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On the evening of July 26, 2024,CATLAnnounce the second quarter results of 2024. Here are the highlights:

1. Revenue was lower than expected, mainly due to a sharp decline in battery unit prices:In the second quarter, CATL's revenue was 87 billion yuan, down 13% year-on-year, and lower than the market expectation of 95.1 billion yuan. Dolphin Jun believes that this is mainly due to the sharp decline in battery unit prices. Contrary to the market's expectation that battery prices will stabilize after lithium carbonate prices stabilize, the battery unit price this quarter was significantly lower than market expectations.

2. Capacity utilization continues to decline and inventory increases:Ning Wang's price reduction was not as expected, but was caused by increasing capacity utilization and clearing inventory to reduce prices. The capacity utilization rate dropped from 70% in 2023 to around 65% in the first half of 2024, and the increase in inventory was mainly due to the high increase in inventory goods.

3. Asset impairment increased again this quarter:Due to the sharp decline in battery unit prices this quarter, the amount of impairment provision for finished inventory increased, and the asset impairment loss this quarter increased from 500 million in the previous quarter to 1.4 billion this quarter.

4. Gross profit margin remains stable when unit price declines:The gross profit margin in the second quarter was 26.6%, basically in line with the market expectation of 26.8%. On the one hand, due to the increase in shipments this quarter, the scale effect has been released. On the other hand, it also reflects that Ningwang will pass on the impact of price cuts to upstream suppliers. Behind this is still the reflection of Ningwang's strong bargaining power in the industrial chain.

5. The three expenses are strictly controlled, and the net profit attributable to the parent company has been released:Although the revenue side was lower than expected, the three expenses were strictly controlled, and the combined expense ratio of the three expenses continued to decline from 12.6% in the first quarter to 11.4% this quarter, bringing about a release of profits.

Dolphin's overall view:

Judging from Ningwang’s second-quarter performance, its revenue significantly missed market expectations, while its gross profit margin was basically in line with market expectations.

The revenue side missed market expectations mainly due to the sharp decline in battery unit prices. The market expected battery shipments in the second quarter to be around 110-120Gwh. The battery unit price in the second quarter was between 0.58 yuan/wh and 0.63 yuan/wh, down about 16%-23% from 0.76 yuan/wh in the first quarter. The market believes that as the price of lithium carbonate stabilizes, the battery unit price is expected to be around 0.72 yuan/wh. The battery unit price this quarter is significantly lower than market expectations.

However, due to the severe decline in unit prices this quarter, the amount of impairment provision for finished products in inventory increased, and the asset impairment loss this quarter increased from 500 million in the previous quarter to 1.4 billion this quarter.

But the problem is that the obvious decline in battery unit prices has not been accompanied by a significant reduction in inventory, and capacity utilization has also declined:

1) Inventories continued to increase, from 44.0 billion in the previous quarter to 48.1 billion in this quarter, mainly due to the high increase in inventory goods, while the shipment of goods showed a downward trend.

2) At the same time, judging from the company's capacity utilization rate in the first half of the year, the battery capacity utilization rate dropped from 70% in 2023 to around 65% in the first half of 2024.

3) Ningwang’s market share continued to decline in the second quarter, and its drastic price cuts failed to successfully seize market share from second- and third-tier battery manufacturers.

But there were some bright spots in this quarter's results:

1) While the unit price has fallen sharply, Ningwang's gross profit margin remained stable this quarter. The gross profit margin in the second quarter was 26.6%, basically in line with the market expectation of 26.8%. The gross profit margins at home and abroad continued to increase month-on-month compared with the second half of 2023.

2) The control of the three expenses was relatively reasonable and all were lower than market expectations. In the end, although the revenue was lower than expected, the net profit attributable to the parent company exceeded market expectations.

The current market concerns about CATL are mainly the following:

1) 2024 is still predicted to be a big year for hybrid vehicles. Since hybrid vehicles generally carry less electricity than pure electric vehicles, there are concerns that the overall demand for batteries will continue to slow down. In the long run, if the growth of hybrid models continues to exceed that of pure electric models, there are concerns that the overall power battery market space will decrease;

2) CATL already has a very high market share in China, but the industry is still in a state of oversupply. The market is worried that CATL's domestic market share will show a downward trend amid the battery cell price war, and is concerned about the company's subsequent growth potential and profit stability.

