Morgan Stanley: Fears Over CATL Seem Overstated, Share Price Ignores Improving Fundamentals

Stock News
09/18

Morgan Stanley has released a research report suggesting that CATL (03750, 300750.SZ), as a structural growth story, trades at a yield of roughly 6.2% in the A-share market, including share buybacks, which appears to price in a highly pessimistic scenario. The market remains fixated on known risks while largely overlooking fundamental improvements. The bank argues that concerns over earnings forecast cuts are exaggerated and regards the stock as a top pick.

The bank notes that even if third-quarter earnings land at around RMB 24 billion to RMB 25 billion, aligning with some sell-side expectations, it still fully matches its full-year forecast of approximately RMB 95 billion in profit. The bearish view assumes market expectations for a single quarter of RMB 26 billion or higher, corresponding to a full-year figure of around RMB 100 billion (up roughly 40% year-on-year), but if buy-side participants were truly anchored to this, the share price performance since April should have been far stronger than current levels. The persistent weakness instead indicates that market expectations have already been significantly revised down from the RMB 100 billion scenario.

The bank believes that recent positive fundamentals have yet to be reflected in the share price, including a re-acceleration in energy storage deployment growth, robust bidding activity, and the implementation of capacity pricing policies. Truck electrification is also accelerating amid high diesel prices, while China's "anti-involution" push drives industry consolidation. Additionally, Geely's sale of battery assets to CATL weakens the logic of OEMs investing in in-house battery production.

The bank also points out that the company boasts a return on equity of approximately 30% and a return on invested capital of about 50%. The current valuation seems to imply a significant earnings decline next year, contrasting with management's guidance for over 25% earnings growth through 2027. Drivers such as accelerating EV penetration in Europe, commercial fleet electrification, and global energy storage demand are also improving rather than deteriorating.

Regarding a potential battery consumption tax, the bank's base case remains that as long as industry demand continues to grow by more than 20% year-on-year, battery manufacturers can largely pass costs down the supply chain. If they must absorb the full cost themselves, over 30% of industry capacity could fall into negative cash profitability, and amid tightening supply and capacity reduction, industry conditions should support cost pass-through.

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