CATL Earnings: Sequential Margin Recovery Trend Intact Despite Battery Pricing Competition

Second-quarter revenue for no-moat Contemporary Amperex Technology 300750, or CATL, grew 56% year over year and net profit for the quarter increased 63% year over year. Gross margin gained 0.7 percentage points in the quarter from last quarter, indicating the margin recovery trend since the trough level last year remains on track. With the first-half revenue and net profit accounting for 46% and 51% of our previous full-year forecast, respectively, we consider the results are slightly ahead of our expectation. As a result, we increase our financial forecast and raise fair value estimate to CNY 257 from CNY 240.56 per share, which implies a forward price/earnings ratio of 25 times.

The company’s second-quarter revenue grew 56% year over year to CNY 100.2 billion underpinned by solid demand for lithium-ion battery from electric vehicles, or EVs, and energy storage systems, or ESS. Gross margin for the quarter improved to 22.0% from 21.8% in the same period last year, likely due to larger production scale and the decline in lithium prices. With faster operating expenses growth than the top line, but offset by CNY 2.7 billion net finance income, second-quarter net profit grew 63% year over year to CNY 10.9 billion.

With first-half earnings ahead of our expectation, we raise our 2023-2025 EV battery revenue by 9% each year with stronger-than-expected selling price offsetting lower utilization amid new capacity ramp-up. We expect CATL to sell 347 gigawatt-hours EV batteries in 2023. As a result, our 2023-2025 revenue estimates are lifted by 6% each year and net profit by 7%-9% to factor in higher gross margin for the EV battery segment.