The lithium battery sector has faced a challenging period recently.

As of July 24, the battery ETF managed by China Universal had fallen over 21% from the beginning of July, with a peak drawdown exceeding 24% by July 20. Major players like Contemporary Amperex Technology Co., Limited (CATL) and Eve Energy have also experienced significant share price volatility.

The market's concern is not about current order volumes, but whether high demand growth can withstand rising raw material costs, price competition, and the release of new production capacity next year.

CATL's interim report provides some answers. First-half revenue grew 54.8% year-on-year, net profit attributable to shareholders rose 42.0%, and energy storage revenue surged 87.5%. This indicates that demand in both the power battery and energy storage sectors has not collapsed.

However, the financial report did not alleviate all pressures: operating cash flow grew by only 2.6%, inventories and finished goods increased significantly, and the comprehensive gross margin for the second quarter fell to 23.15% from 24.82% in the first quarter.

As reported, CATL built up some inventory during the first half in preparation for anticipated second-half demand. This was a major factor contributing to the inventory increase seen in the interim report.

Furthermore, CATL management remains optimistic about power battery and energy storage demand in the coming years, even suggesting that growth rates could improve by 2027. However, for the energy storage business, orders must go through production, delivery, and acceptance inspection before they can be recognized as revenue. Cash collection occurs even later. The market still needs to verify whether these orders can successfully translate into profit and cash flow.

Revenue Recognition Falls Behind

In the second quarter, revenue, costs, and profit growth became unsynchronized.

Reconstructing from the half-year and first-quarter reports, CATL's second-quarter operating revenue reached 147.79 billion yuan, a quarter-on-quarter increase of 14.4%. Operating costs were 113.57 billion yuan, up 17.0% quarter-on-quarter. Gross profit was 34.22 billion yuan, a 6.8% sequential increase. The comprehensive gross margin for the second quarter was approximately 23.15%, lower than the 24.82% recorded in the first quarter.

Net profit also failed to keep pace with revenue growth. The net profit attributable to shareholders for the second quarter was about 22.55 billion yuan, a year-on-year increase of roughly 36.5% and an 8.7% rise quarter-on-quarter. The net profit margin consequently fell from 16.06% in the first quarter to 15.26%.

Several factors are at play here. The extended confirmation cycle for the energy storage business primarily affects the timing of revenue booking, inventory levels, and cash flow. The decline in the second-quarter gross margin should also be analyzed in conjunction with shifts in product mix and changes in raw material prices.

Revenue from power battery products is typically recognized after the customer gains control of the goods and delivery conditions under the contract are met. For energy storage systems, which may require installation, commissioning, and grid connection acceptance, the confirmation cycle is longer. CATL's management noted on the evening of July 24 that the confirmation cycle for some energy storage projects could exceed six months.

This creates a time lag for the energy storage business: sales volumes grow first, with revenue recognized later. In projects with longer acceptance and payment terms, cash collection is further delayed.

In the first half of the year, CATL's power battery system revenue was 192.12 billion yuan, up 46.0% year-on-year. Energy storage battery system revenue was 53.26 billion yuan, up 87.5% year-on-year. While the growth rate of energy storage revenue was nearly double that of power batteries, based on revenue from both segments, energy storage accounted for approximately 21.7% of total battery system revenue. However, management disclosed that the sales volume share of energy storage had already approached one-quarter.

Within the energy storage business, the mix of cells, systems, and project delivery varies, leading to different product prices and revenue recognition points. The factor truly lengthening the confirmation cycle is not simply selling more storage, but an increase in the proportion of long-cycle system projects. This amplifies the time lag between sales volume, revenue, and cash flow.

Changes in inventory within the financial report corroborate this time lag. As of the end of June, CATL's inventory book value was 130.82 billion yuan, of which finished goods accounted for 47.64 billion yuan, an increase of 110.7% from 22.61 billion yuan at the end of 2025. Work-in-progress and semi-finished goods rose by 235% and 50.4%, respectively. Goods in transit totaled 40.49 billion yuan, a modest increase of 4.7% from the beginning of the year. The inventory pressure appears more driven by pre-production for future sales than by delayed recognition.

CATL management stated that this inventory includes products prepared in advance for second-half demand. This confirms a time gap between stocking and revenue recognition and implies that cash may be tied up earlier in the production and delivery chain.

