It belongs to the era of Ningde era

In the past century, the world’s understanding and imagination of automobiles has undergone profound changes.

In 1920, the US car sales exceeded 2 million, thanks to the “explosive” Ford Model T’s product simplification and innovation and the ultimate improvement of the production line process, which brought the price of each car to less than 300 US dollars (Editor Note: In addition to the inflation factor, it is equivalent to about $4,000 now), while the price of similar competing models was still as high as $3,000. In this consumer wave of “automotive democratization,” Ford’s market reputation quickly surpassed other brands. That year, Ford had a 45% market share in the United States, while GM only had 17%.

2020 is a critical year for the vast majority of car companies in the world to start the “pure electric” era. From traditional fuel-powered vehicles to electric vehicles, car companies have to significantly transform their production, sales and service links. The entire market structure is also undergoing a major reconstruction-a year earlier, more than 2.2 million electric vehicles were sold worldwide, and Tesla is the only brand with a market share of more than 10%.

When buying an electric car, consumers no longer focus on the old car manufacturers, but are scattered among the endless new models. However, when making electric vehicles, car companies have limited options for manufacturers of parts such as power batteries and automatic driving systems.

The research and development and production of electric vehicle products are already very much like the relationship between mobile phone brands and chip brands-the latter’s research and development progress determines how competitive front-end products are. If there is no top-of-the-line chip supplied by Qualcomm, it will be difficult for Huawei to bring new flagship phones to the market.

This change makes battery manufacturers like CATL no longer just an “hidden champion” in the upstream of the automobile manufacturing industry, but can stand in front of the stage and directly impose a certain amount on upstream and downstream enterprises, and even the direction of the entire electric vehicle market. Impact.

In 2020, the lithium iron phosphate battery provided by CATL has made the price of Tesla’s domestic Model 3 stuck within the 300,000 yuan subsidy red line for domestic new energy passenger cars, further enhancing the attractiveness of sales. From the signing of the supply agreement in February of that year to the delivery of the domestic Model 3 equipped with Ningde Times batteries in July of that year, Ningde Times’ stock price more than doubled.

The continued improvement in the stock price also allowed CATL to consolidate its No. 1 position in the GEM market in the second half of 2020. Prior to this, Wen’s shares and Mindray Medical were also guests of this position. What the three companies represent are actually three key topics in the Chinese consumer market in 2020 and even longer in the future: the pig cycle, the new crown epidemic, and electric vehicles.

In the last month of 2020, CATL’s share price rose nearly 40% from the end of the previous month, and its market value was approaching the 800 billion yuan mark. Some people think that the value of the Ningde era is overestimated. For this company, which is located in Ningde, a small city in Fujian, whose business does not directly face end consumers, the above confusion is always difficult to eliminate.

The era of Zeng Yuqun
Fujian has many mountains and seas, and has a strong tradition of emigration and business worship. However, for a long period of time, Ningde, which was located along the coast, obeyed the national strategic arrangement of the front line of coastal defense. Few construction projects were implemented and the economic situation was very fragile. For local young people, finding a way out of the mountains or getting a job in a state-owned enterprise is the safest path in life.

Zeng Yuqun, who later became the head of the Ningde era, once seized both opportunities. In 1985, he was admitted to the undergraduate degree of Ship Engineering Department of Shanghai Jiaotong University and left the “Phoenix Mountain” where he was born; in 1989, he was assigned to a state-owned enterprise in the provincial capital of Fujian and served as the “iron rice bowl”. “. But after three months of work, Zeng Yuqun resigned and went to the Xinke Magnetic Power Plant in Dongguan, Guangdong.

Shinco Magnetics Power Plant belongs to the world’s largest independent hard disk head supplier “SAE Magnetics” (SAE Magnetics), and was acquired by Japanese semiconductor group TDK in 1986. In this foreign-funded foundry, Zeng Yuqun became the only mainland technical director at the age of 31 due to his outstanding professional skills, which attracted the attention of SAE CEO and Hong Konger Liang Shaokang.

In addition to mature products such as hard disks, magnetic heads, and digital video recorders, Liang Shaokang is also interested in emerging industries such as lithium batteries, but it is difficult to promote within SAE. In 1999, Liang Shaokang, who had decided to go away, took away Zeng Yuqun and Chen Tanghua, the latter’s immediate boss in SAE. The three jointly established “Amperex Technology Limited” (Amperex Technology Limited, ATL) and accepted the parent company TDK’s Inject capital to start a “second venture” around lithium batteries.

From ATL to CATL, 20 years of Ningde era

Data source: According to public information

Zeng Yuqun once described the birth of ATL as a product of “an impulse”, which is quite similar to the “strong gambling” banner he hung in his office at that time.

