Contemporary Amperex Technology (300750.SZ): Double squat! Is it really that scary this time?

On the evening of March 14, 2025, Contemporary Amperex Technology (300750.SZ) announced its performance for the fourth quarter of 2024. Due to an accounting adjustment made in the 2024 annual report by Ningwang, which included warranty deposits in the cost of sales (leading to an increase in cost of sales and a decrease in selling expenses), Dolphin made an adjustment for 4Q24 before the accounting change to track Ningwang's marginal quarterly changes. Here are the key points: 1) Revenue fell short of expectations mainly due to lower shipment volumes than market expectations this quarter, with the main issue being in energy storage: despite battery unit prices being slightly higher than market expectations this quarter, the reason for the revenue falling short of expectations is mainly due to a significant decline in "second curve" energy storage shipments compared to the previous quarter. Dolphin's estimated energy storage shipments for this quarter were 31 GWh, but they plummeted by 50% to 16 GWh this quarter, while the market expected an increase in energy storage shipments for the quarter. 2) Power battery shipments exceeded market expectations, but still could not make up for the sharp decline in energy storage shipments: this quarter's power battery shipments were good, around 130 GWh, a 38.4% increase compared to the previous quarter and significantly higher than the market's expected 114 GWh. However, this still could not compensate for the sharp decline in energy storage shipments. Battery shipments this quarter were about 145 GWh, still below the market's expectation of 150 GWh. Dolphin believes that Ningwang's significant decline in energy storage shipments is due to factors including: 1) domestically, the cancellation of China's mandatory storage policy affecting domestic large storage shipments in the short term; 2) overseas, a double impact of mismatched shipment cycles and export tax rebate policies. 3) Battery unit prices have not decreased significantly, but due to a rise in costs per Wh this quarter, the gross profit margin has declined by 4.6 percentage points compared to the previous quarter, falling short of market expectations: after adjusting for the warranty deposit accounting change, the actual gross profit margin for this quarter is 26.5%, a 4.6 percentage point decrease from the previous quarter. Dolphin believes this is due to the combination of Ningwang's high-margin energy storage shipments declining and upstream raw material price increases affecting the gross profit. 4) However, capacity utilization in the second half of the year is relatively full: looking at the key capacity utilization indicator in each financial report (strongly correlated with Ningwang's stock price, a core operating indicator for the manufacturing industry), Ningwang's capacity utilization rate in the second half of 2024 was around 86%, an 8 percentage point increase compared to the second half of 2023, showing a marginally positive operational indicator. Overall, due to Ningwang's early performance forecast, the actual performance of this quarter falls within the guidance, but overall performance falls short of market expectations. Dolphin breaks down the points that fell short of expectations, mainly due to the significant decline in the growth rate of the second curve energy storage shipments, dragging down the overall shipment volume and causing the revenue to fall short of expectations. Additionally, the higher-margin energy storage business saw a sharp decline this quarter, coupled with upstream price increases, squeezing Ningwang's gross margin. Therefore, both revenue and gross margin fall short of market expectations, but the miss is not significant. Looking ahead, several indicators stand out: 1) Capital expenditures continued to increase in the fourth quarter, and Ningwang is still on track for expansion: starting from the third quarter of this year, Ningwang began to increase capital expenditures, reaching 9.9 billion in the fourth quarter, an increase of 2.5 billion from the previous quarter. The expansion of production capacity in the fourth quarter of Ningwang has indeed seen a short-term trend of good industry prosperity, especially in the first quarter of this year, where there is government subsidies for power batteries, and the subsidy intensity has increased, with seasonal sales not showing a significant decrease as in previous years. 2) Contract liabilities in the fourth quarter also showed a high increase: contract liabilities can be seen as an approximate indicator of changes in Ningwang's order volume. Looking at Ningwang's contract liabilities in the fourth quarter, they were 27.8 billion, an increase of 5.1 billion from the previous quarter, showing a marginal improvement, indicating that Ningwang's short-term operational perspective is still positive. 3) Inventory saw a significant increase in the fourth quarter: although inventory continued to increase in the fourth quarter, growing by 4.6 billion to 59.8 billion compared to the previous quarter, over 60% of the inventory is products in transit that have not yet reached customer handover points. Since there are more sales regions overseas, longer logistics times, and a higher proportion of sea transport cycles, about 60-70 GWh, this portion of in-transit goods will be converted into revenue in the first quarter of 2025, providing assurance for Ningwang's shipments in the first quarter. Therefore, unlike the industry overstock due to declining industry prosperity and excess capacity, this is a sign of Ningwang's operational improvement, and as a result, the first quarter of 2025 is expected to have stronger performance certainty. Added to this is the announced 20 billion dividend distribution, with a dividend yield of 1.7% for 2024, accounting for 39% of the net profit attributable to shareholders, and a dividend of 4.55 yuan per share, in line with market expectations. Although it falls short of the 22 billion dividend at the end of 2023, considering Ningwang's current signs of improving demand and increasing capital expenditures for expansion, this move is understandable to the market. However, from the perspective