3) Due to pessimistic policy expectations in the United States and Europe and concerns about slowing overseas demand, Ning Wang’s overseas market share has declined.

From the actual situation:

1) The trend of hybrid vehicles in 2024 is indeed expected to continue, with plug-in hybrid sales increasing by 87% year-on-year in the first half of 2024, while pure electric vehicles only increasing by 9% year-on-year. Plug-in hybrid vehicles accounted for 29% of the overall sales of new energy vehicles in the first half of 2023 and increased to 41% in the first half of 2024. It is expected that the overall growth rate of power battery installations this year will still be lower than the growth rate of new energy vehicle sales.

In the long run, if it is verified that pure electric vehicles are not the ultimate solution, hybrid models will still account for a high proportion of overall sales, and the market will pursue fast charging rather than large batteries, and there will be limited room for improving the battery capacity of a single vehicle. The overall power battery market space will indeed be reduced compared to previous forecasts.

2) For Ningwang, the sharp drop in battery unit wh price this quarter does seem to be affected by the domestic battery cell price war, but fortunately, the gross profit margin and net profit margin remained stable.

However, Ningwang's substantial price cuts this quarter did not bring about an increase in market share and capacity utilization, and its own logic for increasing market share was blocked. Ningwang had previously used high R&D investment to obtain a battery pricing premium, but with the ongoing price war in the downstream vehicle industry, automakers are under greater cost pressure and will exercise stricter control over battery costs (this can be further verified by the increase in the proportion of low-priced LFP batteries), and Ningwang's ability to command a battery pricing premium has weakened.

In the long run, Ningwang will also face the risk of self-developed battery replacement by automobile manufacturers. From the perspective of market concentration, the concentration of the power battery market has declined. In the first half of 2024, the concentration of CR3/CR5/CR10 declined by 1.3%/2.2%/0.7% respectively, which may be related to the entry of automobile companies into self-developed batteries.

At present, new energy vehicle manufacturers are mainly constrained by the bottlenecks of automobile scale and mass production experience, but in the long run these bottlenecks will be solved.BYDIn addition, the automobile production scale of Volkswagen, Geely, Changan, SAIC, GAC and other companies meets the break-even threshold of self-developed batteries, and it is expected that they will gradually replace them on a small scale in 24-25 years.

3) From the perspective of overseas markets:

The penetration rate of new energy vehicles in Europe and the United States will increase slowly in 2024. In the first half of 2024, the penetration rate of new energy vehicles in Europe will be 21%, a decrease of 2.8% compared with 23.8% in 2023, mainly affected by the withdrawal of subsidies for new energy vehicles. The penetration rate of new energy vehicles in the United States will be 9.3% in the first half of 2024, basically no increase compared with 0 in 2023. The demand for power batteries is indeed slowing down. In 2024, it will be more dependent on the outbreak of overseas energy storage batteries.

In May, the United States increased its tariffs on power batteries from 7.5% to 25% (to be implemented from August). Ning Wang could only cooperate using the LRS (technology licensing) model, converting revenue from product sales to licensing revenue. Although this affected the logic of increasing revenue scale and market share in the United States, it was fortunate that the high capital investment in the early stage of factory construction could be avoided (the factory capital expenditure was borne by the partner). At the same time, technology licensing has the advantage of high gross profit, which brought about an increase in profit margins in the later stage.

At present, Ning Wang's PE in 2024 is around 17 times, which is still not expensive, but the turning point of performance does not seem to have come yet. The above three points seem to indicate that whether it is external troubles (TeslaWhether it is changing battery suppliers, battery export tariffs), or internal concerns (overcapacity in the industry, self-research and production of batteries by OEMs), they all seem to be weakening Ning Wang's logic of actively reducing prices to clear inventory and clearing the battlefield in the second half of the battle against battery overcapacity.

The following is the text:

1. Overall performance: Revenue was significantly lower than expected, mainly due to the severe decline in battery unit prices in the second quarter

1) Revenue is significantly lower than market expectations：

The quarterly revenue in the second quarter of 2024 was 87 billion, a year-on-year decrease of 13%. The seller expectations that Dolphin Jun saw were all 95.1 billion, and the revenue performance was significantly lower than market expectations.

