CATL 2Q24 Conference Call Minutes

The following is a summary of CATL's second quarter financial report conference call in 2024. For the financial report analysis, please refer to " Internal and External Pressures, CATL "Tiger Falls in Pingyang" "

1. Review of Core Financial Information:

2. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1) Business Highlights:

① Overall Business Situation

a. Shipments

Combined power and energy storage close to 110 GWh, with energy storage accounting for 20%-25%, Shenxing + Kirin batteries accounting for 30%-40%

b. Market Share

Global market share of 37.5%, up by 2.3% year-on-year. Among them, hybrid battery share is 32.2%, up by 6.1% year-on-year, rising to first place.

Domestic power battery share is 46.4%, up by 3% year-on-year. Among them, ternary share is 86%, up by 6.4% year-on-year; lithium iron phosphate share is 37.2%, up by 2.1% year-on-year, both ranking first.

c. Production Capacity

Under construction production capacity exceeds 150 GWh (including 70 GWh in Hungary). The German factory is still ramping up, expected to break even for the whole year, obtained Volkswagen's certification, and is steadily progressing overall. Hungary has upgrades in production line design and factory operations, cost advantages, full orders, and is expected to perform better.

② Overseas Markets

a. Europe

The ban on combustion by 2035 in Europe has not changed, European car manufacturers are quite firm on future trends, many models will be launched in 2025 and 2026, and are more attractive. From the orders received, demand looks good.

b. United States

Currently, the volume directly exported to the United States is not large. The U.S. does have the Section 301 policy, and is actively exploring new cooperation models with customers. The energy storage market is growing strongly, with a significant increase in shipments in the first half of this year in the U.S.

c. Non-European and American Markets

Power: Starting a bit slower but with a large market space. The current penetration rate is not high with great potential, and many companies are also expanding overseas to capture the market.

Energy Storage: With good resource endowment, there are many energy storage projects outside Europe and America, with even greater potential.

③ Product End

a. Passenger Vehicles

Released the Shenxing Plus battery, which can achieve a system energy density of over 200 watt-hours per kilogram, the world's first lithium iron phosphate battery with both 1,000 kilometers of range and 4C fast charging performance; the new generation Kirin high-power battery has a discharge power of over 1,300 kilowatts, which can help new energy vehicles achieve zero to one hundred acceleration in under 2 seconds.

b. Commercial Vehicles

Launched the Tianxing L Supercharge version as the world's first new type of commercial vehicle power battery with supercharging, capable of 4C fast charging and an ultra-long range of 800,000 kilometers over 8 years.

c. Energy Storage

Released the world's first Tianheng energy storage system with zero decay for 5 years and a single unit of 6.25 megawatt-hours, with a 30% increase in energy density per unit area compared to the previous generation and a 20% reduction in footprint

2) Financial Highlights:

① Net profit attributable to the parent company: Net profit attributable to the parent company in the first half of 2024 was RMB 22.87 billion, with Q2 net profit attributable to the parent company at RMB 12.36 billion.

② Gross profit margin: Comprehensive gross profit margin was 26.5%, maintaining stable profitability.

③ Cash flow: Operating cash flow remained strong, reaching RMB 44.71 billion. The year-end monetary funds reached RMB 255 billion.

2.2, Q&A Analyst Q&A

Q: What are the important developments in customer cooperation for CATL?

A: CATL has signed cooperation agreements with multiple well-known domestic and foreign automotive companies (such as Volvo, Beijing Hyundai, Jiangling Motors, Lingong Heavy Machinery, China Dragon Engineering) as well as France's CMA CGM Group to deepen cooperation in the fields of passenger cars, commercial vehicles, and ships. In the energy storage battery field, strategic cooperation agreements have been signed with energy giants such as Sinopec and PetroChina, and strategic cooperation has also been reached with Germany's Rolls-Royce to introduce Tianheng energy storage systems into the EU market.

Q: How is the development of the overseas energy storage market, and what is CATL's positioning and progress?

A: Currently, there is strong demand in the overseas energy storage market, not only rapidly developing in the United States and Europe but also becoming a growth point for the company's operating income. CATL is adopting innovative business models to meet market demand and actively expanding into the overseas energy storage market through cooperation with different channel partners to carry out projects.

Q: What specific investments has the company made in the entire upstream and downstream of the four major materials in the industry chain, focusing on materials, and how can the company maintain cost advantages in the industry with core suppliers?

