Viewing Ning Wang through TSMC: An Inescapable Cyclical Fate

The leading power battery company, CATL, announced at the end of December last year that it would raise at least $5 billion to list on the Hong Kong Stock Exchange. The last time Dolphin Jun initiated coverage on "Ning Wang" (see “CATL: Is Faith Building a 'Rigid Bubble'?”) was back in 2021 when "Ning Wang" was enjoying the favor of many stars.

After experiencing a domestic supply explosion, valuation increases, and valuation cuts, the fallen "Ning Wang" has now turned its attention to listing in Hong Kong. Of course, the desire to go public is understandable; after facing setbacks in overseas markets, listing in Hong Kong provides a great platform for engaging with international capital.

Dolphin Jun also seizes this opportunity to rethink the track that "Ning Wang" is on and the investment logic behind it from the perspective of cross-industry comparative research.

This article focuses on the following questions regarding CATL:

1."Ning Wang": Can a technology leader escape the fate of cycles?

2.Why does even a leading battery company lack the ability to transcend cycles?

3.What are the differences in investment logic between CATL and TSMC, both leaders in manufacturing?

Looking in detail:

1. "Ning Wang": Can a technology leader escape the fate of cycles?

From the historical stock price review of "Ning Wang," its market value peaked at 1.6 trillion yuan at the end of 2021, then rapidly fell to a cyclical low of only 640 billion yuan at the beginning of 2024, before recovering to the current 1.1 trillion yuan, while the TTM PE ratio dropped from a peak of 150 times to only 23 times now.

The fundamental reason for the decline in stock price is mainly due to the insufficient speed of battery technology iteration and low competitive barriers, leading to rapid overcapacity in the industry. At the end of 2021, "Ning Wang's" capacity utilization rate rose to a peak of 95% (which was also the peak stock price), but then continued to decline, and by the first half of 2024, "Ning Wang's" capacity utilization rate had dropped to only 65%.

This shows that "Ning Wang's" stock price is strongly correlated with the industry's beta level, lacking the ability to generate its own alpha and transcend cycles during downturns.

2. Why does even a leading battery company lack the ability to transcend cycles?

a. Product supply side: The industry attributes of batteries determine that the technological moat is not deep.

Dolphin Jun compares "Ning Wang" with TSMC, the leader in the high-end manufacturing of precision chips. From the perspective of R&D results:

① The chip manufacturing industry has a fast technology iteration, and each generation of process breakthroughs can lead to significant improvements in chip performance.

The iteration speed of chip manufacturing processes is very fast, with new process breakthroughs occurring almost every two years, following Moore's Law in the semiconductor industry: when prices remain unchanged, the number of components that can be accommodated on an integrated circuit doubles approximately every 18 to 24 months, and performance also improves by a factor of twoDue to the uniqueness of high-purity silicon, the higher the integration, the cheaper the price of transistors.

The chip manufacturing process also directly affects the chip's performance, power consumption, and cost (for example, under the same power consumption, TSMC's 3nm chip has improved by about 10%-15% compared to 5nm, while under the same performance, power consumption can be reduced by 25%-30%).

In other words, as long as R&D investment maintains an absolute leading level in the industry and there are no path-dependent misjudgments in technological iteration, the certainty of breakthroughs in leading processes is relatively high, and the speed of technological iteration is fast (essentially iterating every two years), forming a strong technological moat. Leaders can leverage advanced processes with rapid iterations to outcompete peers in the technological cycle, which has also led to only three players in advanced processes: TSMC, Samsung, and Intel, with Samsung and Intel increasingly struggling to keep up with the leading TSMC.

TSMC Process Iteration

② The battery industry has a slow technological iteration, and the iteration speed is relatively linear, making it difficult to achieve disruptive breakthroughs during the technological cycle:

In contrast, the battery industry also has a certain technological iteration path. Battery density is proportional to endurance, reflected in the energy density of the battery; higher energy density means longer battery range.