The financial report shows that CATL's operating cash flow for the first half was 60.22 billion yuan, a year-on-year increase of only 2.6%, far below the 54.8% revenue growth rate. However, this gap cannot be fully explained by inventory buildup: contract liabilities fell 25.9% from the beginning of the year, while accounts payable increased by 26.3%. The company is also managing its funds through supply chain financing and other methods to cushion the capital tie-up.

During the same period, the company announced a 6.5 billion yuan dividend and a share buyback plan ranging from 20 billion to 40 billion yuan. However, management emphasized that the buyback is not a routine arrangement and will depend on market conditions, primarily because they believe the current share price is undervalued.

Industry data also highlights a time lag from winning energy storage projects to grid connection. According to SMM, global energy storage cell shipments in the first half were approximately 486 GWh, up 93% year-on-year. However, while domestic energy storage project awards in China surged 110% year-on-year, the volume of projects connected to the grid actually decreased by 35%. This data illustrates the discrepancy in project implementation timelines.

Per-Wh Profit Is Not the Final Answer

Per-Wh profit can provide a glimpse into the unit profitability of the battery business, but it cannot replace segment-level analysis of gross profit, net profit, revenue recognition, and cash flow.

The interim report disclosed that the power battery system generated first-half revenue of 192.12 billion yuan, with an operating cost of 152.49 billion yuan, resulting in a gross profit of 39.63 billion yuan and a gross margin of 20.63%. The energy storage battery system generated revenue of 53.26 billion yuan, with an operating cost of 40.50 billion yuan, resulting in a gross profit of 12.76 billion yuan and a gross margin of 23.96%.

This data corrects a common assumption: that the decline in the overall gross margin cannot be simply attributed to an increased share of the energy storage business. In the interim report, the gross margin for the energy storage battery system was actually higher than for power batteries. All else being equal, a higher proportion of energy storage sales does not naturally depress the overall battery system gross margin.

Since the specific sales volume, revenue, and costs for the power and energy storage segments in the second quarter were not separately disclosed, an accurate per-Wh profit for each business cannot be calculated from the financial report. Based solely on estimated per-Wh net profit, calculations suggest the second-quarter per-Wh net profit was between 0.095 and 0.098 yuan/Wh, slightly down from the first quarter.

CATL management stated that the per-unit gross and net profit have remained relatively stable over the past ten-plus quarters.

While per-unit gross profit is relatively stable, the overall profit and cash flow in the financial report are still affected by a series of factors. Delayed revenue recognition and inventory build-up can alter the final efficiency of cash conversion.

In the first half of this year, raw material prices have re-emerged as a variable. Citing industry data, the Ministry of Commerce's commodity price website reported that the average price of energy-storage-grade lithium iron phosphate (LFP) cathode material rose from approximately 29,000 yuan per ton in the third quarter of 2025 to about 57,000 yuan per ton in the second quarter of 2026, nearly doubling. The average price of power-grade LFP material also increased from around 36,000 yuan per ton to 58,000 yuan per ton. In the cost of LFP cathode materials, lithium carbonate accounts for approximately 60% to 65%.

New consumption tax policies have introduced another variable to price transmission. Effective September 1, 2026, a 2% consumption tax will be levied on battery products like lithium-ion batteries, rising to 4% from September 1, 2027. This means that beyond raw material price pass-through, battery companies must also address how to share this new tax burden within the industry chain.

During an investor conference call on the evening of July 23, CATL management responded that they would communicate fully with customers and share the burden of changes in export tax rebates and consumption taxes, expecting minimal overall impact on operations. The metal price pass-through mechanism remains in effect, while rebates are linked to customers' purchase volumes per their agreements.

Raw material pressures are also driving CATL to expand its resource security efforts upstream. Management stated that the company began laying out its upstream supply chain as early as 2019. In the first half of this year, it established Times Resources Group to integrate resources and invest in mining projects. Regarding the resumption of production at the Yichun Jianxiawo mine, management did not confirm specific plans, emphasizing that announcements from the company or local government should be relied upon.

Therefore, the temporary stability of per-unit gross profit does not directly translate into stable final profits. Taxes, rebates, product mix, overseas service, and project delivery costs can all individually impact gross profit, net profit, and cash flow.

