CATL (1Q25 Minutes): The impact of tariffs is relatively limited, actively negotiating solutions with customers

The following is $CATL(300750.SZ) the minutes of the earnings call for the first quarter of 2025. For the earnings interpretation, please refer to《 CATL: Tariff "robbers" strike hard, CATL faces a difficult ordeal 》

I. Core Financial Information Review

II. Management Discussion

1. Financial Performance

Key data for the first quarter: In Q1 2025, the company's total operating revenue was 84.7 billion yuan, net profit was 14.9 billion yuan, and net profit attributable to shareholders was 14 billion yuan, a year-on-year increase of 33%; profit margin was 17.5%, an increase of 3.5 percentage points year-on-year. Operating cash flow remained strong at 32.9 billion yuan, with cash and cash equivalents exceeding 320 billion yuan at the end of the period.

Shipment volume and revenue recognition: In Q1, shipment volume exceeded 120 GWh (this is the data for revenue recognition), with the ratio of energy storage to power shipments approximately 2:8, with power accounting for 80% and energy storage close to 20%. Due to changes in product structure and cost structure, as well as the decline in battery prices, the revenue recognized in the profit statement was slightly lower. Inventory continued to rise from the end of last year, partly for future sales preparation, and is expected to be significantly digested in the next quarter, which is reasonable.

Profitability analysis: The gross profit margin in Q1 improved slightly quarter-on-quarter, with a net profit margin of 17.5%, the highest quarterly profit level since 2018. Profitability from overseas energy storage orders in the Middle East, Australia, etc., is good. Profit per watt-hour has rebounded compared to Q4 last year, due to changes in cost structure and the decline in lithium carbonate prices, with expected net profit per watt-hour improving compared to last year.

2. Market and Customers

Global market share of power batteries: According to SNE statistics, the company has ranked first in global power battery usage for eight consecutive years from 2017 to 2024. From January to February 2024, the company's global market share of power battery usage was 38%, with a market share of 43% in Europe, an increase of eight percentage points year-on-year.

European market situation: In Q1 this year, the European market sales volume increased by 20% year-on-year, with the company holding the top position in the European power market and continuously expanding its share, currently at 38%. Both export and local production profitability in Europe are good, and the German factory has begun to turn a profit. The company has a positive outlook for the European market, and its market share is expected to continue to increase.

Impact on the U.S. market: The U.S. energy storage business accounts for a small proportion of the company's shipments, with direct exports and end-market business in the U.S. combined accounting for a very small single-digit percentage. The company had already prepared for changes in U.S. tariffs last year, and currently, order demand is strong, with capacity utilization at saturation, and overall performance growth potential has not been significantly affected Customers mostly bear tariffs based on the onshore price, and the company is also negotiating with customers to respond to the rise in tariffs and changes in export tax rebate policies.

3. Business Cooperation and Development

Zero-carbon ecological construction: Significant progress has been made in zero-carbon ecological construction. A cooperation framework agreement has been signed with China Petroleum & Chemical Corporation (Sinopec), aiming to build no less than 500 battery swap stations by 2025, with a long-term goal of expanding to 10,000 stations, jointly promoting the standardization of electricity and energy. A strategic cooperation agreement has been signed with Nio to jointly create the world's largest and most advanced passenger car battery swap service network, and to jointly promote the formulation and promotion of national standards for battery swapping technology. A strategic cooperation agreement has been signed with Dongying City in Shandong Province to jointly build the first zero-carbon industrial park with a high proportion of green electricity supply, and a cooperation agreement for zero-carbon application scenarios has been signed among Dongying City, Shengli Oilfield, and China University of Petroleum.

Progress in battery swap station construction: The goal of building 1,000 battery swap stations this year remains unchanged from last year. Currently, 4S stores and subsidiaries in various regions are being established, and the construction of battery swap stations is progressing in an orderly manner as planned. In addition to cooperation with Sinopec and Nio, a joint venture has been established with Didi to expand the battery swap network ecosystem, and more battery swap models from major manufacturers will be released successively.

