On the evening of October 20, CATL (ASX: 03750) management stated that global demand for power and energy storage batteries is expected to grow by 20% to 30% next year, describing this as an "achievable and not particularly high" expectation.

More than ten hours later, CATL (SZSE: 300750) A-shares opened 5% lower, with intraday losses at one point exceeding 10%.

During the earnings call on the evening of October 20, the company explained why it sold more batteries in the third quarter but did not earn more gross profit. However, as the focus shifts to the fourth quarter, the timing and magnitude of profit improvement remain uncertain.

The first thing to be tested in the fourth quarter is per-unit profitability. The sharing of newly added tax burdens has not yet been negotiated, and how much high-margin new products can compensate depends on actual sales to prove. Meanwhile, some automakers are defining batteries on their own and may increase supplier choices accordingly, requiring CATL (ASX: 03750) to defend its orders and bargaining space. Capacity expansion continues, and the order pipeline for new factories and the delivery pace of energy storage projects will affect costs and capital recovery.

CATL's optimism about demand is not far from institutional assessments. JPMorgan also expects global power and energy storage battery demand to grow 20% to 25% next year, but is more concerned that automakers' own profitability pressures, along with new burdens such as consumption taxes and export tax rebate adjustments, will be passed down more heavily to the supply chain.

The third-quarter report has already revealed such pressure. In the quarter, CATL's net profit attributable to shareholders was 21.246 billion yuan, up 14.54% year-on-year but down 5.77% quarter-on-quarter. Revenue increased by approximately 17.4 billion yuan compared to the second quarter, yet total gross profit remained nearly flat, with the gross margin falling from 23.15% to 20.69%. Taxes and surcharges plus asset impairment losses increased by approximately 2.7 billion yuan quarter-on-quarter, and R&D expenses also rose.

Management attributed the primary reason for the decline in per-unit profitability to product mix: the third quarter delivered more products and projects that are relatively simpler to manufacture and carry lower added value. For the same amount of electricity, delivering as cells, battery packs, or complete systems yields different profits, and customers and contracts also bring variations. The company believes these factors had a greater impact on quarterly profitability than tax changes.

Where the uncertainty lies

Product mix can be adjusted with deliveries, but newly added taxes must be renegotiated with customers. Management acknowledged that all parties in the supply chain face profitability pressure, and the sharing ratio for consumption tax has not yet been settled. The third quarter was only affected for one month, while the fourth quarter will cover the full quarter. This means that even if the delivery structure improves, the outcome of cost-sharing will still affect profit recovery.

Automakers' in-house development adds another layer of change to these negotiations. Li Auto has adopted a division of labor where battery packs are self-developed and self-manufactured, while cells are self-developed but manufactured by contract partners; XPeng chairman He Xiaopeng stated that XPeng is starting to make its own batteries but not cells. Automakers still need professional cell manufacturers, but they are beginning to intervene more deeply in product definition and system integration.

For CATL (SZSE: 300750), orders it retains may also face repricing. If customers can organize supply according to their own development plans and increase supplier choices, CATL will need to prove even more that its advantages in technology, quality, and delivery are worth customers paying a premium.

Scale advantage versus customer self-development

Data cited by CATL (ASX: 03750) management shows that global power battery market share still rose 1.7 percentage points year-on-year to 39.4% in the first eight months. Its scale advantage remains. What matters more going forward is how many vehicles customers actually deliver with self-developed batteries and how procurement shares from existing suppliers are adjusted — these will demonstrate the impact of such changes more clearly than slogans about "moving away from CATL."

How much profitable incremental growth energy storage and overseas businesses can provide is therefore drawing more attention. Management said energy storage sales growth in the third quarter remained faster than power batteries, with strong overseas demand; regarding the domestic market, they also responded to market concerns about the gap between installations and pickups and channel inventory, suggesting that domestic energy storage growth next year may not be as high as the market imagines.

Converting orders into results still depends on delivery and acceptance. Management noted that for some overseas AC-side projects, it takes six months to a year or even longer from shipment to revenue recognition; the gap between domestic pickup and installation relates to how much restocking demand customers will have afterward.

Expansion needs order support

CATL (SZSE: 300750) continues to expand capacity, backed by current orders. In the first half of the year, the company's capacity utilization rate reached 94.86%. Management said new capacity in the third quarter eased supply tightness, and production scheduling and deliveries continued to grow both year-on-year and quarter-on-quarter.

However, after the 764GWh of capacity under construction at mid-year is gradually put into operation, a larger order scale will be needed. High utilization rates at existing factories cannot be directly used to infer returns from new factories. When pressed on whether orders for 2027 and 2028 can keep up with capacity expansion, management emphasized that decisions are based on actual demand and did not provide an order coverage ratio for new capacity. Utilization rates, inventory turnover, and cash collection after capacity is deployed will be more persuasive than the scale of construction in progress.

Cash flow pressures emerge

To capture next year's demand, CATL (ASX: 03750) has already committed funds upfront.

In the third quarter, the company's net operating cash flow dropped from 26.536 billion yuan in the second quarter to 1.409 billion yuan. Procurement payments increased by 34.241 billion yuan quarter-on-quarter, far exceeding the 5.750 billion yuan increase in sales collections. During the same period, cash paid for the purchase and construction of fixed assets and other long-term assets was approximately 17.095 billion yuan, and net operating cash flow for the quarter was already insufficient to cover it. Monetary funds and trading financial assets exceeding 430 billion yuan at quarter-end provided support for these investments.

CATL (SZSE: 300750) management explained that the company is responding to industry payment term standardization initiatives by increasing prepayments, shortening payment cycles, and supporting supplier R&D to help core suppliers facing funding constraints prepare capacity and materials. Such support is expected to last two to three quarters. "The second half of this year is a period for preparing for next year."

These payments first changed the pace of cash outflows. Once payment term adjustments stabilize, whether deliveries and cash collections can keep up will gradually reveal the effects of this round of investment.