Price competition in energy storage projects is also far from over, with the competition now shifting more towards the system and engineering level. According to Polaris Energy Storage Network, the scale of domestic energy storage EPC project awards in the first half reached 61.88 GW / 177 GWh. The average bid price for 2-hour energy storage EPC projects was about 1.063 yuan/Wh, and for 4-hour projects, it was about 0.931 yuan/Wh. During the same period, 44 energy storage EPC projects issued notices of bid cancellation or termination.

However, EPC pricing and project cancellations only indicate competition and implementation risks at the project level. They do not directly prove that cell manufacturers have already borne inventory or accounts receivable costs. The pressure from project delays is only transmitted to the supplier when they have already stocked, shipped, or partially fulfilled their contractual obligations.

For CATL, the key observation point is whether, amid rising raw material costs, customer rebates, and extended energy storage project cycles, unit profitability can be successfully converted into overall profit and cash flow.

Energy Storage Gets Hotter, Competition Gets Tighter

The high growth in the energy storage sector is attracting more competitors, with competition extending from cell pricing to production capacity, product offerings, and delivery capabilities.

According to TrendForce, the global CR10 for energy storage cells in the first quarter of 2026 was 82%, with CATL holding a share of approximately 22%. However, in the large-scale storage segment, the market share gap between the second and fifth-ranked players is less than 3 percentage points. While leading companies hold scale and customer advantages, mid-tier companies are rapidly catching up in terms of production capacity, product development, and overseas orders.

Consequently, rising demand for energy storage does not automatically equate to proportional profit growth for CATL: increased orders can boost shipments, but more participants also intensify customer bargaining power, project pricing pressure, and the challenges of overseas delivery.

On April 9, 2026, four Chinese government departments jointly held a symposium for the power and energy storage battery industry. The meeting included items such as capacity warnings, regulating price competition, shortening supplier payment terms, and addressing the "export of internal competition". The policy level has incorporated the competitive order into its governance scope, indicating that the profit pressure from industry competition is no longer solely a commercial issue between companies.

Overseas markets offer new demand but not an easier path to growth. In large-scale international projects, clients typically require complete solutions covering front-end design, engineering construction, and long-term back-end operations and maintenance. Competition is no longer just about selling individual pieces of equipment.

The evolution of the UAE RTC project demonstrates that having demand in an overseas market does not guarantee winning orders. For battery companies, overseas competition has expanded from cell performance to system integration, pricing, and delivery capabilities.

CATL management remains optimistic about European demand. During the earnings call, they noted that European electric vehicle sales grew by about 30% in the first half, with penetration exceeding 30%, and that energy storage growth could be even faster. This provides demand support for the overseas business but does not eliminate the cost pressures associated with localization, certification, and system services.

CATL management also indicated that its AIGC data center business represents a shift from selling batteries to offering energy systems. Management stated that the company aims to leverage its experience in storage, medium-voltage equipment, power electronics, software, and grid integration to cover both the "grey zone" (electrical infrastructure areas like power distribution, UPS, medium voltage) and the "white zone" (server and IT equipment areas) of data centers, providing backup power solutions.

However, this is not yet a revenue stream validated by the financial report. The management's timeline suggests that the zero-carbon solution will gradually be implemented over the next year or two, with AIGC being just one component. The market will ultimately need to see if these ventures can generate orders, successful delivery, and profits.

CATL also faces another question: whether its current high utilization rate can be sustained into the future. The company's battery system capacity utilization rate reached 94.86% in the first half, with 764 GWh of capacity under construction. However, this capacity figure is the combined total for power and energy storage battery systems, and since lithium-ion and sodium-ion production lines can be shared, it cannot be directly interpreted as solely future energy storage supply.

TrendForce predicts that with the release of overseas localized capacity and new supply additions, the global energy storage cell market could shift from a period of relative tightness to a state of moderate supply-demand balance.

Market concerns for 2027 are focused on the demand for passenger electric vehicles in the power segment, the sustainability of increasing battery capacity per commercial vehicle, and the yields, policies, and grid connection timelines for energy storage projects. CATL management, however, maintains its forecast of 20%-30% compound growth over the next five years, adding that the short-term performance in 2027 could even be better.

This outlook still requires validation through orders and project execution. CATL's growth is becoming heavier, and the real pressure lies here: orders must become projects, and projects must then be converted into cash.