There are two major breakthrough directions in battery technology: one is innovation in material systems, and the other is innovation in structural systems. More advanced electrochemical systems can allow active materials to possess greater energy, while a more streamlined system structure can help battery packs achieve greater utility.

However, innovation in material systems still follows the rules of the electrochemical industry. The electrochemical industry, in a strict sense, belongs to a gradually developing industry through formula trial and error, requiring long-term trial and error accumulation at the foundational level. Therefore, there will be situations where several different technological routes are developed in parallel, and some technological routes may be eliminated during the R&D process due to inherent defects that cannot be resolved. For example, from the previously eliminated lead-acid batteries, nickel-cadmium batteries, and lead-acid batteries, to the current leading battery manufacturers simultaneously laying out sodium-ion batteries, semi-solid batteries, all-solid batteries, etc.

Although the changes brought about by innovation in material systems are generally disruptive, the time taken from laboratory validation to mass production typically takes at least 10 years. Therefore, there has been no fundamental change in the material technology route of batteries over the past 30 years, still primarily based on lithium batteries.

Thus, in the short term, before there is a significant switch in the battery material system route and under the high safety requirements of industrial chain applications, innovations by battery manufacturers are concentrated in structural systems, and the improvement of battery energy density remains a relatively gradual process (high energy density and safety inherently conflict with each other)Therefore, even for the leading company CATL, whether it is NCM or LFP batteries, the improvement in battery density in recent years has mainly come from innovations in structural systems (from CTP 1.0 to CTP 3.0), with the average annual CAGR increase in battery energy density being only around 5%, leaving relatively ample time for other battery manufacturers to catch up. It is difficult to achieve a disruptive impact during the technology cycle, so the technological moat is not very deep.

b. On the demand side: The end-user enterprises of batteries are also experiencing oversupply and are continuously moving towards a "demand downgrade" trend.

From the application scenarios of TSMC's products, smartphones and high-performance computing (HPC) are the main application scenarios, accounting for 88% of revenue. The demand for high-performance chips in these two application scenarios (especially in the HPC industry, although AI smartphones may emerge after the smartphone industry) is almost limitless, as high-performance chips further promote the emergence of new business models for downstream products, helping to expand the overall market demand at the end-user level and solidifying the industry position of end-user enterprises, potentially increasing their market share.

Looking closely at TSMC's two largest clients in the smartphone and HPC fields, they are both industry leaders, Apple and NVIDIA, which have already established strong competitive barriers through ecological closed loops and absolute technological leadership. The overall gross profit margins reached 46% and 75% in the latest quarter, providing ample profit space to return to the upstream supply chain, especially for the core factor affecting the performance of end-user chips—the chip manufacturing process. This allows TSMC to maintain high gross margins for rapid iteration and trial-and-error in manufacturing technology, forming a positive cycle.

In contrast, the battery industry, while also having good extensibility in application scenarios similar to chips, bringing potential market space increments, is currently still constrained by the slow iteration speed of battery energy density and insufficient economic viability. Therefore, it has only unlocked scenarios such as smartphones, two-wheeled electric vehicles, and electric passenger/commercial vehicles.

However, the penetration rate of new energy commercial vehicles is still relatively low, with a penetration rate of only around 20% in 2024, mainly due to the generally heavier models of commercial vehicles (such as trucks), leading to higher energy consumption and requiring higher battery energy density and battery capacity compared to passenger vehicles.

Currently, due to the limitations of battery energy density and economic viability, the range of new energy commercial vehicles is still relatively short, while trucks are generally used for intercity transportation, which requires a higher range than passenger vehiclesTherefore, Dolphin Jun expects that, if there is no switch in the existing technology route, the commercial vehicle market will be the next scenario for CATL to unlock penetration rates, following the linear improvement in current battery energy density (in the order of electric buses/light trucks/heavy trucks). The low-altitude economy and even electric aircraft scenarios are still very far off and may still require a switch to the next-generation technology route (solid-state batteries).

