Article: Financial Street Old Li

Ningde Times creates its best financial report in history, but also faces double obstacles.

On April 21, Ningde Times released its 2021 financial report. During the reporting period, Ningde Times’ power battery shipments reached 133.41GWh, an increase of 184.82% year-on-year. The company’s revenue was 1303.56 billion yuan, an increase of 159.06% year-on-year. The net profit belonging to the shareholders of the listed company was 15.931 billion yuan, an increase of 185.34% year-on-year. The three core financial indicators have all reached historic highs.

However, last night, Ningde Times suddenly announced that, based on the principle of caution, the first quarterly report scheduled to be disclosed on April 28 will be delayed until April 30, leaving investors in suspense. Old Li received information that the first quarterly report of Ningde Times may not meet expectations. Based on statistical principles, some of the performance “hidden” in the annual report will be released in the first quarterly report, which is not a violation and is a common practice in financial report publishing.

The more chaotic the market is, the more we need to look for opportunities. Today, Old Li will talk with everyone about what secrets are hidden behind Ningde Times’ financial report. What obstacles does Ningde face? After the market recovery, can Ningde Times still continue to soar?

Secrets of Ningde Times’ Financial Report

Looking at Ningde Times’ annual report, if we are optimistic, the good outweighs the bad, but if we are pessimistic, the bad outweighs the good. Different perspectives will lead to different judgments. We will briefly summarize the key information of the Ningde Times annual report:

In 2021, Ningde Times’ annual revenue was 1303.56 billion yuan, and the net profit belonging to the shareholders of the listed company was 15.931 billion yuan. The revenue mainly comes from three major sectors:

• The sales revenue of the power battery system business was 914.91 billion yuan, an increase of 132.06% year-on-year;
• The rapidly growing energy storage system business, with energy storage system sales revenue of 136.24 billion yuan, an increase of 601.01% year-on-year;
• The lithium-ion battery material business, with revenue of 154.57 billion yuan, an increase of 350.74% year-on-year.

From the financial data, Ningde Times’ revenue is at the same level as the top three privately-owned car companies in China. In 2021, Geely Auto’s revenue was CNY 101.6 billion, BYD Auto’s business revenue was CNY 112.7 billion, and the first-ranked Great Wall Motor was only CNY 136.4 billion. This illustrates Ningde Times’ outstanding performance.From a profit perspective, CATL crushes the three largest private-owned car companies with a net profit of 15.931 billion yuan, which is more than the combined net profit of the three car companies (Great Wall Motors at 6.73 billion yuan, Geely Automobile at 4.35 billion yuan, and BYD at 3.045 billion yuan).

What is the performance of CATL’s 2021 annual report? Different friends will have different answers. Friends who are optimistic about CATL think it exceeds expectations. Friends who are skeptical believe that CATL is at the end of its rope as competition intensifies.

First, let’s look at the advantages, namely, the high-speed growth of the energy storage and overseas markets, and the continuously improving market share of CATL. In terms of market share, CATL’s power battery business and energy storage business firmly take the first place in the world, and the gap with the second place has been widening. As Mr. Li said before, market share is one of the valuation codes for CATL. As long as it has the market share, its trillion-dollar market value won’t collapse.

Mr. Li would like to talk about the overseas market in particular. In 2021, CATL’s overseas revenue increased from 15.71% to 21.38%, with a gross profit margin as high as 30.48%. Tesla, Hyundai, Ford, Daimler, and other overseas car companies are all customers of CATL.

Through the financial report, we can also see the relatively pessimistic side, including the continuous decline in gross profit margin of the power battery business caused by upstream and downstream competition, and the risk of losing customers. The gross profit margin of the power battery business has fallen by 4.56 percentage points to 22%, and the gross profit margin of the energy storage system has fallen by 7.51 percentage points to 28.52%. Overall, the decline in gross profit is due to the objective law of upstream material price increase and the industry entering a stable period, with dividends gradually fading away.

It should be noted that Tesla is currently CATL’s largest customer, accounting for 10% of the total revenue. Mr. Li would like to say that Tesla is a typical enterprise with core technology self-researching. With the application of 4680 batteries, CATL will eventually lose Tesla as a “super customer.”

