CATL shares drop over 35% from May peak as market frets over automakers' 'de-Ninghua' shift

Sharp Decline in Share Price

CATL, often referred to as the "big brother on the GEM" (Growth Enterprise Market), has experienced a significant decline in its stock price since May this year. The share price has fallen from a high of 467.35 yuan in May to approximately 299 yuan recently, representing a cumulative drop of more than 35%. This decline has resulted in a total market value shrinkage of 700 billion yuan.

Deviation from Fundamentals

The continuous decline in CATL's stock price appears to deviate from the company's fundamentals and profit growth performance. Despite the 35% drop in share price, CATL's interim report for this year showed year-on-year growth in revenue and net profit of 54.80% and 41.98%, respectively. The stock price decline is not attributable to a significant slowdown in performance growth or excessively high valuation.

The "De-Ningdeization" Concern

The most plausible explanation for the sharp drop in CATL's stock price is that automakers are reluctant to rely on CATL as a single supplier. This has fueled market concerns over so-called "de-Ningdeization" (reducing dependence on CATL). Key concerns include:

• Weakened bargaining power: If "de-Ningdeization" becomes a reality, CATL's negotiating leverage and pricing power will diminish.
• Slower performance growth: From a medium- to long-term perspective, the market worries that declining bargaining power may lead to slower future performance growth.
• Difficulty maintaining high growth rates: There is concern that CATL will struggle to sustain its current high performance growth trajectory.

Market Misunderstanding of "De-Ningdeization"

The market may have a misunderstanding of the "de-Ningdeization" phenomenon. From a market perspective, the term suggests that automakers are no longer choosing CATL as a supplier, which has created selling pressure on the stock in the secondary market. In reality:

• Automakers are not abandoning CATL entirely, but rather moving away from using it as a sole supplier.
• Some automakers are selecting multiple suppliers to improve cost control capabilities.
• Others are developing in-house batteries or turning to second-tier battery manufacturers as alternatives.

Shift from Single to Diversified Supply

The transition from a single supplier to diversified suppliers reflects automakers' considerations of:

1. Cost control factors
2. Reducing dependence on CATL by introducing more suppliers

As more automakers adopt similar adjustment strategies, CATL is expected to transform from a single supplier to an important supplier, which will weaken its bargaining power to some extent.

CATL's Remaining Competitive Strengths

Despite these challenges, CATL still maintains strong competitiveness in terms of capacity utilization and product quality:

• Capacity utilization: Except for 2022 and 2023, CATL's capacity utilization has remained around 95% in most years.
• Scale advantages: High capacity utilization reflects high-load production bases and strong economies of scale.
• Production efficiency: These factors remain key competitive advantages for CATL.

Pressure from Intensifying Industry Competition

As competition in the new energy vehicle industry intensifies, automakers face significant profit pressure. Key dynamics include:

• Battery cost burden: Batteries account for a relatively high proportion of total vehicle costs.
• Cost reduction strategies: Automakers are considering cost reductions across various segments.
• Self-research or diversification: By developing in-house batteries or introducing multiple battery suppliers, automakers can reduce costs and enhance their initiative and bargaining power.

Importance of Self-Developed Batteries

Beyond cost factors, more automakers are recognizing the importance of self-developed batteries because battery quality affects:

• Vehicle battery life
• Cost
• Weight
• Body space

By developing battery technology tailored to their own vehicles, automakers can improve vehicle performance and safety while positively impacting cost management.

Potential Impact on CATL

If more automakers choose to develop in-house batteries or introduce additional battery manufacturers to reduce dependence on CATL, the company could face negative consequences:

• Declining product bargaining power
• Pressure on gross profit margins
• Significant changes in valuation and pricing

Valuation Shift: From "Monopoly Leader" to "Competitive Leader"

In the past, the market was willing to assign a higher valuation to CATL primarily due to its competitive advantage as a "monopoly leader." However, as performance growth reaches an inflection point and industry competition intensifies, CATL may transition from a "monopolistic leader" to a "competitive leader."

Outlook

"De-Ningdeization" may exist partially, but the situation is not as pessimistic as the market imagines. CATL still possesses:

• Global market share advantages
• Large-scale production advantages
• Technological advantages over second- and third-tier battery manufacturers

Additionally, automakers' self-developed battery efforts cannot be achieved overnight. CATL still has sufficient time to:

• Improve its competitive advantages
• Find a second profit growth curve

Potential growth avenues include increasing the proportion of energy storage revenue and further developing overseas markets, both of which are effective ways to enhance CATL's competitiveness.

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