From the current proportion of CATL's battery revenue, power batteries still account for 80% of battery revenue, and the shipments of power batteries are still mainly for passenger vehicles, so CATL's main customers are still new energy vehicle companies.

However, among new energy vehicle companies, although Tesla is still CATL's largest customer, the actual gross margin from selling cars has dropped to less than 20%, and at its lowest point, it was even below 15%.

The reason is simple: the application enterprises of power batteries in new energy vehicles, in the first half of the new energy era dominated by electrification, have basically reached the end of core three-electric innovation, leading to an inability to create fundamental performance differences, with increasing homogenization, and even becoming an "assembly plant" for automotive parts. This has also led to new energy vehicles gradually becoming ordinary manufacturing, unable to construct core competitive barriers.

Moreover, the new energy vehicle market has begun to experience oversupply since early 2022, which has continued to intensify in 2023 and 2024, essentially shifting from a supply-driven to a demand-driven logic.

Observing the proportion of new energy vehicles in different price ranges, when the industry shifts from supply-driven to demand-driven (2021 vs. 2024), the proportion of new energy vehicles priced above 200,000 has shown a downward trend, while new energy vehicles priced between 100,000 and 200,000 have become the absolute mainstream, with their proportion continuously increasing, almost accounting for "half the territory" of the entire new energy vehicle market.

Therefore, under the evolution of this trend, it is difficult for new energy vehicle companies to move upmarket and enhance brand perception to obtain high gross margins; they are basically following a brand down-market route, initiating a "price-for-volume" model, such as XPeng Mona, Nio's Lido/firefly, Li Auto L6, and Tesla's "Model 2.5".

However, the elimination race for new energy vehicles is still not over. According to Goldman Sachs, although half of the new energy vehicle companies have fallen into a negative operating cash flow situation, these manufacturers are still increasing capacity expansion in 2024 (with capex expected to grow by 35% year-on-year). There is no sign of a marginal improvement in the supply-demand relationship in the industry, and competition will only become more intense.

Therefore, the new energy vehicle industry is still in an elimination race, especially since the intelligence aspect is not yet mature and has not fundamentally impacted sales and profits. The profit margins of new energy vehicle companies are continuously being compressed, leaving insufficient profit space to return to the upstream supply chain.

New energy vehicle companies may even try to compress the profit margins of the upstream supply chain as much as possible, especially for upstream auto parts where the technical barriers are not strong (for example, BYD requires upstream suppliers to reduce prices by 10% annually).

This is also reflected in the continuous high demand for high-performance chips in the HPC and smartphone sectors (for instance, at a dinner in Taiwan, it was reported that Jensen Huang would proactively suggest price increases from TSMC). The industry structure is moving towards demand upgrading (with the proportion of advanced processes continuously increasing, TSMC's revenue from 7nm and below processes accounting for 70%). TSMC itself has a high technical barrier, and advanced processes have a crushing advantage, continuing to follow a supply-side driven logic.

As for power batteries, since the main application field is still in electric passenger vehicles, new energy vehicle companies have not established a significant performance gap in the first half of the electrification race, failing to construct core competitive barriers, which leads to:

The overall structure of new energy vehicles is moving towards a price-down route, with "exchanging price for volume" becoming the mainstream trend in the industry; 2. The gross profit margin of most new energy vehicle companies is continuously declining.

Thus, the new energy vehicle industry is showing a trend of "demand degradation": manufacturers will try to compress battery costs as much as possible, resulting in lower energy density batteries, while the demand for lower-cost LFP batteries is continuously increasing, rising from 33% in 2019 to 75% in 2024, and even reaching a peak of 81% in December 2024.

It can be seen that as long as there is no switch in the battery material system route, low-cost LFP batteries have become the absolute mainstream in the industry.

c. Industry Attributes: The battery industry has a lower heavy asset attribute compared to the chip manufacturing industry, with low capital barriers for capacity expansion and not obvious scale effect advantages

From the balance sheet perspective, the chip manufacturing industry has a significantly stronger heavy asset attribute compared to battery manufacturing. TSMC's fixed assets account for 50%-60% of total assets for many years, while the leading battery manufacturer CATL's fixed assets and construction in progress only account for around 20% of total assets

From the perspective of the Capex/Revenue ratio of leading battery and chip manufacturers, the ratio for leading battery manufacturers can only reach a maximum of 34% even during peak expansion periods, while during industry downturns, the Capex/Revenue ratio has dropped to less than 10%.