A: From the perspective of upstream materials, the company has established very close cooperation with upstream partners through investments, collaborations, joint ventures, technology licensing, etc. The company has invested in many upstream enterprises, which has built better trust, enabling the company to be ahead in both technological cooperation and new product development in the market. Additionally, due to the company's stable volume, its advantages in scale procurement are also very evident.

Q: Does the company include the income from the external sales of other mineral varieties in the mining cost-profit statement? The gross profit margin of the mining sector decreased quarter-on-quarter in the first half of the year, and the current gross profit margin is 7.8%. What is the current situation of lithium carbonate costs, including the quantity?

A: The income from other mineral varieties (products other than lithium carbonate) will not be reflected in the mining cost-profit statement. In most cases, the revenue from self-produced and self-operated lithium carbonate will not be reflected in this section.

The data released for the mining sector is consolidated financial data. The production of lithium carbonate in Jiangxi has been quite stable, and the lithium carbonate produced in Jiangxi is mainly used within the company's system. From a reporting perspective, it is hedged, so it will not be reflected in the revenue, cost, and profit of the financial statements. The mining sector in the financial statements is for external sales. Measures to reduce costs in lithium carbonate production from Yichun, Jiangxi, are continuously and effectively implemented, and it is currently in a state of full production.

Q: What is the current status of the company's lithium carbonate production? Can it achieve full production and maintain production efficiency at the current market price? A: The company is currently operating at full capacity, ensuring effective production even at the current market prices, reflecting the effectiveness of the company's management and production capabilities.

Q: What is the quarter-on-quarter trend of unit gross profit for the second quarter?

A: The unit gross profit for the second quarter is between 0.19-0.2 yuan/Wh. Overall, it is relatively stable. Despite the decrease in unit prices, costs are also decreasing rapidly. In fact, the company's unit gross profit is very robust. Looking at the trend, the downward trend in prices has slowed down. Over the past 8 quarters, the unit gross profit has been very stable.

Q: With further improvement in cash flow in the first half of the year, are there any considerations or adjustments in policies regarding future capital expenditures and shareholder dividends?

A: The company's operating cash flow has always been good. In addition to the regular 20% dividend this year, the company also provided a 30% special dividend, totaling 22 billion yuan. This is the company's sincere effort to give back to the capital market and investors, which has been effective. However, it has had a significant impact on the company's cash flow. Therefore, in the future, the company will consider market conditions and the future capital development needs when deciding on dividends.

Q: What is the current shipment proportion of new products like Shenxing batteries? What changes are expected in the future?

A: The current shipment proportion of new products like Shenxing batteries is around 30%-40%, and it is expected to continue increasing in the future. Although the market share is currently not high, the products have been well-received by users, and it is expected that this proportion will increase in the future.

Q: How is the future development space for power and energy storage businesses in non-European and non-American markets (especially in Asia, Africa, and Latin America)? What is the company's layout and focus on this?

A: The demand for power and energy storage markets in non-European and non-American regions is huge, with potential not fully estimated. The company will actively participate in international market expansion, especially focusing on the energy storage business in non-European and non-American markets, making it a strategic focus rather than limiting to Europe and the US.

Q: How does the company set its development strategy and shipment targets for overseas markets?

A: The company does not pre-set specific shipment targets that must be achieved in specific markets but strives to compete for market share based on the specific circumstances of each project and the conditions of partners. Especially in non-European and non-American markets, the company seizes local market opportunities through a professional sales team and actively explores the market using flexible cooperation models.

Q: What is the profit situation for the Q2 of the German factory, and what are the profit prospects for the future production of the Hungarian factory?

A: The German factory is still in the ramp-up process, so the company's goal is to break even for the full year. Q2 is still in the continuous ramp-up process, with steady progress in construction and high customer recognition. Hungary has certain cost advantages compared to Germany, and the company is continuously learning from the German experience, with many upgrade points in production line design and factory operations. Therefore, Hungary has a relatively good cost advantage, and future orders are full with good customer demand.

Q: Despite what seems like a deterioration in the sales structure (such as poor performance in the European electric vehicle market), how is the company able to maintain a good level of unit profit?

A: First of all, the actual sales structure has not deteriorated significantly, and the proportion of various business segments remains relatively stable. Secondly, the increase in profit level is mainly due to the decrease in raw material costs leading to a decrease in unit revenue. Although the unit revenue has decreased, the stable gross profit margin and increased labor productivity have maintained a good profit level. In addition, the profit level in overseas markets is slightly higher than domestic markets, as overseas customers have higher requirements for after-sales service quality. We need to increase investment in after-sales service outlets, so there have been some price adjustments, but overall it is in a reasonable and stable state.

