CATL 4Q24 Earnings Call Minutes：In 2025, the proportion of Kylin is expected to increase to 60%-70%

The following is the minutes of the conference call for CATL's Q4 2024 financial report. For the financial report interpretation, please refer to《 CATL: Another Deep Squat! Is It Really That Terrifying This Time? 》

I. Core Financial Information Review

II. Management Introduction

1. Financial Report and Operating Conditions

Performance: In 2024, CATL's total operating revenue reached 362 billion yuan, with a net profit attributable to shareholders of 50.7 billion yuan, a year-on-year increase of 15%; the comprehensive gross profit margin was 24.4%, an increase of 5.3 percentage points year-on-year; operating cash flow was strong, reaching 97 billion yuan; cash reserves were ample, with monetary funds exceeding 300 billion yuan at the end of the period. The company's performance showed steady growth, with all financial indicators performing well.

Market Share: The market share of power batteries and energy storage batteries remained at the top. For eight consecutive years, the usage of power batteries ranked first globally, with a global market share of 37.9% in 2024, 20.7 percentage points higher than the second place; for four consecutive years, the shipment volume of energy storage batteries ranked first globally, with a global market share of 36.5% in 2024, 23.3 percentage points higher than the second place. By the end of the reporting period, the cumulative installation of power batteries exceeded 17 million vehicles, and energy storage batteries were applied in over 1,700 projects worldwide.

2. R&D and Products

R&D System: The company's team has been deeply engaged in the lithium battery industry for many years, forming a unique R&D innovation system based on first principles, with six major R&D centers and over 20,000 R&D personnel. An efficient self-developed R&D platform has been established, which feeds back into R&D design based on customer needs, forming a positive cycle. By the end of the reporting period, the total number of patents and patent applications reached 43,354, with 25,000 in China and 18,000 overseas, generating a patent approximately every 1.58 hours during the reporting period.

Product Matrix: A comprehensive and advanced product matrix has been created. In the passenger vehicle sector, the Kirin battery and Shenli battery series have been mass-produced and installed in numerous vehicle models, with the launch of the new generation Kirin high-power battery and Shenxing Plus battery; in the commercial vehicle sector, the Tianxing series batteries have been launched for different scenarios, with cooperation established with multiple vehicle manufacturers, resulting in a 98% year-on-year increase in domestic commercial power battery sales in 2024, and a 144% year-on-year increase in medium and heavy truck power battery sales; in the energy storage sector, the company has become a supplier for multiple projects, launching the PU100 energy storage product.

3. Innovative Solutions

Chocolate Swap: The new generation Chocolate Swap has been launched, allowing for rapid battery swapping within 100 seconds, with wide adaptability to various vehicle models and strong flexibility. Collaborations have been established with multiple vehicle manufacturers to jointly launch several cross-year models, and efforts are being made to expand cooperation with various parties to build a battery-swapping ecosystem, bringing new energy replenishment solutions to the heavy truck transportation industry, with strategic cooperation agreements signed with several logistics companies.

Integrated intelligent skateboard chassis: It features three main characteristics: decoupling, high integration, and openness. The ultra-safe chassis has passed dual extreme safety tests for maximum speed and impact, supporting L4-level intelligent driving and empowering the intelligent development of vehicles. In the zero-carbon ecosystem field, strategic cooperation agreements have been signed with multiple provinces and cities to promote relevant innovations and demonstration projects, enabling green transformation across various industries.

4. Future Market Expectations

Growth expectations for the power and energy storage market: From the market situation, the performance in January and February this year exceeded that of previous years. The electrification penetration rate in China continues to rise, expected to reach 80%, 90%, or even higher between 2027 and 2030; the European market grew by about 20% in January and February this year; the global market is expected to maintain a growth trend of about 25% in the future. In terms of the energy storage market, although China has canceled the strong allocation policy, the long-term outlook is positive, with a potential increase of about 25% to 30% over the next 3 to 5 years, which is faster than the growth rate of power.

Progress in new products and technologies: Products like Shenxing and Qilin have been recognized by customers, accounting for about 30% to 40% last year, with expectations for this year to reach 60% to 70%. Although the Xiaoyao product was released at the end of last year, over thirty models are already compatible. New products will also be launched at the auto show in April this year. The company places importance on solid-state batteries and is leading in research and development, but currently does not disclose too much information.