In contrast, TSMC's Capex/Revenue ratio reached 53% during peak expansion periods, and even at the low point of the cycle, this ratio does not fall below 30%.

This means that the capital barrier for capacity expansion in the chip manufacturing industry is higher, and the investment amount per unit capacity for more advanced processes is also higher. Conversely, the capital barrier for capacity expansion in the battery industry is relatively lower.

From the perspective of sales cost structure, the chip manufacturing industry and the battery manufacturing industry are completely different. In the chip manufacturing industry, manufacturing costs account for a significant portion, with depreciation and amortization expenses being the highest. Therefore, the core elements of TSMC's production are equipment and production lines.

In the battery manufacturing industry, upstream raw materials constitute the bulk of sales costs, with manufacturing costs accounting for a lower proportion. The impact of depreciation and amortization expenses on CATL's costs is also minimal, so the core element for CATL in controlling costs is the management of raw material costs, which requires high standards for material supply chain management.

As mentioned previously regarding heavy asset businesses, the higher the attribute of a heavy asset model, the more obvious the economies of scale advantages will be when terminal demand continues to grow. This leads to lower unit depreciation and amortization, releasing profits and correspondingly improving ROE levels, which TSMC clearly aligns with.

3. What are the differences in investment logic between leading manufacturers CATL and TSMC?

Based on the analysis above, TSMC's success can mainly be attributed to:

a. End-user application companies such as Apple and NVIDIA have high competitive barriers (whether technical or ecological), possess high gross profit advantages, and have sufficient profit margins to return to the upstream supply chain;

b. TSMC's advanced chip processes are the most critical factors affecting the performance of end products (chips) in the upstream supply chain. Breakthroughs in processes will further promote the emergence of new business models for downstream products, expand the overall market space for end products, and consolidate the market position of end-user companies;

c. TSMC's advanced process has a high technical barrier, with the speed and certainty of technological iteration forming a core moat capability, safeguarding and even achieving further expansion of market share;

Source: Dolphin Investment Research

The simultaneous satisfaction of these three points is very important. TSMC, with its strong technological barriers, not only has the ability to generate its own alpha (ensuring continuous market share growth and obtaining high product premiums through advanced process technology), but also has the ability to foster industry beta (the emergence of new business models downstream due to advanced processes, the continuous expansion of the chip manufacturing market space, and the industry consistently following a demand upgrade logic).

However, if only points a & b are satisfied and TSMC's technological barriers are not high, terminal enterprises, even with ample profit margins, will be more inclined to vertically integrate, keeping the most core products of the upstream supply chain in their own hands to achieve higher profit margins and ensure supply chain stability.

In industries with higher technological barriers in the upstream supply chain, specialized division of labor and cooperation are more necessary. For example, Intel has been using the IDM model (completing all processes such as chip design, manufacturing, and packaging/testing in-house), but due to the slow upgrade of advanced processes, the competitiveness of the final chip products has been insufficient, resulting in a continuous loss of market share even in the CPU market where it excels.

Therefore, from the historical evolution of the chip industry, the Fabless model (focusing solely on chip design and outsourcing production to TSMC) is clearly more suitable for terminal application enterprises than the IDM model (vertical integration model). This is also reflected in the current high-end process players: Samsung and Intel's chip manufacturing shares are gradually being captured by TSMC, and TSMC's market share continues to rise.

