CATL earnings slip masks charged-up ambitions

Battery ram. The world's biggest producer of batteries for electric cars has just hit a rare pothole. On Friday Contemporary Amperex Technology revealed that earnings for the quarter to the end of December had fallen 1.2% compared with a year earlier - the first such decline since early 2022. Yet founder and Chair Robin Zeng seems ever more determined to rev up production.

Overcapacity is rampant in the sector. CATL, for example, reduced its factory utilisation rate to 70% last year from 83% in 2022, Citi notes. The company is also, though, constructing new facilities that will add around a fifth to the more-than-500-gigawatt hours of total production potential it boasted at the end of 2023, per Bernstein. Such aggressive driving is at odds with cooling sales growth for their clients, which include electric-car makers Tesla and Nio: global sales of battery powered models grew 31% last year, compared with 60% in 2022, per Rho Motion.

Investors nonetheless sent the company's Shenzhen-listed shares up 5% on Monday, valuing the group at 9.5 times forward EBITDA, LSEG data showed, versus competitor BYD's roughly 7 times multiple. They have three reasons for their confidence in CATL.

One is scale. Zeng's company grew its share of the global market to 36.8% last year. It dominates at home, accounting for more than half of batteries sold there, per the China Automotive Battery Innovation Alliance.

At the same time, an R&D team of more than 20,000 staff has honed a sharp edge in key battery chemistries, ranging from increasingly popular lithium-iron phosphate, to novel products that may be on the cusp of commercialisation such as sodium-ion cells.

Zeng also had the foresight to expand abroad before headlong growth in China moderated. True, there is a large question mark over his ability to build the business in the United States, where it faces intense scrutiny from lawmakers. Last month, utility Duke Energy said it will phase out CATL products from civilian installations. A plan to licence tech to Ford Motor has drawn criticism from Senator Marco Rubio and others. The road looks somewhat smoother in the European Union, the world's second-largest EV market, where the company is currently constructing a factory in Hungary.

If Zeng's calculations are off, he risks supply racing past demand. But if he has his maths right, CATL's hard drive will pressure weaker players while his company cruises in pole position.