The Amperex in the ATL name is rewritten from the current unit “Ampere”. In an interview with Auto Business Review in 2016, Zeng Yuqun gave another explanation for the name ATL: A Thin Light Battery, a thin and light battery.

At the beginning of the business, it was thanks to Zeng Yuqun’s research on electrolytes that he solved the problem of repeated charging and discharging of polymer batteries. Many large corporate customers, including those, achieved full profits in 2002.

ATL has twice introduced capital injections from external institutions to rapidly expand its production capacity in response to growing orders. The founding team has also transferred most of its shares for this purpose. In 2005, when institutional investors asked for funds to withdraw, the fate of ATL was no longer in the hands of Liang, Zeng, and Chen. The initial shareholder TDK bought out all the shares for US$100 million. Work” status.

The fierce iteration of consumer-grade digital products such as mobile phones has activated the development of the lithium battery industry, eventually spreading to the automobile industry that has long been dominated by traditional fuels. Under the leadership of Zeng Yuqun, ATL established a power battery department in 2008, looking for opportunities in the field of electric vehicles. But in 2011, products using foreign-owned power batteries were removed from the government’s list of subsidies for new energy vehicles, and many companies including Panasonic, LG, and ATL lost the opportunity to compete.

The localization of ATL’s power battery team became an opportunity for Zeng Yuqun to return to his hometown of Ningde in 2011 to “three entrepreneurships” and to establish Contempory Amperex Technology Limited (CATL).

CATL’s first big order in 2012 came from Johann Wieland, who was in charge of the procurement business at the BMW Group. In an earlier interview with “China Business News” magazine, Wei Lande also did not deny that he and Zeng Yuqun have a very deep personal friendship.

When developing the power battery system for the first pure electric SUV “Zino 1E” under BMW Brilliance, CATL studied hundreds of pages of German production standard documents provided by BMW, and got through power battery research and development, design, development, certification and testing. The whole process. In 2014, when CATL was selected as a supplier of BMW’s other pure electric vehicle 530Le, its R&D team also achieved the speed of completing battery design in 2 days, opening mold production in 15 days, and passing inspection in 20 days.

In 2015, CATL’s products successfully entered the “white list” of the “Regulations for the Automotive Power Battery Industry” issued by the Ministry of Industry and Information Technology, and has since entered a period of rapid development. This industry standard was not explicitly abolished until the middle of 2019, which is equivalent to four years of policy protection for the CATL in the growth stage of the company.

The banners in Zeng Yuqun’s office later became “Pu Boyuanquan.” These four words mean “The Doctrine of the Mean”, which means infinite wisdom and bottomlessness.

The era of lithium batteries
From electric cars, drones, to smart phones, AppleWatch, to wireless vacuum cleaners, electric skateboards…Batteries are the key components for these fresh devices to operate and then become popular. The evolution of lithium batteries is also the epitome of the evolution of consumer electronics.

Using lithium batteries as a source of power for electric vehicles is an idea that is almost at the same level of innovation and risk. Traditional cars can use a very mature gas station network, but before the development of the charging pile network, helping electric vehicles solve the consumer’s “range anxiety” on the battery life problem is the core demand for power battery research and development.

Comparison of key parameters of several mainstream power batteries

Data source: LEK China

At the technical level, there are significant generational differences in the development of power batteries. Related research and development began in the 1990s with major Japanese manufacturers such as Sony and Panasonic. In the 2000s, Samsung SDI, LG and other companies in Korea developed cost revolutions. It was only in the last 10 years that Chinese companies represented by the CATL found breakthrough opportunities.

The improvement of each generation of lithium batteries is to find solutions on key issues such as energy density, service life, safety, and cost. The basic unit of a power battery is tens of thousands of cells, and the structure of the cells is basically the same as that of ordinary dry batteries, composed of auxiliary materials such as positive and negative electrodes, electrolyte, and diaphragm. Depending on the selected electrode material, electrolyte and other components, the performance of the battery will be different, which will affect the entire power battery.

The two most common solutions in the power battery market are currently ternary lithium batteries and lithium iron phosphate batteries. The main difference between the two is that the alloy used in the battery cathode material-lithium iron phosphate solution has good safety, low cost, but low energy density; the ternary lithium solution has high energy density, low temperature resistance, but poor safety and high cost.

Comparison of key business data between CATL and LG Chem

Data source: CATL announcement; LG Chem announcement

Power battery shipments and installed capacity (unit: 100 million kWh/GWh)

Data source: SNE Research

Global planned capacity of power batteries (unit: 100 million kWh/GWh) ● CATL ● LG Chem

Data source: Ningde Times announcement; LG Chem data compiled according to public information

The gap at the cell level, power batteries can be reduced by other links. For power batteries, cells are usually assembled into modules, and then the modules are stacked into battery packs. How to “package and assemble” these batteries to achieve high density and low risk is very particular.