In contrast, in the battery manufacturing industry, even the leading battery company Ning Wang has not been able to generate its own alpha. Dolphin believes the main reason is:

a. In the first half of the competition centered on electrification, the technological gap in the core three electrics is already small. Terminal application enterprises (new energy vehicle companies) do not have high competitive barriers. In the context of continuous supply surplus and no signs of marginal improvement, "exchanging price for volume" and "brand downscaling" have become the mainstream trends in the new energy vehicle industry (the price range of new energy vehicles is concentrating around 100,000 to 200,000 yuan).

As the unit price of new energy vehicles continues to decline, car manufacturers will focus on controlling costs (especially for mass market positioned manufacturers like BYD and Geely), particularly in controlling the costs of batteries, which have the highest value in the upstream supply chain, leading the industry to consistently follow a demand downgrade logic (the proportion of LFP batteries, which have lower energy density but lower costs, continues to rise)

b. Although batteries are the most critical factor in the upstream value chain of electric vehicles (directly affecting range), the speed of technological iteration is relatively slow. Unlocking new business models requires disruptive innovations in material systems (such as next-generation solid-state batteries).

In the current business model, the performance of batteries from various manufacturers has not fundamentally diverged, especially in the case of LFP batteries with lower energy density. This results in car manufacturers being unable to enhance their market share and create more end-user demand by using Ningde Times' batteries.

c. Ningde Times' technological barriers are constrained by the chemical properties of the battery industry, making it difficult to achieve a disruptive breakthrough during the technology cycle. The slow improvement in battery energy density provides sufficient time for latecomers to catch up.

This is also reflected in the battery industry, where Ningde Times' market share for power batteries peaked in 2021 (the turning point from supply being less than demand to supply exceeding demand) and has since shown a downward trend.

Analyzing the reasons for the decline in Ningde Times' market share reveals that Ningde Times has a leading advantage in NCM batteries, which have higher energy density and relatively higher technological barriers. Although NCM batteries are more expensive, high-end models inherently have a high premium to absorb the higher battery costs. Therefore, Ningde Times' market share in the domestic NCM power battery market continues to rise, thus maintaining its share in the high-end market (in 2023, Ningde Times' market share in high-end models priced above 300,000 reached 68%, demonstrating a crushing advantage).

However, with the overall demand in the new energy vehicle industry declining and the trend of demand for power batteries shifting towards LFP, Ningde Times' market share in LFP batteries is rapidly declining (from 50% in 2021 to 37% in 2024). This is mainly because models using LFP batteries are generally mid-to-low-end models, which are more price-sensitive and prioritize controlling battery costs. Additionally, the energy density and technological barriers of LFP batteries are not as high as those of NCM batteries.

Dolphin Jun has previously mentioned that for products with low technological barriers (such as LFP batteries, which have a slow iteration speed), but are the most critical and valuable in the upstream supply chain, end car manufacturers tend to prefer vertical integration to ensure their cost and pricing advantages. This is especially true for car manufacturers positioned in the mass market, where cost-performance ratio remains the core competitiveness of models in this price segment.

Lower costs also mean a higher chance of survival in the elimination rounds among car manufacturers, as detailed in "[How can BYD still profit while battling numerous competitors?](https://longportapp.cn/zh-CN/topics/22253259?"channel=t22253259&invite-code=4NOXYT&app_id=longbridge&utm_source=longbridge_app_share&locale=en-US)，《 BYD: The Final Battle!》。

The market share lost by Ningde Times in the LFP battery market has been partially seized by second-tier battery manufacturers taking advantage of lower prices, and another part has been taken by car manufacturers developing and producing their own batteries.

Therefore, regarding the investment logic of Ningde Times, Dolphin believes that if the downgrade of demand for power batteries from terminal new energy vehicle manufacturers remains the mainstream trend, cost advantages will be more important than product premiums.

The ways to achieve cost advantages in the battery industry are:

① Controlling upstream raw material costs: Mainly achieved through vertical integration of upstream raw materials, and Ningde Times' leading position grants it pricing power over upstream suppliers, resulting in lower procurement costs;

② Adopting lower-cost material routes: The "XiaoYao" battery released by Ningde Times in October 2024 introduces lithium-sodium AB battery system integration technology, mainly used in plug-in hybrid models.