Q: How do you view the growth of the European electric vehicle market in the second half of this year and next year, especially after the implementation of stricter carbon emission standards in Europe next year?

A: Despite the recent stagnation in the European market due to various factors, in the long run, European car manufacturers are determined to transition to electrification. It is expected that more competitive new models will emerge in the next few years, gradually addressing issues such as localization production and costs. Considering the support for low-carbon green transformation from the government and society, as well as confidence in market demand, we believe that the market outlook remains promising. In the short term, there may be some challenges in the European market, but from a medium to long-term perspective, with the introduction of new electric vehicles and technological advancements, market demand is expected to recover and continue to grow.

Q: Out of the 150 GWh of in-construction capacity in the company's semi-annual report, how much is overseas capacity?

A: The company's European and Hungarian factories account for about 70 GWh in the first two phases.

Q: How much is the company's shipment volume expected to be in the United States this year?

A: Currently, the company's direct shipments to the United States are not significant, with a focus on regions such as China and Europe. The company is also observing the US 301 policy and is in negotiations with customers, as the US market is more sensitive. Energy storage growth is still strong, with a significant increase in energy storage shipments in the US in the first half of this year. There may be some new changes in energy storage after 2026, and the company is actively discussing new cooperation models with partners.

Q: Will the unit profit decrease significantly in the future?

A: The biggest influencing factor is the fluctuation in raw material prices, as the pricing mechanism is relatively stable. Secondly, the company will consider support from partners and competitive relationships in some projects, so the company will provide certain rebate support. The second factor has a smaller impact, with the biggest influence still being the price impact from fluctuations in raw material prices. Whether there will be any impact in the second half of the year due to raw material price fluctuations is something that the company will always consider, as the current prices have not been particularly stable.

Q: What is the specific mechanism for customer rebates?

A: The company has very high density and frequency of communication with customers, and many things can be discussed during the communication process. Sometimes, due to intense competition, customers may raise cost issues, and the company has internal processes in place to provide rebate support if necessary. It is not fixed and occurs irregularly. For example, when a certain volume is reached as agreed, the company provides a certain rebate. If the target is achieved, it is fulfilled; if not, it is forfeited. It is a rolling process, and the company does the same thing every quarter. The duration of each negotiation agreement varies, some are for six months, and some are for a year

Q: Is the company planning to negotiate annual prices with OEMs more in the second half of the year?

A: No, discussions on prices are based on a pricing mechanism that is more linked to metal prices. The timing and cycle of discussions with different customers vary and are not all concentrated at the end of the year.

Q: In the face of competition from BYD, what is the company's key strategy going forward?

A: The cycle of OEMs is fast-paced, and it is difficult for any company to maintain a high market share in the long term considering the entire OEM cycle. For the company, it is more important to make its products more competitive. The company's market share has been continuously increasing.

Q: Apart from scenarios like electric vehicles and energy storage, such as construction machinery, electric ships, and electric aircraft, the company has also made some product preparations and shipments in these new market segments. What proportion of shipments can the company capture in these new market products? What is the company's assessment of the structure for the landing of future products?

A: The company estimates a market demand of hundreds of gigawatts. Different sub-markets have different maturity cycles, and the company has entered new markets with a first-mover advantage. It is believed that the company will have a good market share in the future.

Q: How much did the price per watt-hour decrease in the second quarter? Is there a possibility of significant price reductions in the future?

A: The price per watt-hour decreased by about six cents in the second quarter. Whether there will be significant price reductions in the future mainly depends on fluctuations in raw material prices. Currently, raw material prices have not completely stabilized, making it difficult to predict price trends, which could either decrease or increase.

Q: How much will the fluctuation in raw material prices affect the second half of the year?

A: Fluctuations in raw material prices will have an impact on the second half of the year, but it is difficult to provide a definitive conclusion. It is emphasized that raw material prices will continue to be an important influencing factor. The current price of lithium carbonate has dropped to about over 80,000 yuan per ton, and future price changes need to be closely monitored.

Q: Regarding the energy storage business, does the company sell directly to overseas partners or plan to participate in bidding? Will the gross profit margin of the energy storage business exceed that of the electric vehicle business in the future?

A: The energy storage business usually adopts a joint bidding approach with partners. The company flexibly chooses suitable business models to participate in energy storage projects based on its own technology and market conditions. Currently, the gross profit margin of the energy storage business is performing well, and with the introduction of new products such as the Tianheng series, which has been well received for its high energy density and long-term zero attenuation characteristics, it is expected that the gross profit margin will remain at a reasonable level in the future.

