Guotai Haitong Securities Co., Ltd. has released a research report indicating that, based on an analysis of the complete lithium battery industry cycle from 2020 to 2024, which transitioned from shortage to surplus, valuation expansions and contractions tend to lead shifts in supply-demand fundamentals. Given current market concerns about a potential slowdown in industry growth by 2027, valuations for several leading sector names have retreated to historically low levels. With earnings growth now well-aligned with these valuation metrics, the sector presents compelling investment value.
The report outlines four distinct phases in lithium battery demand during this period: policy cultivation, technological advancement, explosive demand growth, and a subsequent slowdown. In January 2009, China launched the "Ten Cities, Thousand Vehicles" program to promote energy-efficient and new energy vehicles, using fiscal subsidies to encourage adoption across public transit, taxi, government, municipal, and postal fleets, thereby kicking off the industry's development. In December 2016, revised subsidy policies raised the bar for qualification by imposing stricter requirements on vehicle energy consumption, driving range, battery performance, and safety standards, all while phasing down subsidy levels. This push spurred technological upgrades across the sector.
By 2020, with a more complete domestic new energy vehicle lineup addressing diverse consumer needs—spanning affordable commuter models, long-range family cars, and premium intelligent vehicles—demand entered a phase of explosive growth. In 2022, however, a sustained surge in lithium carbonate prices raised concerns about demand durability, causing new energy vehicle sales growth to decelerate relative to 2021, with growth expectations reaching a peak. Entering 2024, new energy vehicle sales growth stabilized, energy storage demand began to gain traction, and the growth trajectory for lithium battery demand flattened, presenting fresh fundamental opportunities.
Between 2020 and 2024, lithium battery supply expanded significantly, resulting in a shift from tightness to structural oversupply. Fueled by the booming downstream new energy vehicle market, the industry entered a peak period of capacity expansion, with total domestic investment in expansion projects exceeding RMB 300 billion annually from 2021 to 2023. As demand growth slowed in 2023, combined with the release of previously expanded capacity, the sector gradually entered a surplus phase. In 2024, newly planned domestic lithium battery capacity fell approximately 60% year-over-year to around 590 GWh, while total investment dropped 68% to over RMB 180 billion, signaling a substantial contraction in capital expenditure.
Stock prices over this period experienced three phases: high-growth premium, valuation contraction, and differentiated recovery. As new energy vehicle sales climbed rapidly in 2020, the market assigned a substantial growth premium to the lithium battery sector, with CATL's trailing twelve-month price-to-earnings ratio surging from 54x in March 2020 to a peak of 287x in 2021. In 2022, as the market anticipated a peak in growth and a supply-demand reversal, the sector entered a valuation contraction phase, seeing CATL's PE ratio fall to 15x by the end of 2023, a historically extreme low. In 2024, domestic vehicle trade-in policies that amplified new energy subsidies stimulated sales, driving earnings growth and facilitating valuation recovery. Historical analysis shows that sector rallies typically lead supply-demand shifts and earnings reports. Fund holdings transitioned from concentrated positions to divestment and then to structural rebalancing, with increased allocations highly focused on industry leaders like CATL that demonstrate strong earnings delivery.
Risk warnings: Demand for electric vehicles and energy storage may fall short of expectations, and industry competition could intensify.