline in unit price is mainly due to:

1) CATL's overseas shipment volume has declined. In the first half of 2024, the proportion of overseas revenue decreased from 35% in the first half of 2023 to 30% in the first half of 2024. On one hand, this is due to the slowdown in overseas electric vehicle demand (reduction of electric vehicle subsidies in Europe), leading to a slowdown in overall industry power battery overseas shipment growth. In the first half of 2024, overseas shipment volume only increased by 7% year-on-year.

CATL's market share in overseas power battery installations has also further declined, dropping from around 29% in 2023 to 26% in January-May 2024. This may be due to the fact that the company's major customer, Tesla's American Model 3, regained the IRA subsidy, which also implies that the Model 3 battery switched from CATL to Panasonic, affecting the company's overseas power battery shipment volume.

2) CATL's negotiation pace for annual price reductions with downstream car companies is slower than that of second and third-tier battery manufacturers. The negotiation with major customers for annual price reductions usually takes place after the Spring Festival, affecting the battery unit price in the second quarter. With domestic battery prices already dropping to around 0.5 yuan/wh for ternary batteries and around 0.4 yuan/wh for lithium iron phosphate batteries, under the battery price war, CATL is also inevitably reducing prices.

3) The proportion of lower-priced lithium iron phosphate batteries in CATL's shipment structure has increased:

From a domestic perspective, due to the continuous price war in downstream industries, the demand proportion for lower-priced lithium iron phosphate batteries continues to rise, leading to an increase in the proportion of lower-priced lithium iron phosphate batteries in CATL's shipment structure (the proportion of domestic LFP power battery installations in CATL increased from 51% in the first quarter to 61% in the second quarter);

Looking at the overseas shipment data, the year-on-year growth rate of lithium iron phosphate batteries has been consistently higher than that of ternary batteries since the beginning of this year. This may be due to the withdrawal of new energy vehicle subsidies overseas (such as in Europe), where car manufacturers face greater cost pressures, leading to a continuous high demand for lower-priced lithium iron phosphate batteries.

4) Overall, in the first half of 2024, CATL's power battery unit price decreased by 14% from 0.79 yuan/wh in 2023 to around 0.67 yuan/wh in the first half of 2024, with a controllable decline.

However, the unit price of energy storage batteries has declined significantly, from 0.91 yuan/wh in 2023 to around 0.69 yuan/wh in the first half of 2024, a 25% decrease compared to 2023. This may be due to the increase in the proportion of domestic customers in the company's energy storage business and the decrease in overseas proportionThe company's original energy storage customers mainly targeted large overseas storage, but gradually began to cover domestic large storage customers. In China, strategic agreements have been reached with state energy groups, China Energy Construction Group, State Power Investment Group, China Huaneng, China Huadian, etc. As the technical threshold for domestic energy storage is lower compared to power batteries, the competition is more intense. The unit price of LFP batteries in domestic energy storage has dropped to 0.3-0.4 yuan/wh.

Although the provision for sales rebates in this quarter has further declined (as a deduction on the revenue side): due to the stabilization of lithium carbonate prices, which have been hovering around 100,000 yuan/ton in the first and second quarters, the provision for sales rebates in this quarter has further decreased (sales rebates are funds provided by the company to downstream customers under a price linkage mechanism).

The expected liabilities for this quarter (including sales rebates + warranty deposits) are only increasing by 1.9 billion, a significant decrease compared to the expected increase of 5.7 billion in the first quarter (of which about 3 billion is sales rebates). However, the proportion of battery unit price in overseas shipments has decreased, the proportion of low-priced LFP in the shipment structure has increased, and domestic cell prices continue to decline amidst a price war.