For example, BYD’s famous “blade battery” previously made the batteries elongated and thinner, and at the same time erected the batteries into groups to form a battery pack with a higher volumetric energy density; CATL launched in 2019 The CTP (Cell-To-Pack) solution eliminates the need for grouping and directly packs the cells into battery packs, which increases the energy density by 10% to 15% compared to traditional battery packs. Both solutions are based on the improvement of cheap lithium iron phosphate batteries, but they produce better power batteries than traditional solutions.

If you look at the top market share of power batteries, such as LG Chem, Panasonic, CATL, and even BYD, the mainstream products on the production lines of these companies are not lithium iron phosphate batteries, but have higher technical requirements and are more in line with high-end products. The ternary lithium battery required for electric vehicles.

Japanese company Panasonic’s reputation in the field of power batteries comes from its 10-year ternary lithium battery supply partnership with Tesla since 2008. However, the relatively conservative development strategy made Panasonic both unwilling to increase production capacity and unwilling to reduce prices, and eventually lost this major customer.

In contrast, Korean companies and Chinese companies have more flexible strategies and are willing to do personalized research and development for confirmed orders, quickly expand production capacity, and provide more reasonable prices. LG Chem started from chemical manufacturing and has a thorough grasp of various materials and technologies involved in the upstream of the industrial chain. After South Korea is determined to develop the power battery industry, LG has accelerated its expansion of production capacity to meet the needs of the global market.

Changes in China’s new energy passenger vehicle subsidy standards from 2013 to 2020

Data source: Ministry of Finance of the People’s Republic of China

Ningde Times chose to capture enough customers in the core market of China, and then designed various solutions based on customer needs to achieve stable performance growth, and even “winner takes all” domestically.

Statistics show that in 2019, the Ningde era has contributed more than 50% of the power battery to the five major auto companies such as BAIC, SAIC, GAC, Dongfeng and Geely, and BAIC, which has the highest share, even exceeded 90%. From 2018 to 2019, the five major car companies mentioned above all announced plans to establish a joint venture battery factory with CATL to ensure battery supply and increase competition barriers.

China’s battery demand for electric vehicles vs. Ningde era supply capacity

Data source: Roskill, Advanced Industry Research Institute, CITIC Securities

The article “Can BYD’s Road of Opening Up” published in the August 2020 issue of “China Business News” mentioned a basic logic of China’s electric vehicle market: subsidy policy determines what kind of power batteries the market will use The product also determines what kind of car will sell well.

CATL adopts conservative accounting standards on multiple indicators

Data source: Ningde Times Financial Report

For example, the upper limit of the subsidy price of 300,000 yuan determines that the domestic Tesla Model 3 with standard battery life must use low-priced lithium iron phosphate batteries instead of buying more expensive three yuan from LG Chem, which established a supply relationship earlier. lithium battery.

This “enough” configuration can also allow Tesla to reserve a little room for price cuts and further boost sales. According to data from the Passenger Car Market Information Joint Conference, in November 2020, a total of 21,604 Tesla Model 3s were sold across China (Note: the total sales of standard battery life and long battery life), and the sales volume is second only to the average price. Hongguang MINI for 28,800 yuan.

Since 2013, although China’s subsidy policy for new energy passenger vehicles has declined year by year, it has not stopped. Through multiple “renewals”, it will continue until the end of 2022. A long-term change in the subsidy decline is that in order to obtain higher subsidies, the range of electric vehicles (indirectly examining the energy density of power batteries) must be higher. This policy trend is generally more conducive to the development of ternary lithium batteries, but the premise is that it can do a good job in cost control.

For CATL, policies and major customers are both very certain production signals. In the next few years, whether China’s electric vehicles need more cheap, basic lithium iron phosphate batteries, or more ternary lithium batteries that cross the technology and cost barriers, the CATL can satisfy a large proportion of them.

In overseas markets, the European market, which has been forced by the carbon emission bill and has been radically “electrified” in recent years, is a battleground for four power battery companies, Ningde, LG Chem, Samsung SDI and Panasonic. At present, CATL and LG Chem have completed communication with key brands including Volkswagen, BMW, Daimler, Volvo, and Jaguar Land Rover. In an interview with Bloomberg in July 2020, Zeng Yuqun also said that “the possibility of supplying Tesla to the Berlin Gigafactory will not be ruled out.”

Only in terms of localized production, CATL has to pay close attention to it. LG Chem’s Polish plant has a capacity of 3 billion watt-hours (GWh) in 2019, which is equivalent to 60% of the world’s largest production base in the CATL era; the German plant of CATL has been affected by the new crown epidemic and construction progress has been delayed .

