CATL's third-quarter results fell short of expectations, with a sharp drop in unit profit margin triggering deeper market questions about its profitability. Morgan Stanley believes this compression trend is difficult to reverse quickly, and consensus earnings forecasts face significant downward revision pressure.

According to the latest research report from Morgan Stanley, CATL reported third-quarter net profit of RMB 21.2 billion, up 15% year-on-year, but 12% below Morgan Stanley's own estimate. The core pressure stems from unit net profit margin plunging from RMB 0.10/Wh in the first half to RMB 0.08/Wh, a significant decline. Morgan Stanley analysts Jack Lu and Kaylee Xu stated in the report that they expect market consensus earnings forecasts to see meaningful downward revisions following this earnings release.

The current market debate centers on whether RMB 0.08/Wh has become the new normal, or whether unit profitability can recover to first-half levels as product mix improves. The bank leans toward the view that margins will recover somewhat from the trough, but the extent of recovery will increasingly depend on product mix changes and the intensity of competition in the energy storage market.

Third-Quarter Results: Product Mix Drags on Profit Margin

CATL management attributed the third-quarter margin decline to two factors: first, an unfavorable product mix with a higher contribution from low-margin products; second, reduced VAT rebates combined with a 2% domestic consumption tax effective from September, adding approximately RMB 1.5 billion in additional cost burden compared to the second quarter.

Looking at specific financial data, third-quarter battery sales exceeded 260 GWh, with gross profit up 27% year-on-year to RMB 34.2 billion, but gross margin declined 2.5 percentage points quarter-on-quarter to 20.7%. Revenue growth coexisting with margin contraction reflects the structural tension between scale expansion and profit quality.

Intensifying Competition in Energy Storage Market, Quality Premium Under Pressure

Morgan Stanley believes that CATL's quality premium remains overall, but emerging price competition in the energy storage system (ESS) market is weighing on unit profit margins. The report notes that the domestic energy storage market has relatively loose product quality requirements, weakening CATL's ability to translate its quality advantage into pricing power.

Regarding tax burden pressure, Morgan Stanley judges that if incremental tax costs cannot be passed on to downstream customers, they will be gradually absorbed through continuous cost reduction efforts, forming a natural hedge to some extent. However, this process takes time and cannot fully offset the impact of margin compression in the short term.

Morgan Stanley Maintains Overweight but Lowers Earnings Expectations

Despite the earnings pressure, Morgan Stanley maintains its overweight rating on CATL's A-shares and a target price of RMB 500. The stock was trading at RMB 259.08 as of the report's publication, implying approximately 93% upside from the current price.

On valuation, Morgan Stanley uses an EV/EBITDA approach, applying a 13x valuation multiple to 2027 forecast EBITDA, corresponding to a 2027 forecast P/E of approximately 20x, which is 0.5 standard deviations above the three-year average, reflecting potential catalysts from the company's new product cycle. Morgan Stanley forecasts CATL's net profit at RMB 95.088 billion for 2026 and further rising to RMB 111.9 billion for 2027.