5. Warranty Provisions and Accounting Policies

Warranty provision criteria: Provisions are made based on the best estimate of liabilities arising from the obligation to provide after-sales comprehensive service fees for electronic products sold and under warranty, rather than a fixed percentage, estimated annually based on existing data. The average provision level for 2024 is about three percentage points, accounting for 3.8% of total revenue for the year. After the warranty period expires, any unspent portion can be reversed as a cost reduction item; the warranty period for power products is generally 6 to 8 years, while for energy storage, it varies according to contract agreements.

Impact of accounting policy changes: According to the Ministry of Finance regulations, the warranty provision will be reclassified from expenses to costs in 2024, leading to differences in gross margin figures. From the perspective of operating profit, there is an overall steady upward trend, and under the new comparable criteria, gross margin is also steadily increasing.

6. Costs and Prices

Cost control: In the face of price increases in certain supply chain segments, the company believes that overall supply exceeds demand upstream. Through technological innovation and cost reduction measures, the goal is to achieve a certain degree of reduction in product costs this year.

Product pricing: For products like Shenxing batteries, the company focuses more on using product services to enhance competitiveness rather than simply focusing on premiums. This year, Shenxing or Qilin will also be upgraded to provide better products for customers.

7. Capacity and Capital Expenditure

Capacity utilization rate: The capacity utilization rate in the second half of 2024 is expected to increase by about 20 percentage points compared to the first half, approaching 80% for the year (over 76%), with the second half nearing the company's historical peak, contributing value to manufacturing costs and depreciation.

Capital expenditure and capacity growth: To meet market demand, the company will expand capacity, with operational plans showing a moderate improvement compared to last year. Due to the promotion of super battery applications, the development efficiency per production line or kilowatt-hour is improving, with the growth rate of development being lower than that of capacity growth. At the end of last year, the capacity was 676 GWh, with over 200 GWh under construction8. Market Regional Situation

Regional Market Growth Rate: At the beginning of this year, there were good orders in the Middle East and Australia, and the growth rate in the US market is also not slow, with an expected growth scale of 40-50 this year, and the individual volume is relatively large. Meanwhile, markets like Australia and the Middle East are expected to far exceed traditional regions in growth over the next few years, with data center energy storage demand increasing globally.

Project Profit Margin: The company does not rely on low-price competition; for example, the Middle East projects succeed based on quality, yielding good returns and forming a virtuous cycle.

9. Inventory and Operations

Inventory Composition and Reasons: At the end of the year, battery inventory was 106 GWh, an increase of over 51% compared to the initial plan for 2023, mainly consisting of shipped goods, over 60%, due to an increase in overseas shipping areas and longer logistics times. Goods in transit will convert to revenue in the next quarter, not due to an active increase in inventory.

Distribution of Ongoing Projects: Domestically, there are thirteen major base projects underway in Guizhou, Jining, Luoyang, and Ningde, among others. Overseas, the German base's capacity is ramping up, construction of the first and second phases of the Hungary project is accelerating, preliminary preparations for the joint venture factory in Spain are ongoing, and there are also industrial chain projects in Indonesia.

10. Other Business Related

Jiangxi Mine Operations: Although the Jiangxi mine has experienced production halts and restarts, the company is confident in reducing costs to a reasonable level through cost-cutting measures, which can be covered under the current lithium carbonate market prices.

Clarification on Robotics Business Layout: The investment in Shenhua is mainly to strengthen cooperation in lithium battery materials, not a rapid significant layout in the robotics sector. Although the potential of the robotics market is recognized, this investment is unrelated to the production and manufacturing of robotic bodies.

III. Q&A

Q: From the perspective of market prosperity, what is the company's overall growth expectation for power and energy storage this year? What is the trend of demand in the second quarter?