of the lithium battery industry, unlike the rapid upward trend seen in the power battery industry sales/production in the fourth quarter of 2023, which indicated a clear turning point, Ningwang's last round of stock price rebound started from a low point in the cycle (Ningwang's stock price began to rebound around March 2024, reflecting the rise in Ningwang's key operating indicators, capacity utilization), and the industry's sales/production has been fluctuating around 70% since then. Although the industry prosperity is still acceptable, indicating that the turning point for the lithium battery industry may still be early, further attention is needed.To continue tracking.the market currently expects a shipment volume of 574 Gwh in 2025, an increase of 21% year-on-year. Dolphin Jun expects that the current stock price corresponds to a PE multiple of 18-19 times Ninkwang in 2025. Dolphin Jun believes that with relatively high certainty in Ninkwang's performance in the first quarter of 2025, the current stock price is still not considered expensive. However, if there is no significant turning point in the power battery industry and with the short-term fluctuations in energy storage, the upside potential may be relatively limited. Here is a detailed analysis: 1. From the performance in the fourth quarter, both revenue and gross profit margin were slightly below market expectations. 1. Revenue: Below expectations mainly due to a significant decline in energy storage shipments, but battery prices remained stable. Operating income this quarter was 103 billion, slightly lower than the market's expectation of 104.6 billion. Dolphin Jun identified the main reason for falling short of expectations in the shipment volume. 2. Profit margin: Also slightly below market expectations due to the impact of the shipment structure and upstream price increases. 2. Capacity utilization rate is full in the second half of the year, with a decrease in the proportion of sales rebates. - Capacity utilization rate in the second half of the year is full, with an expected rate of over 90% in the fourth quarter. Overall, the analysis shows that while the company's performance was slightly below market expectations in the fourth quarter, there are factors contributing to this and reasons for optimism in the future.Due to the fact that the first half of the year is generally a low season for shipments, the comparability is relatively weak.However, compared to a capacity utilization rate of 79% in the second half of 2023, it has still increased by 8 percentage points year-on-year, and the capacity utilization rate in the second half of the year remains relatively high. It is expected that the capacity utilization rate in the fourth quarter will be above 90%, still signaling an improvement in business conditions. Although production in the fourth quarter exceeded sales (with full capacity utilization), there has been an accumulation of inventory, which is also a positive sign. This increases the certainty of Ning Wang's performance in the first quarter of 2025, as mentioned later in this document. 2. Lithium carbonate prices have stabilized, with the overall proportion of sales rebates in 2024 decreasing compared to 2023: Looking at the year-on-year change in estimated liabilities, it is expected that by the end of 2024 the liabilities will reach 71.9 billion, an increase of 20.3 billion compared to 51.6 billion at the end of 2023. Of this increase in estimated liabilities, 11.8 billion is due to quality assurance deposits confirmed in 2024, while the rest is mainly sales rebates provided to downstream customers based on the price linkage mechanism of lithium carbonate. Sales rebates confirmed in 2024 are around 8.4 billion (offsetting as income), accounting for approximately 2.3% of income before offsetting. In contrast, quality assurance deposits confirmed in 2023 were about 17 billion, accounting for about 4.1% of income before offsetting. As lithium carbonate prices stabilized in 2024 (especially showing a slight increase in the fourth quarter), the proportion of sales rebates to income before offsetting also decreased. In 2025, as business conditions are observed to be improving marginally, there is little room left for further decline in lithium carbonate prices in the short term (prices are already relatively low), and the proportion of sales rebates to income for Ning Wang in 2025 may continue to decrease. 3. Asset impairment risks are still decreasing: In the third quarter, Ning Wang recognized a significant impairment loss of about 4.7 billion (2.3 billion from inventory write-downs and 4.5 billion from long-term asset impairments, which are related to mineral resource assets directly linked to lithium carbonate prices.) In fact, the market is most concerned about the high increase in inventory write-downs, especially a significant increase in finished goods/raw materials inventory write-downs - indicating that battery prices may continue to decline significantly. The impairment of assets in the fourth quarter has decreased to about 1.8 billion, with around 0.8 billion from inventory write-downs and around 1.0 billion from long-term asset impairments. Although implied unit prices may continue to decline in the first quarter, the downside risk is manageable (the proportion of inventory write-downs to income is still relatively small). 3. High shipment increases, Ning Wang's market share stabilizes: Looking at the shipment volume for this quarter, a total of approximately 145Gwh was shipped in the fourth quarter, an increase of about 20Gwh from the previous quarter, but still below the market expectation of 150Gwh. Of this, around 130Gwh were for power batteries and 16Gwh for energy storage batteries, with a decreasing proportion of energy storage. 