4. Energy Storage Business

Development of energy storage business: The company is gradually extending from battery cells to the role of integrator. The energy storage business adopts a project-based business model, collaborating with customers through an open strategy to provide battery cell modules and DC or AC products. The product forms and R&D in the energy storage industry are continuously iterating, and developing products from the perspective of overall system integration can better meet customer needs.

Revenue recognition method: The payment methods for energy storage systems are diverse, and revenue recognition varies due to business diversity. The revenue recognition cycle for DC side shipments is short, while for AC side shipments, some revenue is related to installation and debugging, resulting in a longer recognition cycle, generally less than six months. The industry is also exploring solutions to shorten the recognition cycle.

New scene demand: The demand for energy storage driven by AI data centers is increasing, and the cost of solar storage plus storage has basically achieved parity. Due to high requirements for the operational guarantee of data centers, the demand for energy storage batteries is large, and it is expected that the demand for solar storage plus storage brought by data centers will grow rapidly in the future.

5. Other Businesses

Commercial vehicle business: Commercial vehicles are an important market for the company, with a market share of over 80% in the bus market and over 60%-70% in heavy truck logistics. Last year, the Tianxing series products were launched, with over 300 models in use. This year, the market is growing rapidly, becoming an important source of revenue due to cost parity and policy support. Overseas, the penetration rate is slightly lower except for buses, but as the Chinese model matures, it is expected to be applied overseas, with the electrification of commercial vehicles in Europe entering a phase of rapid growth. Commercial vehicles account for about 20% of the power business, with increased applications for large battery capacity, and the demand for single vehicle battery capacity and lithium batteries has increased, with commercial vehicle growth expected to outpace that of passenger vehicles.

Revenue from other businesses: The gross profit margin of other businesses in the financial report is relatively high, and the revenue growth rate is also high, including waste materials, materials, licensing, R&D, and other items, some of which are proportional to business volume. Income from technology licensing and other areas is growing even faster, and if a particular item is significant enough, it will be listed separately. The gross profit margin for patent licensing and similar items exceeds 60%, due to the capitalization of R&D expenses, resulting in a high gross profit.

III. Q&A

Q: What are the shipment and recognition volumes for the company's power and energy storage in the first quarter of 2025, and what percentage of the ending inventory is made up of shipped goods? Is this stockpiling for the market? What is the total shipment volume for the first quarter, and how does it relate to confirmed revenue?

A: The total shipment volume for the first quarter exceeded 120 GWh, which is the data confirming revenue. There has been a slight increase in inventory, which is indeed for future sales preparation. The sales situation in the first quarter saw over a 30% growth compared to the same period last year, and inventory has slightly increased compared to the end of last year, mainly because the shipment volume is rolling growth every quarter and month, and inventory will be significantly digested in the next quarter, which is reasonable. Revenue growth is not much affected by the unit price of batteries compared to the same period last year and this year; last year's lithium carbonate was between 100,000 and 120,000, corresponding to this year's price range of 70,000. Looking at the annual shipment volume, Q2 production scheduling is saturated and currently meets expectations.

Q: What is the progress of battery swap station construction in the first quarter this year, and how is the pace of B-end and C-end customer advancement?

A: Since the battery swap ecosystem conference held at the end of last year, progress has been continuously made in the construction of the battery swap network ecosystem. A strategic cooperation framework has been reached with Sinopec on infrastructure, an agreement has been reached with Nio on co-building and sharing the battery swap network, and a joint venture has been established with Didi to expand the battery swap network ecosystem. More battery swap models from major manufacturers will be released successively. The goal of building 1,000 battery swap stations this year remains unchanged, with 4S stores and subsidiaries being established in various locations, and the construction of battery swap stations is progressing in an orderly manner as planned, with confidence in achieving this year's goals.

Q: Does the 120 GWh refer to shipments or confirmed revenue?

A: The 120 GWh refers to confirmed revenue data.

Q: What is the approximate division between energy storage and power in the 120 GWh shipments?

A: The ratio of energy storage to power in the first quarter sales is similar to before, with power accounting for 80% and energy storage close to 20%.

Q: Has the increase in U.S. tariffs affected energy storage orders, and how is the company responding?