The reason why the revenue was lower than market expectations was mainly because the battery unit price was significantly lower than market expectations. The market expected battery shipments to be around 110-120Gwh this quarter, a month-on-month increase of about 16-26%, while the power + energy storage revenue in the second quarter was about 69.7 billion yuan (according to the 10% share of other business revenue in the first quarter given by the conference call) and fell by 3%.

This means that the unit price of batteries this quarter is between 0.58 yuan/wh and 0.63 yuan/wh, down about 16%-23% from 0.76 yuan/wh in the first quarter. The market believes that as the price of lithium carbonate stabilizes, the unit price of batteries is expected to be around 0.72 yuan/wh. The unit price of batteries this quarter is significantly lower than market expectations.

Dolphin believes that the serious decline in unit price is mainly due to:

1) Ningwang's overseas shipments have declined. The proportion of overseas revenue in the first half of 2024 has dropped from 35% in the first half of 2023 to 30% in the first half of 2024. On the one hand, due to the slowdown in overseas demand for electric vehicles (the decline in subsidies for electric vehicles in Europe), the industry's overall overseas shipments of power batteries have slowed down. In the first half of 2024, overseas shipments only increased by 7% year-on-year.

Ningwang's overseas power battery market share has also further declined, from about 29% in 2023 to 26% in January-May 2024. This may be due to the company's major customer Tesla's US Model 3 regaining IRA subsidies, which also means that the Model 3 battery has been switched from the original CATL toMatsushitaBatteries have some impact on the company's overseas power battery shipments.

2) The pace of Ningwang's negotiations with downstream car companies on annual price cuts will be slower than that of second- and third-tier battery manufacturers. Major customers usually negotiate annual price cuts after the Spring Festival, which will affect the battery unit price in the second quarter. The domestic battery unit price has dropped to around 0.5 yuan/wh for ternary batteries and around 0.4 yuan/wh for iron-lithium batteries. Ningwang will inevitably cut prices amid the battery cell price war.

3) The proportion of lower-priced lithium iron phosphate in Ningwang’s shipment structure increased:

From a domestic perspective, due to the ongoing price war in the downstream industry, the demand for lower-priced lithium iron phosphate continued to rise, resulting in an increase in the proportion of lower-priced lithium iron phosphate in Ningwang's shipment structure (Ningwang's domestic LFP power battery installation volume increased from 51% in the first quarter to 61% in the second quarter);

Judging from the overseas shipment data, overseas shipments of lithium iron phosphate batteries have continued to be higher than those of ternary batteries this year. This may be due to the withdrawal of overseas subsidies for new energy vehicles (such as in Europe), which has put greater cost pressure on automakers and the demand for low-priced lithium iron phosphate has continued to grow rapidly.

4) From the overall perspective of the first half of 2024, the unit price of Ningwang power batteries will drop by 14% month-on-month from 0.79 yuan/wh in 2023 to about 0.67 yuan/wh in the first half of 2024, and the decline is controllable.

However, the unit price of energy storage batteries has declined sharply, down 25% month-on-month from 0.91 yuan/wh in 2023 to about 0.69 yuan/wh in the first half of 2024. This may be due to the increase in the proportion of domestic customers in the company's energy storage business and the decline in overseas customers.

The company's original energy storage customers were mainly large overseas storage, but it has gradually begun to cover large domestic storage customers, and has reached strategic agreements with the State Energy Group, China Energy Engineering Group, State Power Investment Group, China Huadian, China Huadian, etc. Domestic energy storage has a lower technical threshold than power batteries and more sufficient competition. The unit price of domestic energy storage battery LFP has dropped to 0.3-0.4 yuan/wh.

Although the sales rebate accrued this quarter further declined (as a reduction on the revenue side): as the price of lithium carbonate has basically stabilized, hovering around 100,000 yuan/ton in the first and second quarters, the sales rebate accrued this quarter further declined (sales rebates are the capital returns provided by the company to downstream companies under the price linkage mechanism).

The estimated liabilities (including sales rebates + warranty deposits) for this quarter only increased by 1.9 billion, a significant decrease compared to the estimated liabilities increase of 5.7 billion in the first quarter (of which about 3 billion were sales rebates). However, the proportion of battery unit price in overseas shipments has decreased, the proportion of low-priced LFP in the shipment structure has increased, and it continues to decline amid the domestic battery cell price war.