1. Looking at the market share of power batteries: Domestically: In the fourth quarter, Contemporary Amperex Technology's market share of power batteries decreased slightly compared to the previous quarter, from 44.9% to 43.8%. If the installation volume of BYD Company Limited is excluded, Ning Wang's market share also decreased from 59.1% in the previous quarter to 58.2% in the fourth quarter, a decrease of about 1 percentage point, which is a normal fluctuation. Looking at the market share of ternary and LFP batteries in Ning Wang's domestic market, Contemporary Amperex Technology's market share of ternary batteries has been stable, reaching 70% in the fourth quarter. Considering LFP batteries, the total installation volume in the industry reached 80% in the fourth quarter, an increase of 6 percentage points from the previous quarter. Ning Wang's domestic market share of LFP batteries also increased in this quarter, with a 0.7 percentage point increase to 37.3%. This increase was small, and if the installation volume of BYD Company Limited is excluded, it only increased by 0.2 percentage points. Behind this, as mentioned in a detailed analysis of Contemporary Amperex Technology by Dolphin Jun, Ning Wang's position in the high-end vehicle models remains stable (the market share of ternary batteries with higher prices continues to steadily increase). However, in the LFP market, there is a trend of consumption downgrading due to price wars in the new energy vehicle industry, which may limit the space for Ning Wang's market share to increase in LFP batteries. 2. Looking at energy storage batteries: In the short term, there may be pressure, but in the long term, the domestic energy storage market is returning to market-driven competition, and the increase in AI computing power has led to a surge in data center demand, requiring uninterrupted power supply, which will increase the demand for energy storage and is expected to drive Ning Wang's long-term energy storage sales volume. However, it may take some time for data center energy storage to take off. Ning Wang's outlook for the energy storage market is also optimistic. Ning Wang believes that looking at a 3-5 year perspective, the growth rate of the energy storage market is faster than that of power batteries, closer to the 25%-30% range. 4. However, forward-looking indicators imply that Ning Wang's short-term business operations may continue to improve: Looking at several forward-looking indicators of Ning Wang's performance in the fourth quarter, the short-term business conditions in the battery market still seem favorable, alleviating concerns about a downside risk in Ning Wang's short-term operations: 1. Capital expenditures continued to increase in the fourth quarter, and Ning Wang remains on a path of expansion.From the perspective of expenditure cycle, although Ning Wang has already passed the intensive investment period of capacity expansion (2021-2022), due to market competition saturation and overcapacity, capital expenditure has been in a downward cycle since the fourth quarter of 2022, and even reached a temporary low of 6.7 billion yuan in the fourth quarter of 2023.However, starting from the third quarter of this year, Ningwang began to increase its capital expenditure, reaching 9.9 billion yuan in the fourth quarter, an increase of 2.5 billion yuan compared to the previous quarter. Looking at Ningwang's capacity under construction, the battery system's capacity under construction is expected to reach 219GWh by the end of 2024, increasing from 153GWh in the middle of 2024. The amount of capacity under construction also increased from 25.2 billion in the third quarter to 29.8 billion, an increase of 4.6 billion. This means that Ningwang's expansion in the fourth quarter did see a positive short-term outlook for the lithium battery industry, especially as there is support from government subsidies for power batteries in the first quarter of this year. Moreover, the subsidies have increased, and the off-season sales volume is not significantly lower than in previous years. As for Contemporary Amperex Technology's power battery products, Shenxing batteries and Qilin batteries are expected to ramp up their deliveries this year, with their market share increasing from 30-40% last year to 60-70% this year. Meanwhile, the hybrid battery XiAo was released at the end of last year and has been adapted to more than 30 models. By 2025, vehicles equipped with XiAo batteries will be launched, indicating a positive trend for Ningwang's operations in the short term. Looking at Ningwang's current contract liabilities, there was a significant increase in the fourth quarter: As Ningwang mainly conducts business-to-business transactions, there may be situations where advance payments have been received from downstream customers but goods have not been delivered yet. Therefore, contract liabilities can be seen as an approximate indicator of changes in Ningwang's order volume. Looking at Ningwang's contract liabilities in the fourth quarter, they amounted to 27.8 billion yuan, an increase of 5.1 billion yuan compared to the previous quarter, showing a marginal improvement trend. Therefore, from the perspective of its short-term operational outlook, Ningwang is still in a positive trajectory. Regarding Ningwang's inventory: Although inventory in the fourth quarter increased by 4.6 billion yuan compared to the third quarter, reaching 59.8 billion yuan, corresponding to a stock level of 106 GWh, some market concerns may arise about Ningwang accumulating excess inventory again. However, there is no need to worry too much, as nearly 40% of Ningwang's inventory consists of goods that have already been shipped (products that have been shipped but revenue has not been confirmed) and 18% of stocked goods (goods that have not been shipped but may have been ordered and prepared in advance). Ningwang also explained that over 60% of the inventory is goods in transit that have not yet reached the customer's handover point. Because of increased overseas sales areas and longer logistics times, with a higher proportion of ocean shipping cycles, approximately 60-70 GWh is in transit. These goods in transit will be converted into revenue in the first quarter of 2025, providing assurance for Ningwang's shipment volume in the first quarter. Therefore, unlike the excessive inventory accumulation caused by a downturn in industry conditions and excess capacity, Ningwang's operational performance continues to show signs of sustained improvement, with greater certainty in its performance in the first quarter of 2025. This article is reprinted from the "Dolphin Investment Research" public account, edited by GMTEight: Jiang Yuanhua.