A: The U.S. energy storage business accounts for a small proportion of the company's shipments. Since last year, the company has made advance plans and preparations based on environmental changes. Currently, we are actively negotiating solutions with customers. The company currently has strong order demand, with capacity utilization being saturated, and the demand for power and energy storage in China and other regional markets is growing rapidly, so the overall performance growth potential has not been significantly affected.

Q: Has the company's profitability changed compared to previous expectations, and what is the outlook? How does the profitability of energy storage system orders in the Middle East and Australia compare to before, and what impact does it have on overall profitability?

A: The profitability of energy storage orders obtained by the company in regions such as the Middle East and Australia is very good, with overseas orders being profitable. In the first quarter of this year, the company's gross profit margin has improved compared to last year, with a net profit margin level reaching 17.5%, the highest quarterly profit level since 2018, and the company's profitability is steadily improving.

Q: How does the company feel about the sales data in Europe this year, and what are the goals and expectations for the European market this year?

A: Since the first quarter of this year, the market sales in Europe have increased by 20% year-on-year. The company holds the leading market share in the European power market and is continuously expanding, which is a good supporting factor for performance.

Q: What is the company's latest market share in Europe? Is there a difference in profitability between products shipped from China to Europe and those produced locally in Europe?

A: The company's current market share in Europe is 38% and is expected to increase. Export profits are good, and localization is also performing well. The German factory has started to turn a profit, and the market share in Europe is widening compared to competitors. Overall, the situation is as expected and performing well.

Q: Is the revenue from energy storage systems recognized in accounting like peers, only after the project is connected to the grid and accepted?

A: Depending on the agreements signed with each EPC, the payment methods may not necessarily be 3331 or 3322. Previously, revenue came more from the DC side, where most revenue could be recognized quickly after delivery, with a shorter cycle; now, with a more diverse business, products from the AC side are starting to be shipped, which have a longer cycle. Some revenue is related to installation and debugging, while product-side revenue can be recognized in a shorter cycle. Service revenue related to installation and debugging needs a longer cycle. The industry is also discussing more effective ways to shorten the recognition cycle.

Q: If it is AC side shipments, is the entire contract's revenue recognized only after it is connected to the grid?

A: Not necessarily, it depends on the contract signing situation. If the equipment and services are signed separately, the equipment can be recognized upon delivery, while installation and debugging-related costs need to be recognized after successful installation. Details can be shared further.

Q: What was the proportion of AC side shipments in the total energy storage last year, and how long does it generally take from shipment to final grid connection?

A: The proportion of AC side shipments rapidly increased last year and currently exceeds half. The recognition cycle for the AC side is related to the agreements signed with customers, generally shorter than six months.

Q: The annual report last year stated 93GWh of energy storage battery sales; is the actual number larger, and does accounting adjustments lead to a lower recognized sales volume than perceived shipments? In the annual report, there is a 106GWh inventory; aside from offshore transportation, is there any unrecognized inventory in transit?

A: Your understanding is correct. Due to different recognition cycles, some revenue is tied to installation and debugging. There is a portion of goods that have been shipped but for which the receipt status has not been recognized in the accounting records, and the annual report also mentioned that for some shipped goods, their revenue has not been recognized.

Q: In the first quarter of 2024 and 2025, what proportion do energy storage products directly exported to the U.S. and the portion in the U.S. end market account for of the total?

A: An analysis of the exposure and impact on the U.S. market before and after the tariff events shows that the shipment volume directly and indirectly exported to the U.S. is a very small single-digit percentage, with minimal impact.

Q: Are most contracts exported to the U.S. in FOB form, with customers bearing additional tariffs? Have any customers proposed to share the tariff burden?

A: Previously, contracts were more confirmed at the CIF price, mainly borne by the customers. When tariffs increased, we actively communicated with customers to jointly address the situation. Currently, tariffs have risen to a relatively high level, and we are observing changes.

Q: Regarding the export tax rebate policy that took effect on December 1 last year, which currently bears a 4% rebate difference, how is the price increase negotiation with customers going?