A: From the perspective of the power market, the situation in January and February this year is better than during the pandemic in previous years, and there are seasonal fluctuations in the industry. The electrification penetration rate in China has surpassed 50%, reaching a weekly high of 58%. It is expected that the penetration rate may reach 80%, 90%, or even higher between 2027 and 2030. The trend of traditional fuel vehicles being squeezed out of the market is clear, and the application of self-driving in A-class and A0-class vehicles will also boost the electrification market. The market situation in Europe in January and February this year is good; although there was a slight decline last year, growth of about 20% was observed in January and February this year without subsidies. The EU policy aims to appropriately reduce the burden on car manufacturers, and the goals and directions remain unchanged. The US market is currently slightly stagnant due to policies after Trump's administration, but in the long term, the global market is expected to maintain a growth trend of around 25% from 2027 to 2030. From the perspective of the energy storage market, China's cancellation of mandatory configuration policies is conducive to the real application of energy storage products. The full market entry of new energy power promotes the marketization of electricity trading, increasing electricity price fluctuations, which creates a real business model for energy storage applications. The energy storage market in the US and Europe has already seen rapid growth last year, and with the demand driven by AI, computing centers and data centers will bring additional increments. In a 3-5-year dimension, the growth rate of the energy storage market may exceed that of power, possibly approaching the 25%-30% range, with an optimistic market outlook.

Q: What is the current proportion of Shenxing and Qilin? How is the profitability of new products after mass production? What is the future characteristic route and rhythm of the company's solid-state products?

A: The share of Shenxing and Qilin was about 30% to 40% last year, and it is expected to reach 60% to 70% this year based on the vehicle situation. The Xiaoyao product was launched near the end of last year, and there are currently more than 30 models that need to be adapted, which are well-recognized by users. The profitability of new products has not been mentioned. In terms of solid-state technology, the company has been leading in research and development for many years, but it is not suitable to discuss it in detail at the moment, adhering to the principle of doing more and saying less, or even just doing without talking.

Q: What are the criteria for the company's warranty provision? Will the provision ratio for 2024 remain the same as in 2023? Is there a fixed provision ratio for overseas energy storage, domestic energy storage, overseas power, and domestic power? If no actual expenses occur after the warranty, can it be reversed?

A: The company assumes repair responsibilities for electronic products sold and under warranty, and will estimate the best valuation of the comprehensive after-sales service fees incurred to fulfill this obligation based on a large amount of historical data for newly sold products. This forms a provision for liabilities, which are not simply calculated based on fixed ratios for domestic and overseas sales. Additionally, the liabilities are reviewed and provided for on the balance sheet date. The average level for 2024 is about three point-something percent, with an annual proportion of 3.8% of revenue. According to the Ministry of Finance's interpretation of the enterprise accounting standards, the type of warranty provision will be classified from expenses to costs in 2024. After the warranty period expires, if expenses have not been fully incurred, they will be reversed according to the accounting cycle, with adjustments made accordingly.

Q: What is the average warranty period for the company's power and energy storage products, and does the reversal after the warranty period become a deduction from operating costs?

A: The warranty period for power products is generally 6 to 8 years according to contract agreements, while the warranty period for energy storage varies based on agreements with customers, with some projects lasting over ten years or even longer, such as 15-year projects. The remaining portion will be released as a deduction from costs after the warranty period, according to the promised contract cycle.

Q: Why is the company's warranty provision lower in the first half of the year and higher in the second half? Is it seasonal or is it more conservative in the second half?

A: This is related to sales volume, product coverage areas, and product composition. Typically, the shipment volume in the first half of the year is lower than in the second half, and the warranty periods and ratios for power batteries and energy storage batteries differ. Multiple factors contribute to this result, making it more logical and normal for the provision to be higher in the second half.

Q: After the release of the second-generation sodium battery, will it mainly be in a dedicated or AB battery form? How do the costs compare to lithium batteries, and when will the costs be more competitive with lithium iron?

A: It has not been mentioned whether the second-generation sodium battery will mainly be in a dedicated or AB battery form. The performance indicators of the second-generation sodium battery are already close to the general lithium iron level, with better performance than the first-generation sodium battery. From the BOM cost perspective, sodium batteries will be cheaper than lithium batteries, and the cost depends on the volume produced. As long as they can be used, the cost will have a considerable advantage.

Q: With price increases in iron lithium, negative electrodes, lithium hexafluorophosphate, copper foil, etc., will the company pass on the price increases to automakers? How much room is there for battery price reductions this year?

A: From the upstream perspective, the overall situation is still in a state of oversupply. The company not only uses business methods but also employs technological innovation and cost-reduction techniques to help itself and its industry chain partners reduce costs. The company's goal this year is to achieve a certain degree of reduction in product costs, rather than a complete increase

Q: What is the premium space of the Shenxing battery compared to ordinary products, and what is the expected delivery time and rhythm for the further upgraded Shenxing Plus product?

