Profitability worries for world’s largest EV battery maker are overdone

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Last March, China’s President Xi Jinping stated he had mixed feelings about his country’s rapid expansion in electric vehicle batteries. That raised questions about profitability for the industry.

This week’s trading update from world-leader Contemporary Amperex Technology Co. Ltd. proved those wrong. The battery group’s full-year earnings should handily beat analyst expectations. 

The company, better known as CATL, now anticipates net income between Rmb42.5bn and Rmb45.5bn ($6.3bn). At the top end that is a nearly 50 per cent increase from the previous year, a pleasant surprise for investors and analysts. They have fretted about slowing global demand for EV sales and the risk of squeezed margins as local rivals rapidly pile on production capacity. 

CATL’s Shenzhen-listed shares rose 8 per cent on Wednesday, notable given the weak sentiment towards Chinese equities. Even so, the share price is down more than 40 per cent over the past year.

Profitability has more than stabilised. Operating margins for CATL have improved, surpassing 10 per cent last year. That suggests its dominant market share provides an advantage in pricing. The company’s more than 37 per cent share of the global EV battery market comes from a wide range of sizeable automaker clients including Tesla, Volkswagen, BMW and Ford. That has led to a steady flow of orders.

Challenges remain. The pace of EV sales expansion has indeed slowed. Global sales rose about a third last year, down from over 50 per cent the previous year. In China, battery-electric and hybrid car deliveries should increase by a quarter this year, down from over a third in 2023.  

In the US, lawmakers have reportedly asked the Biden administration to investigate Chinese companies involved in Ford Motor’s planned Michigan battery plant. Such scrutiny means Chinese tie-ups with US automakers will be increasingly difficult. 

CATL, not surprisingly, has been on an aggressive marketing drive to win over other automakers in the US and Europe in recent months. Its ability to mass-produce cheaper lithium iron phosphate-type batteries means it can target a wider audience compared to its rivals.

Much of the battery overcapacity concerns look priced in for CATL. Its shares now trade at 13 times forward earnings, a small fraction of peers such as South Korea’s LG Energy Solution. CATL’s scale gives it a big advantage across all EV makers, in all price ranges, which will help as mass-market EV demand grows. CATL shares merit more attention.