A: Orders with previously agreed prices will not be reconsidered. For new orders, we will consider relevant factors when negotiating prices with customers and renegotiate pricing.

Q: As the company extends from battery cells to the role of integrators, will it directly compete with original customers like Tesla and Sunshine? How does the company consider and avoid being both a customer and a competitor? A: Energy storage is an emerging industry, with product forms, designs, and R&D constantly iterating. From the perspective of overall system integration, better, more efficient products that meet customer needs can be developed, so the company needs to have independent capabilities. Energy storage is mostly project-based business, and the company adopts an open business strategy, not limited to any specific form, providing customers with battery cell modules, DC products, AC products, etc. The key is to offer customers the most cost-effective, highest quality, and safest products.

Q: The gross margin of other businesses in the financial report is relatively high, and last year's revenue growth rate was also high, including patents, recycling, licensing, etc. How do you view the future growth rate of this business and its relationship with the growth rate of the main business's shipment volume?

A: Other income includes waste materials, materials, licensing, R&D, etc., and the individual scale is not large, so it has not been broken down. Part of it is proportional to business volume, while another part, such as technology licensing, has a faster revenue growth rate. When a certain income item is large enough to show its importance, it will be reported separately.

Q: What is the expected profitability of businesses such as patents, licensing, and IP, and what is the gross margin of the recycling business?

A: Since the company capitalizes all R&D expenses, the gross margin for this business is relatively high.

Q: The gross margin per watt-hour has declined year-on-year, with sales volume increasing by 30%. What are the main reasons for the change in unit profit? How does it compare year-on-year?

A: The gross margin per watt-hour has rebounded compared to the fourth quarter of last year. Year-on-year, the product structure and cost structure have changed significantly, mainly due to lithium carbonate price factors. Last year, the price of lithium carbonate was between 100,000 and 120,000, and now it is over 70,000. The change in cost structure has a significant impact on profitability. Attention should be paid to recent cyclical operational factors rather than those from four quarters ago.

Q: What proportion of income is accounted for by warranty reserves and rebates?

A: Warranty reserves are extracted based on relatively stable actual conditions, about a few points over three years, which is an average stable figure, with little difference between the first quarter and previous quarters. Rebates are pre-estimated based on agreements with customers and considerations of this year's customer, competition, and price trend situations, and the specific proportion cannot be determined. It is based on a cautious principle, and the accounting treatment is consistent with previous practices.

Q: Is the profit from large watt-hours for the whole year slightly higher or stable compared to last year?

A: It is a bit early to say about the year-on-year comparison for the whole year, considering recent volatility factors, the net profit per watt-hour has slightly increased compared to last year.

Q: Will the annual shipment volume have a growth rate of 30%?

A: Currently, the uncertainty in the market environment is too great to determine the annual shipment volume growth rate. However, the production schedule for the first and second quarters is very full, and it currently meets expectations. The company's market position and advantages in Europe and domestically are stable, but shipment volume is affected by many factors.

Q: The financial expenses for the first quarter are about 2 billion, influenced by policies. How does this affect the currency structure held by the company, and will it continue to have an impact in the second quarter?

A: The foreign currencies held by the company mainly include euros, US dollars, etc., and hedging is conducted based on its own situation. On the books, the exchange rate fluctuations generate current gains and losses, and there will be a reverse confirmation on the cost side, which is a reasonable and effective hedge. The increase in financial expense income on the books potentially means an increase in costs. Hedging is a tool for ensuring financial safety and smoothing profits, and changes in individual accounts do not affect overall income Assuming that the euro exchange rate declines next quarter, financial expenses may incur losses, but costs will be compensated. From the comprehensive net effect of hedging disclosed in the annual report, it is basically close to zero. The company's net profit margin will generally remain stable, with ROE stabilizing at 24%-25% over the past few years, making ROE more worthy of attention.

Q: On June 1st, the domestic energy storage strong allocation was canceled. Did the company feel any changes in domestic strong allocation orders, and what kind of response will be made?