Since the launch of the "XiaoYao" battery, it has gained high industry recognition, and it has already been designated for brands including Li Auto, Avita, Deep Blue, Qiyuan, and Nezha. It is expected that by 2025, nearly 30 range-extended models will be equipped with the "XiaoYao" battery.

In the long term, breakthroughs in the next generation of condensed matter batteries and solid-state batteries, achieving a leap in energy density, are more important for unlocking new application scenarios and expanding the overall market space of the battery industry.

Therefore, Dolphin believes that the short-term investment logic for Contemporary Amperex Technology Co., Limited (CATL) lies in observing the industry's capacity clearing rhythm, which is more about the industry beta-level logic. In the long term, whether CATL can build its alpha logic depends more on breakthroughs in next-generation battery technology, while the latter part remains a narrative of watching and waiting.

Financial Report Commentary:

October 21, 2024 Financial Report Commentary: “Trillion” Ning Wang is really going to rise this time?

October 21, 2024 Conference Call Minutes: CATL 3Q24 Earnings Call Minutes

July 27, 2024 Financial Report Commentary: Internal and External Pressure, Ning Wang “Tiger Falls to the Plain”

July 29, 2024 Conference Call Minutes: CATL 2Q24 Conference Call Minutes

April 15, 2024 Financial Report Commentary: Ning Wang: The Low Point Has Passed, Is Dawn Near?April 16, 2024 Conference Call Minutes: Full Production Capacity, Has the Battle of Ning Wang Begun?

March 16, 2024 Conference Call Minutes: Before the Dawn of the Battery Blood Battle, Did Ning Wang Step In to Deliver the Final Blow?

March 16, 2024 Conference Call Minutes: Ningde Times 4Q23 Conference Call Minutes

October 19, 2023 Financial Report Commentary: Ning Wang: Slowing Growth, When Will the Trillion Era Return?

October 20, 2023 Conference Call Minutes: Slowing Growth, Does Ning Wang Continue to Protect Gross Profit at the Expense of Market Share?

July 25, 2023 Financial Report Commentary: Ning Wang: Stability is Enough, Just Becoming "Mediocre"

July 25, 2023 Conference Call Minutes: [Ningde Times Minutes: Expanding Overseas, Protecting Gross Profit](https://longportapp.cn/zh-CN/topics/8478937?app_id=longbridge)

April 21, 2023 “Ning Wang: Perfect Counterattack Expectations? A Strong Foundation is Key”

April 21, 2023 “CATL: Grasping Energy Storage and Overseas Markets, Gross Profit Remains Stable (Minutes)”

March 9, 2023 Earnings Report Review “CATL: Car Manufacturers Cry, Batteries Laugh, How Far Can This Money Go?”

March 9, 2023 Conference Call Minutes “CATL: ‘Current Gross Profit Margin is a Reasonable Level’ (Minutes)”

October 22, 2022 Earnings Report Review “With All Stars Supporting, Ning Wang, Next Year is the True Test of Love”

October 22, 2022 Earnings Call Minutes “Lithium Prices Will Drop Next Year, New Energy Vehicle Penetration Rate Will Be Faster Than Expected”

August 24, 2022 Earnings Report Review “CATL: Minor Setbacks are Just Interludes, YYDS is the Main Theme”August 24, 2022 Financial Report Conference Call Summary: Profits from power batteries in the second half of the year will not be worse than in the second quarter

May 20, 2022 Overview of the Power Battery Sector: The collapse of new energy, has the investment divergence point arrived?

April 30, 2022 Financial Report Commentary: Performance thunder arrives as expected, is the era of Ning Wang coming to an end?

April 30, 2022 Financial Report Conference Call: Ning Wang does not care about performance thunder, market share and customer structure are the core observation indicators

April 22, 2022 Financial Report Commentary: Dispersed public sentiment kills valuation, CATL faces a dual test of profitability and confidence

October 28, 2021 Financial Report Commentary: In the face of yyds CATL, should we still fear valuation?