A: The company's focus is not on premium pricing, but rather on providing better products to serve customers and enhance the competitiveness of customer products. Shenxing and Kirin will undergo certain upgrades this year; please look forward to the specific progress.

Q: What impact does the new standard have on performance, and how does the unit gross profit trend from Q3 to Q4 look? What is the impact of new product penetration and changes in capacity utilization on profitability?

A: In 2024, the overall unit gross profit will remain stable, with an annual gross profit margin showing a year-on-year increase. Due to differences in product structure and sales in regional markets, there are variations in unit gross profit for each product, and the penetration rate of new products has increased. Capacity utilization in the second half of the year is expected to improve by about 20 percentage points compared to the first half, with the annual capacity utilization approaching 80% (around 76%). The second half of the year is close to the company's historical peak levels, contributing certain value in terms of manufacturing costs and depreciation. In the next one to two years, capacity expansion and development expenditures will increase. To accurately calculate the gross profit margin on the Q4 financial statements, warranty reserves need to be added back. Quarterly data has limited reference value, especially in Q4, due to many project-based deliveries, particularly overseas, which will have seasonal fluctuations; looking at data over multiple quarters is relatively stable.

Q: What is your view on the pace of capital expenditure and capacity growth this year?

A: According to the annual report, online capacity has improved to some extent. Over the next three years or even longer, the market is expected to maintain a growth rate of 20-30%. To meet customer and market demand, the company will undertake certain capacity expansions. Currently, the planned operational situation has improved compared to last year, as the application and promotion of super batteries have enhanced the development efficiency per production line or kilowatt-hour, with the growth rate of development being slightly lower than that of capacity growth.

Q: Last year, the capacity was 676 GWh; what is the expected capacity by the end of this year?

A: The company has over 200 GWh under construction, and considering those that are ramping up, it should be able to meet customer demand.

Q: How is the order distribution by region this year, and how is the performance of the energy storage business in each region?

A: At the beginning of this year, there were good order controls in the Middle East and Australia, and the growth rate in the U.S. market is also not slow, potentially reaching a scale of 40-50% growth this year. The U.S. market is relatively large in terms of individual volume and is currently the largest market in the short term. However, we cannot ignore other markets outside of China, the U.S., and Europe; markets like Australia and the Middle East are expected to be the fastest-growing regions in the coming years, far exceeding traditional areas. With the global promotion of data center applications, there is energy storage demand everywhere, and the key is to provide good products.

Q: How does the profit margin of the Dongdong project compare to now?

A: The project's returns are acceptable; the company does not rely on low-price competition but wins through quality after multiple rounds of bidding. With good product quality assurance, there will also be reasonable returns, creating a virtuous cycle.

Q: What impact does the change in accounting standards have on gross profit and net profit margins, and why is there a situation where gross profit declines but operating profit rises?

A: According to the latest standards, if we make a comparable analysis, the gross profit is steadily increasing. However, under the new standards, a figure close to 4 has been removed, resulting in a decrease in gross profit. Nevertheless, operating profit shows a steady upward trend, and the overall profitability is good.

Q: Is the trend of profit improvement brought about by changes in product structure still evident?

A: This is a long-term process; the acceptance of new products by customers requires time. The proportion of new products in shipments is gradually increasing, which can lead to further improvements in profitability, so we are very optimistic about 2025. However, there will not be a sudden change, as the process from customer certification, and integration into vehicles, to mass production takes time, and each project's progress varies, leading to gradual impacts on the financial statements.

Q: What is the current order or shipment volume for the company's data center energy storage? Many domestic projects use lead-acid batteries, while there are more energy storage projects overseas. Can you share relevant information?

A: The current data centers are driven by AI large models and are GPU-centric, which is different from traditional CPU-centric data centers. They have higher energy demand assurance requirements and greater energy density, and the scale of individual computing centers is increasing, requiring higher energy storage capacity. For example, a project in the Middle East has a single capacity of 19 GWh, with longer matching times and two sets of circuits to ensure operation. Data centers have only recently gained significant traction, and future construction generally requires a 1-2 year cycle. The visible volume may not be large at present, but the trend is clear.