A: The cancellation of strong allocation is a fundamental change and impact on the domestic new energy and energy storage industry. On one hand, it encourages new energy to fully enter the market, which will make the price fluctuations of new energy electricity more intense; on the other hand, it allows energy storage products to truly play their role, with their flexible adjustment system resources being applied between the source side and the load side. In the future electricity market, electricity spot and trading will be more launched and applied in various provincial capitals, which is very beneficial for companies and manufacturers producing high-quality energy storage products, and is positive in the medium to long term.

Q: Does the unit gross profit from the first to third quarters include the one-time impact of raw material price concessions, and should the base be calculated from last year's Q4 going forward?

A: There has been an impact from raw material price fluctuations in the past, but the base varies each quarter, so it cannot be calculated in this way. Various factors such as raw material price fluctuations, exchange rate fluctuations, and product structure will affect product prices and costs. The net profit is the result after balancing and smoothing revenues using all tools and means, and the profit level per watt-hour and ROE are better observation targets.

Q: From both short-term and long-term perspectives, with the tariff impact in the US market, does the company have any transit inventory in the US market, how long can it be maintained, and how will the industrial chain be rearranged in the long term to reduce the impact?

A: Since last year, the company has had plans and preparations for the US market, and the current impact is very small, in single digits. There is significant uncertainty in the medium to long term, depending on the implementation and landing of policies between major countries, and we can only proceed step by step. CATL has the strongest technical strength, the broadest customer base, the most advanced international layout, and the strongest supply chain, with the greatest risk resistance capability, and is confident in seizing market opportunities, with customers willing to face problems together with the company and seek solutions.

Q: The Hungarian factory in Europe is expected to start production at the end of the year. Is there any redundancy in capacity that can be used for exports to the US market? With Tesla facing tariff impacts, is there a possibility of shifting some orders to the Shanghai factory?

A: The original intention of the European factory is to provide localized battery product supply for European OEMs, and the current capacity has been booked. Whether there will be space for capacity enhancement in the future still needs to be observed. Tesla has very high confidentiality requirements for commercial arrangements, and they have their own plans, so the company is not convenient to comment.

Q: What is the general scale and growth rate of the company's commercial vehicles last year and this year, as well as the trend of electrification of commercial vehicles overseas?

A: Commercial vehicles are a very important market for CATL, and the company has always had a high market share in commercial vehicles, such as having a market share of over 80% in buses and a share of around 60%-70% in heavy truck logistics, with a high growth rate expected in 2025. Last year, the company launched the Tianxing series products, with over 300 models using this series. This year, the growth rate of the commercial vehicle market is very fast. As it gradually achieves cost parity, environmental support and government policies will be enhanced, making the commercial vehicle business an important source of revenue.

Overseas, except for buses, the penetration rate in other areas is slightly lower, and there are not enough cost-effective models observed. However, many models can be applied overseas after the Chinese market matures, and some overseas manufacturers are developing electric heavy truck versions. The EU has new regulations for heavy vehicles in 2024, requiring a 90% reduction in carbon dioxide emissions from heavy trucks by 2040 compared to 2019. In 2024, over 90% of bus tenders in Europe will be pure electric, and some overseas commercial vehicle brands are also launching more pure electric products. The electrification of commercial vehicles in Europe will enter a phase of rapid growth.

Q: What is the general scale of the company's commercial vehicles? Will the significant increase in battery capacity for commercial vehicles this year lead to a more optimistic expectation for overall growth?

A: Commercial vehicles account for about 20% of the company's total power battery business. The realization of large battery capacity is attributed to the cost advantages of CTP. Especially, as the CTP cost for large-capacity heavy trucks further decreases, their economic advantages are enhanced. Coupled with policy subsidies, this has led to an increase in the application of large-capacity heavy trucks and other commercial vehicles. This leads to an increase in the average battery capacity per vehicle and also boosts the demand for lithium batteries.

Q: How do you view the growth rate and scale of the company in new energy storage scenarios (such as energy storage for data centers in Australia) over the next two years?

