China bear vs UBS, Nomura: Tesla’s battery supplier CATL to hurt investors or deliver windfall in battle of analysts

Contemporary Amperex Technology, which supplies lithium batteries to Tesla and its Chinese electric-car challengers like XPeng and NIO, cannot convince stock analysts about its prospects, even after delivering more than 150 per cent surge in earnings last year.

The stock could hurt investors by another 20 per cent, after losing about 370 billion yuan (US$59.1 billion) or a quarter of its market value from an all-time high on December 2, Wei Zhichao, chief economist at Capital Securities based in Beijing, wrote in a February 10 note to clients

That bearish view resonates with current market sentiment amid a rash of speculative attacks on the company’s prospects. The price targets of 700 to 722 yuan by analysts at UBS and Nomura look too bullish, as with consensus target of 723.65 yuan among 18 analysts tracked by Bloomberg.

The state of China’ electric-vehicle (EV) market, global lithium ore prices, economic policies and market valuations will determine who will come out victorious, according to money managers. One thing is certain: the one-way bet on Chinese “hot green stocks,” driven by President Xi Jinping’s carbon-neutrality agenda, is over.

“The major market concern comes from EV sales because of rising lithium cost and reduced subsidies for car purchases,” said Chen Ping, a fund manager at HSBC Jintrust Fund Management in Shanghai. “If sales miss expectations, the sector will face more valuation pressures.”

CATL fell 2.5 per cent to 497.41 yuan on Tuesday in Shenzhen, giving it a market capitalisation of 1.2 trillion yuan. It is the biggest constituent in the ChiNext gauge. Tesla was its biggest customer in 2021, taking up almost one-fifth of its installed capacity, followed by NIO and XPeng, according to Soochow Securities.

CATL’s outlook has dimmed for several reasons. The price of lithium ores, a key raw material, has risen almost fivefold in 2021 and 40 per cent this year, pressuring profit margins.

Beijing’s nod for green cars has also tempted a slew of new players into the industry, fanning a rush to secure long-term raw-material supply globally. Rivals like Ganfeng Lithium and Zijin Mining Group have been buying up mines to lock up supply.

Exuberant investors could take some of the blame too. At its peak, they drove the stock valuation to 276 times in terms of price-earnings multiple. The slump in the past three months has only flattened it to 115 times, still lofty compared with 16 times average for large-cap members of the benchmark CSI 300 Index.

“The valuation of the renewable plays is still elevated,” said Deng Lijun, an analyst at Northeast Securities. “There will be limited upside room” for such stocks in the near term, he added.

In his report, Wei at Capital Securities said the six-fold surge in CATL over the past two years was excessive. The slide from an all-time high has more room to go because of overstretched valuations. Liquor distiller Kweichow Moutai, for example, lost as much as 32 per cent in 2021, ending a five-fold rally in the preceding two years.

Wei’s report was eventually removed from his WeChat account the following day. Local mainland media said Wei was overwhelmed by criticism from CATL bulls. He could not be reached for comments when contacted by phone on February 18.

Recent speculations about US sanctions, removal from the ChiNext index and a breakdown in talks with Tesla have knocked 16 per cent off the stock value this month. CATL has dismissed them as baseless and filed a police report to douse the rumours.

UBS believes CATL could rise to 700 yuan over 12 months based on better than estimated earnings, it said in a report earlier this month, implying a 41 per cent upside.

CATL’s earnings will moderate in the coming years. The company will post a 76 per cent increase in net income this year and 43 per cent in 2023, according to Bloomberg data. Earnings likely grew 151 to 196 per cent in 2021, the company said in a January filing.

Additional reporting by Cheryl Heng