II. The decline in battery unit price is accompanied by continued growth in inventory, and the capacity utilization rate has declined slightly

1) The decline in battery unit price has led to a slight increase in asset impairment this quarter

Unlike in 2023, where lithium carbonate prices plummeted, most of the asset impairments at CATL are related to lithium carbonate assets (falling raw material prices/mineral resource impairment in construction of factories/mining and exploration rights). In the first half of 2024, lithium carbonate prices have basically stabilized, with an impairment provision of 1.9 billion.

Among them, the provision for fixed asset impairment is about 700 million, mainly related to the impairment of machinery and equipment related to battery production. However, inventory impairment reached 1.2 billion, mainly concentrated in the second quarter (with asset impairment losses of 1.4 billion in the second quarter, an increase of 900 million compared to the first quarter), mainly due to the significant decline in unit price this quarter, leading to an increase in the provision for inventory goods (finished products) and self-made semi-finished products.

2) Inventory continues to grow, and the capacity utilization rate has declined slightly

The issue in the second quarter is that the significant decline in battery unit price has not been accompanied by a significant reduction in inventory, and the capacity utilization rate has also declined:

① Inventory continues to increase: Inventory has increased from 44 billion in the previous quarter to 48.1 billion in this quarter, and compared to the end of 2023 at 45.4 billion, inventory continues to increase, mainly due to the high increase in inventory goods/self-made semi-finished products, while the shipped goods show a significant downward trend.

From an industry perspective, the cumulative production of domestic power and other batteries from January to June 2024 was 430 GWh, but the cumulative installed capacity was only 203 GWh, with production being twice the number of installed vehicles. Power battery production still far exceeds market demand, and the industry as a whole still faces significant inventory pressure, still in the stage of capacity clearance.

② Capacity utilization rate decline:

In the new energy vehicle industry, which has emerged from a low point in the first quarter, while the sales volume of new energy vehicles and the installation volume of power batteries in the second quarter increased by 32%/37% year-on-year, CATL's battery system capacity utilization rate has declined from 70% at the end of 2023 to 65% in 2024. On the one hand, this is related to CATL's overall off-season shipments in the first half of the year, and on the other hand, it also reflects that despite CATL's significant price reduction, it has not brought about a high increase in shipments in this quarterCapacity utilization remains mediocre.

In the first quarter conference call, CATL mentioned that the expected capacity utilization for this year would be maintained in the range of 80%-90%. However, it seems that there is still a significant gap. The market expects CATL's annual shipments to be around 460-480 GWh, with shipments reaching around 210 GWh as of 1H24, basically in line with production. Although the second half of the year is CATL's peak shipping season, Dolphin Jun estimates that based on the current sales progress, considering the impact of the peak season, the capacity utilization can only recover to around 70%, basically the same as in 2023.

③ Market share is still declining:

Despite the significant price reduction this quarter, it did not lead to an increase in market share. In the second quarter, domestic sales of new energy vehicles have rebounded from the off-peak season and new car vacancy period, with sales of new energy vehicles and power battery loading increasing by 37%/38% year-on-year.

However, CATL's domestic power battery loading only increased by 26% year-on-year, and the domestic market share decreased from 48.4% in the first quarter to 44% in the second quarter. This is mainly due to the recovery of the market share of whole vehicle manufacturers led by BYD. BYD's market share increased from 21.6% in the first quarter to 27.2% in the second quarter, influenced by the launch of the Honor Edition at a low price and the new product cycle led by DMI 5.0. Despite CATL's significant price reduction in the second quarter, it failed to successfully capture market share from second and third-tier battery manufacturers.

CATL's overseas power battery loading market share is also further declining, dropping from around 29% in 2023 to 26% in January-May 2024. This is mainly due to the decrease in overseas shipments, partly affected by the overall slowdown in industry shipments and possibly related to the switch from CATL batteries to Panasonic batteries due to Tesla's regaining of the IRS subsidy for the American Model 3.

However, there are several good points in CATL's financial report this time:

III. Gross margin continues to remain stable

Despite the continued decline in battery unit prices this quarter, CATL's gross margin in the second quarter remained stable at 26.6%, slightly below the market's expected 26.8%.

