Ningde Times: Little setbacks are just interludes, YYDS is the main melody

On the evening of August 23, 2022, Ningde Times announced a surprising and somewhat helpless performance for the first half of 2022. Let's take a look at the beginning and end: revenue for the first half of the year was 113 billion yuan, a year-on-year increase of 156%; and net profit attributable to shareholders was 8.2 billion yuan. Both core numbers exceeded market expectations, and the main reason for the over-performance was the rapid margin repair in the second quarter:

With its high status and almost effortless profit repair, the earnings trend for the first half of the year was poor for energy storage, but the core of the rapid margin repair in the second quarter was power batteries. With Ning Wang's superior position in the industry chain, when the downstream price increased after the power battery upstream, vehicle manufacturers had no choice but to accept it. Therefore, the pressure was smoothly transmitted, and the gross profit margin recovery speed in the second quarter exceeded market expectations.
Hidden surprises: the overseas market strengthens Ningde's confidence. With the rapid growth of BYD battery's market share driven by its own vehicle business in the first half of the year, it suppressed the position of Ning Wang in the domestic market. However, with the fierce global market attack by Ning Wang, the expansion of market share is still the undisputed leader. In addition, with the continued price increase, although Ningde Times was affected by the epidemic in the second quarter, the year-on-year growth rate of overall revenue in the second quarter was still accelerating compared to the first quarter.
The operating leverage accelerates under the scale effect: since the income growth in the second quarter is still accelerating above a large volume, the scale effect of the second quarter is more obvious, and the single-quarter expense ratio has directly dropped to 9.6%, which is below 10% for the first time.
Financing powerhouse: the company's operating cash flow for the quarter is to supply funds for expansion, but due to its strong financing ability and market response to financing demand, the company's cash reserves became richer by the end of the second quarter. In addition, with more than 150 billion yuan in cash and equivalent reserves, and Ning Wang's rare dividend in the first half of the year, it gave all shareholders a red envelope of nearly 1.6 billion yuan.

Dolphin Analyst's view:

Ning Wang is still Ning Wang. The so-called profit instability in the fourth quarter of last year and the first quarter of this year were just minor incidents. The fact proves that as long as it wants profits, the pressure transmission seems to be easy. Looking forward, as the price has risen and the cost of battery-related raw materials has declined from its peak, the profitability of Ning Wang should come to an end for now.

At the same time, the unexpectedly strong income in the second quarter reflects the momentum of the company's sweeping of overseas markets after becoming bigger and stronger in the domestic market. In the future, overseas market vehicle production will be a major area of focus.

From the recent trend of the stock price, the market has already anticipated Ning Wang's over-performance in advance. After the profit margin gradually becomes less of an issue, the subsequent focus should be on the pace of Ning Wang's overseas market invasion and the competitive dynamics in the domestic market.

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Regarding Ningde Times' latest financial report, Dolphin Analyst is primarily concerned with the following issues:

Growth: Power batteries, energy storage, and even battery materials are all running fast. What is the company's market seizing trend?
Gross margin: After the straight-line decline in gross margin in the first quarter, can the company smoothly pass on cost pressures and maintain gross margin?
Expense ratio: Focus on the ability to release operating leverage. Can the company continuously compress R&D, management, and sales expenses by expanding its scale?

With these questions in mind, let's find the answers in the financial report. The following is the main text:

I. Overall Performance: Globally Competitive and Strong Momentum

Revenue and Net Profit: In the first half of 2022, the company achieved revenue of 113 billion yuan, a year-on-year increase of as much as 156%, and its size has almost reached the level of last year's total income of 130 billion.

Especially in the second quarter, the company's single-quarter revenue reached 64.3 billion, while Dolphin Analyst saw that the market's revenue expectations for Ningde's second quarter were only around 57 billion; the growth rate of 158% was even higher than the first quarter's growth rate under the pressure of the epidemic.

Among them, the power battery business is still amazing: it is still accelerating its growth with a high base. From the perspective of market share in the power battery market: Although the domestic market share of Ningde era has slightly decreased due to the sharp increase in delivery volume of BYD, its global market share still increased by 6.2 percentage points.

Looking at the entire battery business (including energy storage), the overseas business has reached 22.3 billion in the first half of this year, and its contribution to the overall battery revenue has reached 22%.