Q: What is the capacity situation of the company's ongoing projects in various regions, and where are they distributed?

A: From the perspective of bases, last year there were projects in Guizhou, Jining, and Luoyang, as well as local projects in Ningde. This year, we will gradually advance the construction of these bases, including a smaller-scale project in Beijing. There are a total of thirteen major base projects in the country that will continue to be promoted. Overseas, in addition to the further ramp-up of capacity at the German base, we are accelerating the construction of the first and second phases of the Hungary project, the joint venture plant project in Spain is in the preparatory stage, and there are also industrial chain projects in Indonesia.

Q: The configuration of 19 GWh for data centers seems very large, and the difference compared to photovoltaic energy storage is significant. What is the reason?

A: The purposes of data center configurations and photovoltaic energy storage are different. Datacenter configurations are for uninterrupted power supply, which cannot be interrupted; any interruption can lead to significant losses, such as severe consequences if a training task is suddenly interrupted halfway. The entire logic of the two is different, and the requirements for endurance time also vary, leading to exponential differences.

Q: What cost reduction measures were implemented during the process of the Jiangxi mine's suspension and resumption of production? What level can costs be reduced to now? Is the operation of the mine based on cost calculations to determine profitability, or is it to adjust the market structure to optimize overall costs?

A: The company has been researching cost reduction methods and currently has effective means to lower costs. At the same time, market demand is strong, and as a strategic resource for the company, it has been decided to resume production at the mine, with confidence in reducing costs to a reasonable level. Overall, under the current lithium carbonate market conditions, the costs of the mine can be covered.

Q: The company's battery inventory at the end of the year has increased by more than 51% compared to the initial plan for 2023. Since 2022, the company's inventory has been continuously decreasing, but there have been inventory actions since the second half of 2024. Is the inventory trend due to many existing orders, prompting proactive inventory management, or is it based on a judgment of overall raw material prices?**

A: The company's inventory is mainly composed of shipped goods, with over 60% of the inventory consisting of goods in transit that have not yet reached the customer handover point. Out of more than 100 GWh of inventory, approximately 60 to 70 GWh falls into this category. These in-transit goods will smoothly convert into revenue in the next quarter, and from the shipment volume perspective, the inventory is reasonable. As the proportion of overseas products increases, logistics time lengthens, and the sea freight cycle takes up more share, the inventory quantity appears to increase numerically. Additionally, in the fourth quarter of last year, the capacity utilization rate was extremely high, facing insufficient capacity and delivery delays. The company had neither the ability nor the willingness to actively increase inventory; this inventory was formed during the circulation process.

Q: In the equity investment announcement for Jiangxi Shenghua (actually Shenhua), it mentioned collaboration with the company in the robotics sector. What is the company's layout and current progress in the robotics segment, and will it participate in the production and manufacturing of robotic bodies in the future?

A: There may be a misunderstanding; the company invested in Shenhua, which is a supply chain enterprise of the company, and the company is also a shareholder. This investment is a way for both parties to strengthen cooperation in the future layout of lithium battery materials, not related to any layout in robotics. However, the company does see market potential in robotics, which has related demands with batteries, but this announcement is not related to the robotics layout.

Q: The inventory of shipped goods in the fourth quarter increased by 13.7 billion compared to mid-year. Does this mean that the revenue recognition pace is closely aligned with shipments and invoicing in the first quarter, and could the invoicing value in the first quarter be higher or equivalent to the shipment value due to fourth-quarter shipments being recognized in the first quarter, leading to a positive outlook for the first quarter?

A: Currently, the shipment data volume is relatively large and in a relatively discrete state, which from a mathematical perspective is a stable structure and will not undergo significant changes due to variations in certain projects. The high volume of shipped goods in December is due to the sales structure, and the sales structure in the first quarter is similar to that in the fourth quarter, which may also lead to a large inventory carried over to the next quarter for realization. The sea freight cycle is approximately over two months, with some domestic cycles being slightly shorter, while the overseas cycle is generally over two months. It cannot be simply assumed that the accumulation from the fourth quarter plus the first quarter will all be recognized in the first quarter; revenue recognition is a rolling process.

Q: Other income has been growing rapidly each year, with 9.9 billion this year and 3.2 billion in the fourth quarter, among which government subsidies are relatively high. Many pending revenue confirmations are already in the cash flow statement but not in the profit statement. What will be the recognition pace going forward?