2. Battery unit prices fell while inventory continued to grow, and capacity utilization declined

1) The decline in battery unit prices has led to an increase in asset impairment this quarter

Unlike 2023, when lithium carbonate prices fell sharply, Ningwang's asset impairment was basically related to lithium carbonate assets.（Raw material price decline/impairment of mineral resources factories under construction/mining and prospecting rights), the price of lithium carbonate has basically stabilized in the first half of 2024, and the amount of impairment provision is 1.9 billion.

Among them, the impairment of fixed assets was about 700 million yuan, mainly due to the impairment of machinery and equipment related to battery production, but the impairment of inventory reached 1.2 billion yuan, mainly concentrated in the second quarter (the asset impairment loss in the second quarter was 1.4 billion yuan, an increase of 900 million yuan compared with the first quarter). This was mainly due to the serious decline in unit prices this quarter, and the increase in the amount of impairment of inventory goods (finished products) and self-made semi-finished products in the inventory.

2) However, inventory continued to grow and capacity utilization declined

The problem in the second quarter was that the obvious decline in battery unit prices was not accompanied by a significant reduction in inventory, and capacity utilization also declined:

① Inventories continue to increase: Inventories increased from 44 billion in the previous quarter to 48.1 billion in this quarter, and inventories will continue to increase compared to 45.4 billion at the end of 2023, mainly due to the high increase in inventory goods/self-made semi-finished products in the inventory, while the shipped goods showed a sharp downward trend.

From the perspective of the industry as a whole, the cumulative domestic production of power and other batteries from January to June 2024 was 430Gwh, but the cumulative installation volume was only 203Gwh. The output was twice the installed capacity. The output of power batteries is still far higher than market demand. The industry as a whole still faces great inventory pressure and is still in the stage of clearing production capacity.

② Decline in capacity utilization:

While the new energy vehicle industry has emerged from the trough in the first quarter, with new energy vehicle sales and power battery installations increasing by 32%/37% year-on-year in the second quarter, Ningwang's battery system capacity utilization rate is declining, from 70% at the end of 2023 to 65% in 2024. On the one hand, this is related to Ningwang's overall shipment off-season in the first half of the year. On the other hand, it also reflects that Ningwang's substantial price cuts did not bring about a high increase in shipments this quarter, and its capacity utilization rate remained mediocre.

Ning Wang said in the first quarter conference call that it expects capacity utilization to remain in the range of 80%-90% this year, but it seems that there is still a big gap. The market expects Ning Wang's annual shipments to be around 460-480Gwh. As of 1H24, the shipments were around 210Gwh, which is basically the same as the output. Although the second half of the year is Ning Wang's peak season for shipments, Dolphin Jun expects that according to the current sales progress, considering the impact of the peak season, the capacity utilization rate can only recover to around 70%, which is basically the same as in 2023.

③ Market share is still declining:

The sharp price cuts this quarter did not bring about an increase in market share. In the second quarter, domestic sales of new energy vehicles have emerged from the off-season trough and the new car window period, and new energy vehicle sales and power battery-equipped vehicles have rebounded by 37%/38% month-on-month.

However, Ningwang's domestic power battery-equipped vehicles only rebounded by 26% month-on-month, and its domestic market share fell from 48.4% in the first quarter to 44%, mainly due to the recovery of the battery business market share of vehicle manufacturers, mainly BYD. BYD's market share increased from 21.6% in the first quarter to 27.2% in the second quarter, affected by the low-priced launch of the Honor version and the start of the new product cycle led by DMI5.0. Ningwang's drastic price cuts in the second quarter failed to successfully seize the market share of second- and third-tier battery manufacturers.

Ningwang's market share in overseas power battery installations is also declining further, from about 29% in 2023 to 26% in January-May 2024, mainly due to a lower proportion of overseas shipments, which is affected on the one hand by the overall slowdown in industry shipments, and on the other hand may be related to the company's own major customer Tesla's US Model 3 regaining IRA subsidies and switching from CATL batteries to Panasonic batteries.