Looking at the gross margin structure in the first half of the year, CATL's power battery business gross margin continued to increase by 2.8% to 26.9% month-on-month, while the energy storage battery gross margin also continued to increase by 2.9% to 28.9%. The improvement in CATL's gross margin in the first half of the year was mainly driven by the increase in the gross margin of the battery business.

Despite the significant price reduction in batteries this quarter, CATL still maintained a stable gross margin in the battery business. This is partly due to the growth in shipments this quarter, with economies of scale being realized, and also reflects CATL's ability to pass on the price reduction impact to upstream suppliers, demonstrating CATL's strong bargaining power in the industry chain.

However, looking at the gross profit margin based on entering a US stock standard (including impairment in cost), the gross profit margin for this quarter fell from 25.4% to 24.8% on a quarter-on-quarter basis, mainly due to the increase in asset impairment from 5 billion in the first quarter to 14 billion in this quarter.

IV. Reasonable control of operating expenses, with some net profit release

This quarter, CATL continued to strictly control operating expenses, with the total operating expense ratio continuing to decrease from 12.6% in the first quarter to 11.4% in this quarter, significantly lower than the market's expected 13.4%.

1) Sales expenses:

Although sales expenses increased by 2 billion to 36 billion this quarter, it was significantly lower than the market's expected 45 billion. This was mainly due to the decrease in comprehensive service fees within sales expenses, possibly related to the reduced proportion of overseas shipments. Overseas operations require more sales and after-sales service fees compared to domestic operations.

2) Research and development expenses:

In terms of research and development investment, CATL has always differentiated its products through high-intensity R&D to achieve product premium pricing, maintaining its position in the high-end market and gross profit margin. This quarter, R&D expenses were 43 billion, basically flat compared to the previous quarter, and significantly lower than the market's expected 54 billion.

On the product side, as early as 2022 and 2023, CATL had released fast-charging ternary batteries (Kirin batteries) for high-end models and fast-charging LFP batteries (Shenxing batteries) for mid-range models. However, competitors have caught up with CATL's progress in supercharging batteries, with both releasing supercharging batteries in 2024.

In the second quarter, to meet the increasing demand for LFP batteries, CATL launched the Shenxing Battery Plus based on LFP batteries in April. This new battery achieved stronger supercharging performance while increasing the range to over 1000km from 700km, and the supercharging speed was further increased by 50% from 400km/10min to 600km/10min compared to the Shenxing battery.

Looking ahead, the company is attempting to transition from selling products to selling platforms. In 2024, the company launched the Panshi chassis, based on CTC integrated technology, expected to be mass-produced in the second half of 2024. This innovation can help OEMs save around 60%-70% of development costs and enhance the value of the company's single-vehicle supply.

V. Profit higher than market expectations, core profit margin increases

In the second quarter, net profit attributable to shareholders was 12.4 billion yuan, with a profit margin increasing by 1% to 14.2%. This was mainly due to the decrease in operating expense ratio and the improvement in financial income. However, what Dolphin is more concerned about is the column core operating profit of the core main business (revenue - cost - taxes - operating expenses - asset & credit impairment) separately pulled out compared to US peers.

From the perspective of core profitability, the profit ability in the second quarter has improved, with the core profit margin increasing from 12.1% in the previous quarter to 12.9% in this quarter. The main reason for the improvement is the strict control of expenses by CATL, which has released both the core operating profit margin and net profit margin.

VI. The premium ability of the industrial chain is still solid.

In the second quarter, CATL's accounts payable turnover days were 172 days, slightly lower than the 176 days in the previous quarter, but still implying the company's strong bargaining power over the upstream supply chain.

The net operating cycle (accounts receivable turnover days + inventory turnover days - accounts payable turnover days) is -37 days, which also means that the company operates entirely using interest-free liabilities from suppliers, without needing to use its own cash.

This article concludes.

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