The age of competitors
The future competitors in the Ningde era may be major auto companies. In the era of electric vehicles, better power batteries are the core element of car companies selling cars. Once the design competition for the electric car itself is over, car companies will inevitably turn their attention to self-developed power batteries.

In the global electric vehicle market competition, Tesla is a temporary winner. The investment in the “Tesla industry chain” and even the investment in the industry chain of “Tesla suppliers” in the Ningde era has been considered a viable way to make money in the past two years.

But Tesla is not an ordinary car company. In September 2020, Tesla held the “Battery Day” for the first time. CEO Elon Musk announced the planning and progress of self-developed power batteries, as well as a series of “combination innovations” centered on batteries. Musk believes that through the improvement of batteries, independent production and the combination of batteries and cars, Tesla’s cruising range can be increased by 54% in 2023, and investment and production costs can be reduced by 69%.

As this was an “advanced conference” three years before the realization of various technologies and production capacity, the general pessimism in the market made Tesla’s market value shrink by $22 billion on that day. There are also optimists who believe that if Musk can achieve what Musk said, then Tesla will become a highly vertically integrated company with battery technology as the core, just like it had mastered everything from iron ore to automobile production systems. Series resources like Ford.

BYD, which declared that it wants to be “more open” in 2020, its power batteries were previously independently developed, but only for its own products. This approach ensures that the company’s internal supply and demand are highly matched, while saving a lot of advanced research and development costs. Since 2018, BYD has opened battery supply to the outside world and plans to split its power battery business into independent companies by 2022. Many car companies that have a demand for low-cost batteries will be interested in this new supplier and its “blade batteries”. The potential financing and listing opportunities of this business in the future can also supplement a large amount of liquidity for the parent company.

Suppliers and new energy car companies must pay attention to research and development in the future

Data source: Financial reports and announcements of CATL, LG Chem, BYD, and Tesla

Not only car companies, but other large component companies will also join the competition in the power battery market, and they will be even more radical in their thinking.

In 2018, Bosch, the world’s largest auto parts manufacturer, once announced the abandonment of self-developed power batteries. Since then, Ningde products have been used in the power battery system. But Bosch has also made it clear that the company is more optimistic about next-generation battery technologies such as solid-state lithium batteries, and commercial products are expected to come out in 5 to 10 years. From the perspective of energy density, the liquid lithium battery represented by the current ternary lithium battery is difficult to break through the bottleneck of 300Wh/kg, while the theoretical value of the solid lithium battery is 700Wh/kg.

As the midstream link of the electric vehicle industry chain, if you focus on power battery research, it means entering a “risk industry” with high R&D investment and long return periods. Taking the industry leader LG Chem as an example, the group’s resources and external funds can support the company’s annual R&D investment of RMB 2 billion to RMB 3 billion, but there is no guarantee that the company’s most basic gross profit rate will always be positive.

One of the problems revealed in the financial reports of CATL in recent years is that the overall gross profit margin has declined due to the impact of global competition. But after deducting non-recurring gains and losses, its net profit margin attributable to shareholders of listed companies has remained around 10% for the past three years. Considering that this is the result of the company’s rather conservative accounting policies, it is not easy.

According to the calculations of CITIC Securities, CATL will achieve up to 42% in 2019 by shortening the depreciation period, 100% of R&D costs, accruing inventory depreciation in advance, accruing a large amount of battery warranty costs, and cashing in sales rebates. The “processing” of net profit of 100 million yuan has become operating costs.

If this part is added back, the net profit attributable to the parent company of the Ningde era is actually 8.8 billion yuan, and the P/E (price-earnings ratio) corresponding to its valuation will also drop from 109 times which is considered to be an inflated high to about 57 times.

On the other hand, thanks to the improvement of the accounting period, the cash flow of CATL is also quite stable. In 2019, the company’s net operating cash flow reached 13.472 billion yuan, which was much higher than the net profit level of the same period. The high net profit and operating cash flow means that the company can quickly use a large amount of capital to replenish the market when there is real demand.

In order to tie the gap with LG Chem in the upstream and downstream layout, CATL announced in September 2020 an industrial chain investment plan totaling 19.06 billion yuan. This rare “money-spending move” in the Ningde era may have been stimulated by external statistical results-data from SNE Research shows that the installed capacity of LG Chem’s power batteries surpassed that of the Ningde era in the first half of 2020, marking the first time in history.

Changes in the market structure often occur in similar moments, and few companies can always remain invincible. For example, Ford, which “puts wheels on the world,” its record of No. 1 sales in the U.S. has actually only been maintained for 15 consecutive years. year.

Whether to choose “strong gambling” again or prefer “Pu Boyuanquan” will determine how long the power battery era belonging to the Ningde era will last.