But Ning Wang also performed well in several aspects in this financial report:

3. Gross profit margin continues to remain stable

As battery unit prices continued to decline this quarter, Ningwang's gross profit margin remained stable in the second quarter, reaching 26.6%, slightly lower than the market expectation of 26.8%.

According to the gross profit margin structure in the first half of the year, Ningwang's power battery business gross profit margin continued to increase by 2.8% month-on-month to 26.9%, and the energy storage battery gross profit margin also continued to increase by 2.9% month-on-month to 28.9%. The increase in Ningwang's gross profit margin in the first half of the year was mainly due to the increase in the gross profit margin of the battery business.

While Ningwang's battery prices fell significantly this quarter, it still maintained a stable gross profit margin for its battery business. On the one hand, this was due to the increase in shipments this quarter and the release of economies of scale. On the other hand, it also reflected that Ningwang would pass on the impact of price cuts to upstream suppliers, which was still a reflection of Ningwang's strong bargaining power in the industrial chain.

However, from the perspective of gross profit margin that meets U.S. stock standards (including impairment in costs), the gross profit margin this quarter fell from 25.4% to 24.8% month-on-month, mainly due to an increase in asset impairment this quarter, which continued to decline from 500 million in the first quarter to 1.4 billion this quarter.

4. Reasonable control of the three expenses and a release of net profit

This quarter, Ning Wang implemented strict control over the three expenses, and the combined expense rate of the three expenses continued to decline from 12.6% in the first quarter to 11.4% this quarter, which was significantly lower than the market expectation of 13.4%.

1) Sales expenses:

Although sales expenses increased by 200 million to 3.6 billion this quarter, they were significantly lower than the market expectation of 4.5 billion. This was mainly due to the month-on-month decline in comprehensive service fees in sales expenses, which may be related to the decrease in the proportion of overseas shipments. Overseas sales require more sales and maintenance, and after-sales service costs will be higher than in China.

2) R&D expenses:

In terms of R&D investment, Ningwang has always achieved product premium through high-intensity R&D to create product differentiation and maintain high-end and gross profit margin. R&D expenses for this quarter were 4.3 billion, basically the same as the previous quarter, and significantly lower than the market expectation of 5.4 billion.

On the product side, Ningwang released fast-charging ternary batteries (Kirin batteries) for high-end models and fast-charging LFP batteries (Shenxing batteries) for mid-range models as early as 2022 and 2023, but its peers have also caught up with Ningwang's progress in super-charging batteries and all released super-charging batteries in 2024.

In order to cater to the growing demand for LFP batteries in the second quarter, Ningwang launched the Shenxing Battery Plus based on LFP batteries in April. It achieved stronger supercharging performance while realizing a higher range, basically catching up with the Kirin battery of the ternary system. The range has been increased from 700km to more than 1000km, and the supercharging speed has been further increased by 50% from 400km/10min of the Shenxing Battery to 600km/10min.

At the same time, in the long run, the company is trying to transform from selling products to selling platforms. The company will launch the Panshi chassis in 2024, built based on CTC integrated technology. It is expected to be mass-produced in the second half of 24. It can help OEMs save about 60%-70% of development costs, and also help to increase the value of the company's single-vehicle supply.

5. Profits were higher than market expectations, and core profit margins increased month-on-month

In the second quarter, the net profit attributable to the parent company was 12.4 billion yuan, and the profit margin continued to increase by 1% to 14.2%, mainly due to the decline in the three-expense rate and the increase in financial income. However, Dolphin Jun is more concerned about a separate column compared with the US stock peers.Operating profit of core business (revenue – cost – tax – three expenses – asset & credit impairment).

From the core profit perspective, profitability improved in the second quarter, with the core profit margin increasing from 12.1% in the previous quarter to 12.9% in this quarter. The increase was mainly due to Ning Wang's strict control over the three expenses, which released both the core operating profit margin and the net profit margin.

6. The premium capacity of the industrial chain remains solid

In the second quarter, Ningwang's coping turnover days were 172 days, a slight decrease from 176 days in the previous quarter, but still implying the company's strong bargaining power over the upstream supply chain.

The net operating cycle (accounts receivable turnover days + inventory turnover days - accounts payable turnover days) is -37 days, which also means that the company completely uses the interest-free liabilities of suppliers to complete its operations without using the company's own cash.

<End of this article>

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