Friends who are familiar with the industry will find that CATL “hid” a part of its 2021 performance. The revealed shipment volume in the annual report was lower than the industrial statistics. We can predict that CATL has left some flexible space for 2022.

After the market closed on April 19th, rumors circulated that CATL’s Q1 2022 earnings would be lower than expected, possibly less than 5 billion yuan, or even significantly revised downward. Mr. Li believes that it will be very difficult for CATL to achieve a net profit of 5 billion yuan in Q1 under the influence of the epidemic this year.Due to the price of lithium carbonate being 100,000 yuan/tonne higher in March than at the beginning of the year, and estimated based on CATL’s monthly production of about 20GWh, cost has increased by 800-1,000 million yuan. Therefore, it is expected that the net profit of CATL’s first quarter will be around 3 billion yuan, which is obviously an unacceptable market figure. Added to the overly pessimistic external environment, CATL may release the hidden profits from its annual report last year in the first quarter, with the possibility of increasing profits to 4 billion yuan and breaking 5 billion yuan is not high.

Starting is always hard. In the relatively bearish market environment, CATL’s Q1 start is bound to face challenges, but the situation of other battery companies is even worse than that of CATL.

A Double Attack from Upstream and Downstream

Various voices have been heard about CATL since the first quarter of this year. In “CATL, Is It Still The ‘King’?” of Old Li, the situation of CATL was introduced. In fact, there are not many factors that negatively affect CATL, and if one wants to nitpick, then “the two forces attacking CATL are, firstly, the battery companies playing the price war, which is self-defeating and secondly, the obstacles from the automotive companies themselves.”

Firstly, the price war among peer battery companies caused damage on both side.

Since last year, the market share of second-tier battery companies has been rising. However, Contemporary Amperex Technology (CATL) has been impeded by the price war launched by 中航锂电 and Farasis Energy. The price of 中航锂电 and Farasis Energy’s products is lower than that of CATL, and based on market share, it is more important for these two companies to exchange market for price than to exchange profit for market.

The benefits of Farasis Energy are self-evident. The company has been working hard to enter the supply chain system of major car manufacturers. 中航锂电 is even more ferocious. The price of its products in the same category is 10-15% lower than that of CATL, and uses real money as a “reward” to support its car manufacturers.

We can catch a glimpse of it from the financial report data. From 2019 to 2021, the operating income of 中航锂电 was 1.734 billion yuan, 2.825 billion yuan, and 6.817 billion yuan respectively, and the net profit was –156 million yuan, -18 million yuan, and 112 million yuan respectively.

Although price war is not a long-term solution, what battery companies are fighting for is market share. If Old Li were the leader of these second-tier companies, price war would certainly be his main focus because fighting for these existing carmaker customers would be their only way out when they are not competitive in their technology and products.

Secondly, obstacles from automotive companies are also a challenge.

For car manufacturers, tomorrow’s power batteries are equivalent to today’s internal combustion engines, and they will eventually have to master the technology themselves. From BYD to Tesla, from Great Wall Motors to GAC, everyone is striving to master power battery technology.

The Attitude of Major Automakers towards Batteries

Mr. Li has conducted researches in multiple host factories in the automobile industry. Currently, the attitude of major automakers towards batteries basically shows that: With the enlargement of the scale of host factories, the bottleneck problem in the upstream of batteries is the most concerned issue of automobile enterprises. Automobile enterprises with an annual sales volume of over 200,000 units basically have the idea of developing their own batteries.

The reality is that not all host factories have the ability and courage to manufacture batteries. Those companies with strong financial capability and good sales of new energy vehicles, such as Great Wall Motors, GAC Group, etc., have basically developed their own layouts, while the companies with good sales of new energy vehicles but weak financial capability, such as WmAuto Automobiles, do not have their self-developing plans yet. Additionally, companies with weak financial capability and average sales volume have no plans at all.

Ningde Times strives to compete with the second type of companies. In the early stage of the development of the new energy vehicle industry, there was a saying among power battery suppliers called “AB angle,” which means that automobile enterprises would look for a B-angle supplier based on the mainstream supplier A-angle. A-angle supplier is mainly used for daily use, while the B-angle supplier is used in emergencies.