At the same time, the company achieved a net profit attributable to shareholders of 8.2 billion yuan in the first half of the year. Although the profit fell short in the first quarter, it reached 6.7 billion yuan in the second quarter after cost pressures were smoothly passed on, significantly exceeding the market's profit expectations of about 5 billion.

1.2 Rapid recovery of gross margin: After the gross margin dropped straight to 14.5% in the first quarter, in the second quarter, the price of Ningde's batteries began to be linked to raw material prices, and the upward pressure on upstream prices was smoothly passed on to automakers, so the gross margin has begun to recover, reaching 21.8%, which is more than the market's generally expected level of around 20%.

Looking ahead, the prices of metals and materials related to batteries have gradually decreased, and coupled with the continuous growth in shipments, it can also support the continuous recovery of Ningde's era's profitability.

1.3 Cost End: The Magic of Operating Leverage Continues, Cost Ratio Continues to Decline With the rapid expansion of the company's business scale, the corresponding cost scale also shows a trend of rapid expansion, but the scale effect has also been fully reflected, especially the dilution effect on management costs is very obvious. In addition, the company is now flush with cash, lying on interest, and in the second quarter, the overall cost for the first time decreased to below 10%, only 9.6%.

For example, the company's first major expenditure item is R&D costs, and the growth rate has been doubling since the first half of last year. However, due to the company's sufficient income growth, the cost ratio is actually narrowing. The same logic applies even more to the company's management expenses, which have a stronger operating leverage effect than R&D.

Although the comprehensive service of after-sales rises linearly with the increase of market share and delivery, other sub-items have not exceeded revenue growth. The overall cost performance is impressive and reflects the company's strong product strength.

II. Power Battery System: The Hard and Solid Strength Behind the Double Increase of Volume and Price

1) Global Dominance: From the perspective of power battery installed on vehicles in the first half of the year, due to the surge in BYD sales, Ningde Times' domestic market share has significantly declined. However, due to the significant surge in overseas markets, and with BYD batteries mainly for self-use, Ningde continues to lead Chinese battery brands in their erosion of overseas brands, with market share increasing by 6.2%, which is still the largest increase.

2) Revenue: Strength Overflow, Price Rises as Planned

During the first half of 2022, power battery revenue was RMB 79.1 billion, a year-on-year increase of 156%. According to SNE data, the installed volume of power batteries in Ning Wang globally was 71GWh, a year-on-year increase of 115%. In other words, revenue for the first half of the year contributed 115% from the volume dimension, while from the price dimension, through continuous price increases, contributed growth of around 20%.

The gross profit margin of the power battery in the first half of the year dragged down the core, mainly due to poor profits in the first quarter. From the over-expectation of organizing the gross profit margin (more than 60% of the gross profit contribution of the power battery) in the second quarter, it can be judged that Ning Wang's power battery gross profit margin repair speed is very fast.

3. Energy Storage and Battery Materials: More Eye-catching than Power Batteries

1) Energy Storage Business: In the first half of the year, the overall performance of the energy storage business was much worse than the previous quarter's outbreak, compared to the full recovery of power batteries. The energy storage revenue in the first half of the year was 12.7 billion yuan, a year-on-year increase of 171%, still in high growth. The profit performance this time was a bit unsightly, with a gross profit margin of only 6.4%, significantly lower than the previous 20% level，which may be related to the overseas project-based energy storage.

However, gross profit in the energy storage business is not the focus, explosive growth is more important. As a leading player in the industry, the energy storage track has great prospects, and the future growth and explosiveness should be similar to that of power batteries.

2) Lithium-ion Materials: The sales revenue of lithium-ion materials in the first half of the year was 13.7 billion yuan, a year-on-year increase of 174%, with a gross profit margin of 21%, and a decline in growth rate and gross profit margin. It seems that the price increase of upstream resource products still has some pressure on its profitability.

4. Cash Flow: The Number One Financing Player

Although Dolphin has strong profitability and lending capabilities, due to continuous investment, the company's operational cash flow cannot cover investment expenses.

Fortunately, the company's financing capabilities are very strong. After Q2 financing, coupled with strong lending capabilities, the cash flow is better than before. By the end of Q2, there were more than RMB 150 billion in cash and cash equivalents, which can be said to be well-prepared. Dolphin can now confidently develop and invest in new technologies.