CATL Earnings: Revenue Missed Due to Price Competition, but Margin Continued to Expand

Contemporary Amperex Technology 300750, or CATL, reported 8% revenue growth year over year and 11% growth for net profit in the third quarter. The results trailed our expectation as revenue and net profit for the first three quarters only accounted for 67% and 70% of our previous full-year forecasts, respectively. However, the margin recovery trend since the trough level last year continued, with a 0.5-percentage-point gain in the quarter’s gross margin from last quarter. We cut our financial forecasts and reduce our fair value estimate to CNY 240 per share from CNY 257, which implies a 2024 price/earnings ratio of 20 times. At the current level, we view shares as undervalued.

The weaker-than-expected third-quarter revenue is likely due to soft battery selling prices, and we reduce our 2023-25 electric vehicle, or EV, battery revenue by 6%-8%. We expect CATL to sell 325 gigawatt-hours, or GWh, EV batteries in 2023. Together with a weaker price outlook for energy storage system, or ESS, batteries, we cut our 2023-25 revenue estimates by 8%-10% and net profit by 6%-7%. We also factor in lower administrative expense.

We maintain our forecast that the company’s battery production capacity will grow to 670 GWh by 2025 from 390 GWh in 2022. Driven by robust demand for EV batteries and capacity expansion, we estimate CATL’s revenue to achieve 2022-25 CAGR of 14%, driven by sales volume growth of 26% CAGR for lithium-ion rechargeable batteries but partly offset by an average 8% decline in EV battery selling prices. Growing economies of scale and the decline in lithium prices should help gross margin to increase to an average of 23.5% during 2023-25 versus 20.0% in 2022. We estimate CATL’s net profit to grow to CNY 63.6 billion in 2025 from CNY 30.7 billion in 2022, implying a three-year CAGR of 27%.