A: The energy storage demand driven by new types of data centers (AI data centers) is very large. Compared to traditional data centers, AI data centers have higher power density or energy requirements. Tech giants have clean energy zero-carbon goals and are increasingly adopting solar storage plus storage solutions to provide clean power, in addition to traditional power supply solutions, with the cost of solar storage plus storage basically achieving parity. This scenario has a large demand for energy storage batteries, such as the Middle East project which has an 8-hour dual circuit. Although the scale of energy storage seems considerable, it accounts for less than 10% of the total investment in data centers. The Middle East and Australia have long sunshine hours and good photovoltaic conditions, and the costs of solar storage plus storage are controllable. The demand for solar storage plus storage driven by data centers will grow rapidly in the future.

Q: What is the expected growth rate for commercial vehicles this year?

A: The growth rate for commercial vehicles will definitely be higher than that for passenger vehicles, and the data we are seeing is quite high.

Q: Are the planned 10,000 battery swap stations mainly for passenger vehicles or commercial vehicles? If you were to segment them, how many would be for passenger vehicles, commercial vehicles, or both? Are all 10,000 stations for chocolate battery swaps?

A: The planned 10,000 battery swap stations are mainly for chocolate battery swaps for passenger vehicles, while there are other plans and arrangements for commercial vehicles. These 10,000 stations are targeted at passenger vehicles for chocolate battery swaps.

Q: Currently achieving 5C for ternary batteries and 4C for lithium iron phosphate, how do you assess the commercial balance of higher and faster charging speeds? Will you continue to accelerate charging speeds, or do you think the current domestic 4C and 5C already have good results?

A: The company developed a 4C lithium iron phosphate battery two years ago, and last year the Shenxing Plus achieved an average of 6C for lithium iron phosphate (charging from 20% to 80%), with peak values reaching 12 - 15C (charging from 0% to 20%). Fast charging has its application scenarios but also has drawbacks and limitations, such as the need for higher voltage levels, higher power designs, and higher requirements for the electronic and electrical structures of vehicles, charging piles, and batteries, which increases costs and requires higher power from the grid, making it not suitable for all locations. The company believes that the future energy replenishment landscape will be divided among slow charging, fast charging, and battery swapping, and developing a battery swap network and fast charging products is not contradictory.

Q: Under the background of U.S. tariff policies, will customers in other markets such as Southeast Asia, Africa, Latin America, and Europe be affected by the butterfly effect, such as stockpiling or reducing purchases?

A: Currently, other markets are doing well except for the U.S., and there is no significant impact. The international situation is volatile, and we need to observe the subsequent developments. The company will make its own preparations and arrangements.

Q: In the context of fluctuations in lithium carbonate prices, how do you view the company's inventory, costs, and future prices?

A: The decline in lithium carbonate prices is due to oversupply, with new projects coming online in South America, Africa, Australia, and domestically. The company's inventory management and production operations have not been significantly affected, but sales prices will decrease, leading to revenue growth not being as large as the increase in shipment volume.

Q: The company previously made an impairment on its lithium mine in Jiangxi. Has it been fully impaired, and will there be similar actions in the future?

A: The impairment was a cautious estimate based on a comparison of market prices and net realizable value at that time. If prices continue to decline, it will be handled according to prudent accounting principles. Currently, the Jiangxi lithium mine has resumed production and is operating normally.

Q: In the long term, what market share does CATL hope to achieve in the European market?

A: The company has advantages in product research and development, which have been recognized by customers, and it also has local supply chain advantages in Europe. Market share is steadily increasing. However, it is difficult to specify a particular market share figure due to cyclicality; one wave of fixed points and one wave of sales will have an impact. The company will become increasingly localized in Europe and perform better.

Q: Assuming that U.S. tariffs remain high for a long time in the future, will customers consider switching back to using ternary batteries after accounting for tariff costs?

A: In the current uncertain international situation, there are various possibilities for the future market. The U.S. market may experience a decline in scale and growth due to high tariffs. Ternary batteries have physical property issues, and there have been multiple incidents of combustion in the U.S. It is difficult to have a serious discussion on this possibility; the company needs to prepare itself and wait for changes in the situation. The U.S. market also faces uncertainties such as inflation and recession, which are all open-ended issues.

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