A: Additional other income belongs to non-recurring gains and losses, not other businesses, nor sustainable projects, and should focus more on the recurring income from the main business.

Q: In the fourth quarter, the U.S. market had a significant demand release due to the election of a new president. This year, tariffs have increased by 20%. Will this affect local demand, currently, tariffs are mainly borne by customers. Is there a possibility that the company will share part of the tariffs in the future?

A: The demand for energy storage in the U.S. is strong, and the company has a good cooperative relationship with U.S. customers, with many long-term collaborations. The company has been analyzing the impact of tariffs and discussing subsequent approaches with customers. Different customers have different situations, but overall, U.S. battery capacity is insufficient to meet customer demand for energy storage products. The cost of Chinese products is much lower than that of the U.S., and even with tariffs, they are still cheaper than U.S. costs. Additionally, the U.S. lacks sufficient high-quality lithium iron phosphate capacity. There is mutual demand between customers and the company, and we will discuss reasonable solutions with customers moving forward.

Q: What is the production progress of the Hungarian factory? If it officially starts production, how will it change the company's business in Europe? Also, with the recent relaxation of feedback requirements for the carbon border adjustment mechanism, will this slow down the launch of new energy vehicles for investors and customers, leading to a slowdown in the growth of battery demand in Europe this year?

A: The first phase of the module factory in Hungary was put into production last year, and the entire cell factory for the first phase will be fully operational this year. The second phase has obtained the relevant procedures and is currently preparing for the initial work, with construction expected to start this year and completion of the second phase in a little over a year. Compared to the German factory, the Hungarian factory has lower electricity and labor costs, and the company has learned from the experiences and lessons of the German factory, making improvements in factory design, production line design, etc. The production line speed and level of automation are better, and after production starts, costs will be optimized compared to the German factory, which will greatly benefit the company's localization in Europe, better serve customers, and supply localized products. Regarding the carbon tax, the EU's new regulations only provide a two-year buffer period, using a three-year average calculation, and car manufacturers will still face significant fines in the future. They are using the money saved in the short term to promote electrification and have not relaxed due to the new regulations; rather, the new regulations provide more opportunities and feasibility for promoting electrification in Europe.

Q: What is the trend of the company's overall gross margin in the fourth quarter compared to the third quarter?

A: Looking at the whole year, the unit gross profit last year was stable, and the gross margin improved. In Q4 of last year, due to factors such as quarterly structure and region, the gross margin decreased compared to the previous quarter, but overall it was still at a high level, and year-on-year it was at its highest point. It is recommended not to look at just one quarter's data.

Q: Based on the data from the first three quarters, is the estimate of 120 GWh for power battery shipments and around 1.7 billion for energy storage shipments in the fourth quarter accurate? If accurate, why is the confirmed shipment in the fourth quarter the lowest value of the year? Will a large portion be confirmed in the first quarter?

A: The actual data for energy storage is slightly higher than estimated. Many businesses have different confirmation areas; some project-based businesses require installation and debugging, leading to longer confirmation cycles. Additionally, the time for exports to overseas markets is also long, and unconfirmed revenue cannot be counted in Q4 sales volume. Furthermore, the export tax rebate policy started in the last month of the fourth quarter, reducing from 13% to 9%, which has a certain impact on the business.

Q: How will the changes in the export tax rebate policy affect the company's profit margin levels, and how will the company share the impact with customers in the future?

A: The export tax rebate policy has been reduced from 13% to 9%, and this 4-point impact will directly affect profitability (assuming prices remain unchanged). The company is currently researching with customers how to share the impact to minimize the effect on both parties' profits.

Q: In 2019, accounting standards were adjusted, and the depreciation period for some production lines was shortened. The peak of construction and capacity was in 2020-2021. After the depreciation of production lines is completed in 2025-2026, how much impact will it have on the company's profitability?

A: The company's accounting policy has always been cautious and prudent. Thanks to the leading technology of the equipment, some production lines invested in 2020 will have completed depreciation by 2025, and these production lines will still have a certain value in continuous production. After renovation, they can keep up with the latest design and continue to contribute value. The company will consider the actual situation of each production line and provide the optimal solution for production efficiency after appropriate renovations