Author: Zai Er

On April 30, the 2022 first-quarter financial report released by CATL attracted attention. The data shows that the company’s total revenue for the reporting period was 48.678 billion yuan, a year-on-year increase of 153.97%, and the net profit attributable to shareholders of listed companies was 1.493 billion yuan, a year-on-year decrease of 23.62%.

Since the second half of last year, the pressure on the power battery industry has doubled due to the skyrocketing upstream raw material prices. However, CATL, who has always been known as the “King of Ningde”, even if it firmly occupies the leading position in the power battery industry, cannot escape the dilemma of “increased revenue but decreased profits”.

On the evening of April 29, CATL Secretary of the Board of Directors Jiang Li emphasized in a CCTV financial program that they value the company’s long-term stable profitability more than short-term net profit decline.

Performance is under pressure, with skyrocketing upstream raw material prices

CATL’s upstream is battery material manufacturers such as positive electrode materials, negative electrode materials, diaphragms, and electrolytes. A significant increase in raw material prices will seriously squeeze the profit margins of downstream companies.

Taking lithium carbonate as an example, the price of lithium carbonate in the first quarter of this year soared to 500,000 yuan/ton, while it was less than 50,000 yuan/ton in the same period last year, almost ten times higher.

In the CCTV financial program, Chen Zikun, chief analyst of Guangfa Securities’s New Energy Industry, analyzed, “Last year, the price of lithium carbonate rose from 100,000 yuan/ton to 200,000 yuan/ton in the fourth quarter. Price increases and product demand growth matched. However, in the first quarter of this year, the price of lithium carbonate rose rapidly, from 250,000 yuan/ton to 500,000 yuan/ton, but the sales volume of new energy vehicles did not show a high growth compared with the fourth quarter, resulting in a disturbance of the battery manufacturer’s inventory cycle.”

CATL stated that, considering the healthy development of the industry, the company took the initiative to bear some of the pressure from rising raw material prices in the first quarter.

The financial report shows that during the reporting period, CATL’s operating cost was 41.628 billion yuan, a year-on-year increase of 198.66%, far exceeding the company’s revenue growth rate of 153.97%. There are two main reasons for this: first, sales growth has increased costs, and second, the cost of some upstream materials has risen.

At the same time, it can be seen that under the pressure of rising raw material prices, funds used to strengthen the supply chain have correspondingly increased, resulting in a net cash flow from operating activities of 7.076 billion yuan, a year-on-year decrease of 35.48%.

As a leading enterprise in the power battery industry, even if the prices of raw materials are “savage growth”, CATL’s product prices have hardly been adjusted.Ningde Times explained that the current prices of raw materials are unreasonable, and if they rise quickly, midstream battery enterprises will inevitably follow suit, which is not conducive to the sustainable development of the industry. Therefore, the company did not choose to transfer costs downstream in the first quarter.

It can be seen that in the extremely irrational situation where the prices of upstream raw materials are skyrocketing, Ningde Times still takes on the responsibility and mission of a leading enterprise. With the support of scale advantages, supply chain advantages, and cost advantages, Ningde Times still has the ability to withstand pressure.

Upstream, midstream, and downstream enterprises are like “fleas on the same rope,” where a slight change will have far-reaching effects. One can imagine whether upstream can achieve sustainable development by simply raising prices without considering the capacity of midstream and downstream to bear such a burden.

Active Measures to Alleviate Pressure

In the first quarter, the main reason for the price increase in raw materials, especially lithium carbonate, was that the development cycle of lithium resources is long, and downstream demand is strong, leading to a short-term mismatch between supply and demand.

Regarding the problem of unreasonable price increases in raw materials, relevant departments have intervened. In mid-March, the Ministry of Industry and Information Technology, the National Development and Reform Commission, and the State Administration for Market Regulation held a meeting to ensure supply and stable prices, and required upstream and downstream companies in the industrial chain to strengthen supply-demand coordination and guide the rational return of raw material prices.

According to data from Shanghai Nonferrous Network, as of April 30th, the quotation for battery-grade lithium carbonate was between 450,000-473,000 yuan/ton, and the average price was 461,500 yuan/ton.

“This year, the increase in raw material prices is indeed too fast and too fierce. The company has renegotiated prices with major customers, dynamically adjusting product prices to cope with supply chain pressure,” said Jiang Li. With the release of production capacity, raw material prices will return to normal levels, and it is expected that the supply-demand relationship will be reversed in the second half of this year, so the industry outlook and the company’s development are both good.

In addition to adjusting prices, Ningde Times has been actively deploying raw materials, and has successively invested in nickel projects in Indonesia, cobalt projects in Congo, Yichun lithium projects, Yichang material integration projects, etc., to increase the proportion of raw materials for self-supply and fend off upstream price increase risks.

According to Jiang Li, the company has also been laying out resource development with partners in Jiangxi and other places recently. After the release of upstream production capacity, the pressure of raw material price increases will be further alleviated.

Jiang Li believes that from manufacturing enterprises to technology innovation-oriented enterprises, the development of Ningde Times cannot be achieved without improving its innovation capabilities. It is disclosed that Ningde Times has 10,079 R&D technicians, including 170 with doctoral degrees and 2,086 with master’s degrees. The company and its subsidiaries hold a total of 3,772 domestic patents and 673 international patents, and are applying for a total of 5,777 domestic and foreign patents.

CNY 45 Billion Private Placement Plan Approved by China Securities Regulatory CommissionOn the evening of April 29, CATL announced that its application for the issuance of stocks to specific objects was approved by the China Securities Regulatory Commission, and it plans to raise no more than 45 billion yuan from no more than 35 specific objects.

The raised funds will be used for the construction of 135 GWh lithium battery production capacity and other projects. The production capacity construction projects include Fuding era, Guangdong Ruiqing Era Phase I, Jiangsu Era Phase IV, and Ningde Jiaocheng Era’s four production bases.

According to SNE Research statistics, CATL’s power battery usage has been ranked first in the world for five consecutive years from 2017 to 2021. According to ICC Xinglun Information, CATL’s global energy storage battery production capacity market share was the first in 2021.

In addition to the three main revenue projects of traditional power batteries, energy storage batteries, and battery recycling and utilization products, CATL is constantly expanding its business boundaries and establishing new growth points.

On January 18 this year, CATL’s fully-owned subsidiary, Era Charging, released the EVOGO battery swapping service brand and the overall solution for combination battery swapping. It has signed cooperation agreements with multiple automakers such as FAW Pentium and Ai Chi Automobile.

Chen Zikun stated in a CCTV finance live broadcast that in the short term, the more of CATL’s performance comes from the release of scale effects; in the medium term, CATL has laid out major lithium battery materials throughout the supply chain and investment is expected to gradually reflect in three to five years. In the long term, CATL will gradually increase revenue in the non-manufacturing sector. The current decline in net profit is just short-term disturbance.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.