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Charges unmerited

CATL hit by Tesla rumours amid share price slump

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Building EVs is not easy says Musk

The ‘Pyramid of Success’ is how one of America’s most famous basketball coaches defined what it takes to climb to the top. It’s often cited as a framework for success whether in life, work or sport.

But what happens when someone reaches that pinnacle? They usually discover that while there isn’t much room for anyone else, plenty of others hope to take their place.

This is the situation that China’s biggest battery producer currently finds itself in. Contemporary Amperex Technology Ltd (CATL) has had a storming few years, as demand for electric vehicles (EV) has soared in the transition to a greener future.

In 2021, CATL consolidated its global market share, expanding from 24.6% to 32.6%. It outshone both of its nearest rivals, LG Energy Solution, which dropped from 23.4% to 20.3% and Panasonic, down from 18.4% to 12.2%.

Until recently, its share price reflected that success, rising from close to Rmb100 at the beginning of 2020 to a peak of Rmb688 in December 2021. Last month, CATL also said it expected 2021 net profits to reach Rmb14 billion ($2 billion) to Rmb16.5 billion.

However, its share price has lost 11.4% since the beginning of the year and investors are hitting the sell button at the slightest rumour.

One such concerns the US Entity List. In early February, Chinese news sites said that Washington was considering adding CATL in a bid to do a “Huawei” (i.e. target it with sanctions that choke off its access to US tech components).

Yet how likely is that? Yes, one of CATL’s biggest customers is American carmaker Tesla, accounting for an estimated 20% of sales. But that revenue comes from Tesla’s Shanghai-based gigafactory. Would the US government really try to disrupt the operations of one its most successful corporate entities, particularly when there’s no technology transfer to Chinese rivals?

On February 13, CATL published a WeChat post denying the likelihood. It also refuted rumours of difficulties with Tesla and suggestions that CATL might no longer be included in Shenzhen’s ChiNext Index.

But all sort of speculation keeps on coming. EV start-up XPENG recently felt compelled to flag support following rumours of negotiations to replace CATL with two smaller Chinese battery suppliers, CALB and Sunwoda. It says CATL will remain its core supplier.

It’s unlikely to remain the only one. EV manufacturers are diversifying their supply chains and that’s likely of benefit to second-tier players.

Tesla also appears to be reducing its reliance. In mid-February CnEVPost reported an order for BYD’s Blade Battery in 204,000 vehicles per year (globally Tesla sold 936,172 vehicles in 2021).

What Tesla and BYD have in common is a growing preference for lithium iron phosphate batteries (LFP). Historically, their lower energy density made them less popular than lithium ion ones (made with nickel, cobalt and magnesium and which are closely associated with CATL; see WiC499 for more on the technology differences).

However, BYD’s LFP cell-to-pack technology, which Tesla redesigned with a honeycomb structure, overcomes some of these issues. Many of China’s LFP patents also expire in 2022. This January, LG Energy Solutions flagged plans to deploy LFP and it believes this will help it to overtake CATL as the world’s largest battery manufacturer.

EV manufacturers may also opt to follow Tesla’s lead in switching to LFP to mitigate soaring raw material prices. As we wrote in WiC569, industry players expect lithium carbonate prices to rise as much in 2022 as they did in 2021, when they jumped from Rmb77,000 to Rmb300,000 per tonne. So far they’re up a third, crossing the Rmb400,000 threshold this week.

A report by Capital Securities asks: “How far can CATL fall”? The brokerage’s analyst Wei Zhichao swiftly removed it from WeChat after being bombarded by CATL supporters but not before it had received widespread attention.

Wei compares CATL to Kweichow Moutai, which saw its stock price quadruple over two years before almost halving during 2021. The liquor giant’s shares have partially rebounded.

Wei believes that CATL could fall another 20%. It’s currently trading around 55 times consensus forward earnings according to S&P Global Market Intelligence data, though that’s below BYD on 69.6 times and far below Tesla’s 96 times.

As a cohort, however, financial analysts remain bullish with a consensus price target of Rmb716, roughly 30% above its current Rmb504 trading level. CATL has no intention of being displaced any time soon.

For instance, it’s aggressively pioneering new technologies like sodium ion and is hoping to capture more sales in Europe (its first factory in Germany is ramping up production) and if other rumours are to be believed, CATL is considering setting up in the US so as to be closer to Tesla too.


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