Q: In the overseas markets, what operating models does the company adopt in the United States and Europe?

A: In overseas markets, the company collaborates with European and American OEMs to implement the License to Produce (LRS) model, and also considers investing in building battery factories. Depending on specific conditions in different regions, including customer demands, resource conditions, etc., the company flexibly chooses various forms of cooperation such as wholly-owned, joint ventures, or license technology authorization.

Q: When might the LRS model become a significant source of revenue?

A: The specific timing for the implementation of the LRS model and becoming a significant source of revenue cannot be accurately predicted due to various collaborative factors. Once it becomes an important source of revenue, the company will make a special disclosure in a timely manner

Q: Can you share the comparison of metal prices in the first and second half of last year?

A: There were more fluctuations in metal prices in the second half of last year, while relatively fewer in the first half.

Q: Regarding price mechanisms, are they solely determined by metal prices? For example, how much does the price change of lithium affect the price increase?

A: Price mechanisms are not solely determined by lithium prices, but are closely related to various metals (such as nickel, copper, etc.) and chemical material prices. Price changes are not linear and consistent with lithium price changes, but are the result of a series of complex calculation parameters.

Q: If negotiating prices with OEMs next year, how much will the price change of the non-metal part be approximately?

A: The proportion of price changes in the non-metal part will not decrease, and the specific reduction range depends on the specific circumstances.

Q: What is the trend and magnitude of the cost increase for non-linked parts?

A: It is not a simple cost increase. We negotiate pricing with customers and cannot calculate prices using traditional cost markup methods. We will use a linked approach to share risks or lock in prices based on changes in metals, chemical materials, and other related factors to ensure that the products have technological content and high value.

Q: Can you provide the specific shipment growth rate for automotive batteries and the energy storage market in the first half of the year?

A: The shipment growth rate for energy storage in the first half of the year was approximately around 45%.

Q: How do you view the decision to abandon the low-price strategy in the domestic market and shift towards the overseas market?

A: In the domestic market, due to unclear policies and market conditions, the business model for energy storage projects is not yet clear, and a large number of low-price bids are not conducive to the long-term development of the industry. In overseas markets, the business model for energy storage power stations is more mature, and customers value product quality and brand reputation more. Therefore, the company has a higher market share in overseas markets.

Q: Can you provide the official stance on the specific production scheduling in the third quarter or July/August, as well as the internal production trend in the later period?

A: There is a lot of misinformation spread by fake experts in the market. It is recommended that investors and analysts rely on official statements. Currently, our production capacity is gradually being built up, and we expect to achieve over 100% capacity utilization in the medium term. Orders are very saturated, leading to a lot of overtime work for employees.

Q: What advantages does the company's Tianheng series products have in terms of performance parameters compared to competitors?

A: When the company launched the Tianheng series products, they were significantly ahead of competitors in terms of specifications. This is because the company established a dedicated R&D team for energy storage projects early on and carried out targeted design optimizations, such as increasing the lifespan of battery cells to five years with zero attenuation, while achieving higher energy density through structural design, with a single box capacity of up to 6.25 megawatts.

Q: With the hot sales of Tianheng products, how will the company establish a dominant position in the future energy storage field?

A: The company has deeply explored and expanded into the energy storage market, adopting flexible cooperation models based on different application scenarios. The key lies in the company's team building capabilities and precise understanding of market demands, rather than a single pursuit of a specific technological route. Regarding the R&D reserve and technology route selection for large-capacity battery cells, the company has corresponding technical and product development capabilities. Not all products are suitable for direct use by customers, but the optimal solution is determined by considering various performance indicators and cost-effectiveness

Q: What are the company's plans for the research and mass production of high-capacity battery cells?

A: The company is conducting technical research and development on high-capacity battery cells, with corresponding product reserves currently available. However, further evaluation is needed in terms of actual mass production, including cost, manufacturing difficulty, lifespan, and safety factors, in order to find the best cost-performance ratio (i.e., the sweet spot) as the basis for product decision-making.

Q: What is the development stage and goal of the company's intelligent chassis business?

A: The intelligent chassis project has passed national acceptance and is progressing smoothly, with high interest from domestic and foreign customers. It is expected that more cooperation agreements will be signed soon and enter the market. As for the inverter business, the company believes that energy storage system integration capability is more critical than the individual inverter hardware itself. Currently, the focus is on the overall energy storage system solution.

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