CALB Earnings: First-Half Margin and Profit Missed Due to Pricing Pressure; Shares Fairly Valued

No-moat CALB’s 03931 first-half revenue and net profit were both weaker than we expected due to lower power battery selling prices and margin contraction. The company posted 34% year-over-year revenue growth for the period, which was mainly driven by capacity expansion, while gross margin missed, falling 1.4 percentage points half on half. We reduce our 2023-25 net profit forecasts due to lower price and margin assumptions and cut our fair value estimate to HKD 17 from HKD 20 per share. Our fair value implies a forward 2024 P/E ratio of 12 times. At the current price, the shares are trading in Morningstar 3-star territory and are fairly valued, in our view.

We reduce our 2023 revenue forecast by 27% to factor in a weaker battery price and a slightly lower utilization rate. Together with reduced gross margin assumptions and lower government grant estimates, we slash our 2023 net profit by 63%. Due to the same reasons, we cut our 2024-25 revenue forecasts by 12% each year and net profit by 25%-26%. We now estimate CALB’s revenue to achieve a 2022-25 CAGR of 33%, driven by capacity expansion and sales volume growth of 62% CAGR for lithium-ion rechargeable batteries. In view of the decline in lithium prices, we forecast the average selling price for power batteries will drop by 19% CAGR. Growing economies of scale will partly offset pricing pressure and help to retain an average gross margin of 11.9% during 2023-25 versus 10.5% in 2020-22.

With weaker-than-expected interim results, we retain our view that the company will face increasing pricing pressure to acquire new automobile customers, which leads to lower profitability than leading players in the next few years. Given its relatively smaller scale, we believe CALB will have to compete on pricing. Excluding government subsidy and investment income, we forecast CALB’s net margin to stay at a single-digit level of 2%-6% in 2023-25.