An analysis report highlights investment opportunities in lithium ore, where supply variables are significant, and in materials like separators, copper foil, and aluminum foil, where current profitability does not yet support capacity expansion. The recommended priority order is lithium carbonate > aluminum foil > copper foil > solvent > separator > high-density lithium iron phosphate. Sectors showing substantial growth in inventory and contract liabilities, such as copper/aluminum foil, lithium iron phosphate, electrolyte, and structural components, are viewed favorably for their high earnings potential. Key findings from the report are outlined below.
Revenue showed accelerated growth over multiple quarters, accompanied by a significant rise in net profit. Sample enterprises in the lithium battery industry reported a 35% year-on-year increase in Q4 2025 operating revenue, with net profit attributable to shareholders surging 199%. For Q1 2026, operating revenue grew 52% year-on-year, remaining flat quarter-on-quarter, while net profit rose 108% year-on-year and 23% quarter-on-quarter. Industry profits have now increased year-on-year for five consecutive quarters, with profit growth significantly outpacing revenue growth. This substantial profit improvement is attributed to multiple factors resonating together, including a low base effect, price increases, improved capacity utilization rates, and inventory gains.
Profit margins are steadily recovering. The gross profit margin was 21% in Q4 2025 and 22% in Q1 2026, showing continuous improvement over several quarters. The net profit margin was 9% in Q4 2025 and 11% in Q1 2026, yet it remains considerably below the peak levels of the previous cycle.
High turnover coupled with accelerating inventory growth indicates an upward trend in industry vitality. Inventory turnover rates for lithium iron phosphate, separators, structural components, and copper/aluminum foil segments increased significantly in Q3-Q4 2025. Although there was a slight quarter-on-quarter dip in Q1 2026 due to the seasonal lull of the Spring Festival, levels remain high historically, at around the 90th percentile. Inventory levels across various lithium battery material segments have now experienced quarter-on-quarter growth for over four consecutive quarters. Notably, the year-on-year and quarter-on-quarter growth rates of inventory for lithium iron phosphate, batteries, electrolyte, and copper/aluminum foil accelerated in Q1 2026. The pattern of "inventory replenishment atop high turnover and low inventory" typically signals a more sustainable cyclical recovery and points to persistently tight supply-demand conditions.
Capital expenditure trends are mixed. Key ratios for the battery segment, such as capital expenditure to depreciation/amortization and construction-in-progress to fixed assets, suggest it is still in the early stages of an upcycle. Battery segment capital expenditure exceeded 22 billion yuan in Q4 2025-Q1 2026, growing 30%-40% year-on-year, marking the sixth consecutive quarter of positive year-on-year growth. In contrast, capital expenditure in material segments remains at historically low percentiles. However, year-on-year growth turned positive in Q1 2026 for lithium iron phosphate, ternary cathode materials, structural components, and copper/aluminum foil.
Substantial growth in contract liabilities underpins future growth certainty. Contract liabilities saw significant year-on-year increases in Q1 2026 for segments including lithium carbonate, copper/aluminum foil, lithium iron phosphate, electrolyte, and structural components. Many companies reported substantial year-on-year and quarter-on-quarter growth in contract liabilities during Q4 2025-Q1 2026. Sample lithium battery equipment enterprises reported contract liabilities of 23.1 billion yuan and 26.6 billion yuan for Q4 2025 and Q1 2026, respectively, both representing 25% year-on-year growth.
Investment recommendations are as follows: (1) Structural opportunities are emerging in the materials sector. Continued optimism is warranted for segments facing tight supply, where both volume and price are expected to rise. Suggested focuses include Longpan Technology, Fuling Jinggong, Defu Technology, and Dangsheng Technology. (2) It is also advised to monitor leading companies across various segments, such as CATL, EVE Energy, CALB (H), Keliy, Hunan Yuneng, Dingsheng New Materials, Enjie Co., and Tinci Materials.
Potential risks include lithium battery supply-demand improvements falling short of expectations; price increases for lithium battery materials being lower than anticipated; new energy vehicle sales underperforming forecasts; and energy storage tender volumes not meeting expectations.