What Ningde Times wants to do is to enhance the market competitiveness and strive to make itself the A-angle when companies choose AB angles. It needs to find a balance between product performance and price.

Take the Qinlong Battery of Ningde Times as an example. The Qinlong Battery is the third-generation CTP battery of Ningde Times. Its system weight, energy density, and volume energy density continue to lead the industry’s highest level. Compared with the 4680 system, the Qinlong battery pack can increase its capacity by 13% at the same chemistry system and battery pack size, and it is also safer. This is the competitiveness. Ningde Times needs to maintain a high market share, which fundamentally means that it needs to strengthen its competitiveness.

Looking at Ningde Times in a New Stage

The first quarter of this year has been extremely difficult for industry research. On the one hand, the capital market has almost entered a “lying flat” state, and on the other hand, the industry has been under great pressure due to the resumption of work. When many researchers are studying the industry and predicting future trends, they are largely influenced by the public health incidents.

Entering the second quarter, there are two indisputable facts: One is that the number of new energy vehicles has exceeded 10 million, and the new energy vehicle industry has entered a new stage of development. The other is that under the global economic impact, the A-share market has reached the bottom of a new cycle, and a new stage of development is coming towards us. When production returns to normal and the market becomes rational, from the perspective of fundamentals, is Ningde Times still the king?

From the performance of capital markets, Lao Li believes that Ningde Times is still given greater expectations by the secondary market. Since 2022, Ningde Times’ market value has retreated by more than 30%, and the retracement is even greater if calculated from the historical high point.

However, in the just-concluded first quarter, Ningde Times regained the first place in public fund heavy positions with a marginal advantage of CNY 812 million, surpassing Guizhou Moutai once again. This is also the second time Ningde Times has topped the public fund heavy position “throne” since the third quarter of last year.

In the equity fund, 1485 funds have heavy positions holding Ningde Times, an increase of 188 compared with the last quarter of last year. The position value is as high as CNY 110.371 billion, and nearly one-third of the equity funds of new energy and technology concepts hold positions in Ningde Times. In addition, Ningde Times is also the stock with the most holding market value in the first quarter of active equity funds. These data reflect a fact: when the market rebounds, Ningde Times will still be the leader.

A while ago, Wu Kai, the chief scientist of Ningde Times, said that electrification has entered a new stage and a new journey. He hopes that everyone can work together to create a new system with new technology, new breakthroughs, and new standards. This sounds empty, according to Ningde Times’ business strategy, Ningde Times hopes to promote four new innovation systems: material system, system structure, extreme manufacturing, and business model. Lao Li briefly explained the interpretation of the four new innovation systems. Simply put, the upstream needs to lead, the midstream needs to be stable, and the downstream needs revenue generation.

Lao Li believes that from the perspective of technology, products, and manufacturing, Ningde Times is still far ahead of other companies. Ningde Times has developed high-performance materials such as high-stability positive electrode materials, long-life negative electrode materials, and high-safety electrolytes. In 2021, Ningde Times released the first-generation sodium-ion battery. After the sodium-ion battery system, Ningde Times also plans to launch a new product M3P, a ternary battery system based on phosphate, with lower costs.

In terms of business model innovation, based on the long-life battery technology and liquid-cooled CTP battery box technology, Ningde Times has launched outdoor systems such as EnerOne and EnerC, which can provide a full range of products from battery components to complete energy storage battery systems, with industry-leading safety and economics. It is worth mentioning that Ningde has begun to lay out the battery swapping business. Ningde Times hopes to build new business models such as battery leasing, battery swapping operation, and recycling based on the vehicle-battery separation model, and create a closed-loop service for the entire life cycle of the battery.

As a global leader in power batteries, Ningde Times must maintain the development trend of “Ning Wang”, continuously build technical advantages, cost competitiveness, profit capabilities, expand scale effects, enhance customer viscosity, and maintain the security of operating funds. Only in this way can it maintain the trillion-dollar “moat” in 2022.

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.