As the Hang Seng Index and the Shanghai Index successively entered a technical bull market, the allocation value of China's core assets has once again received great attention from investors.

On May 19, Goldman Sachs analysts Eric Shen and Qiying Wei released the first coverage report on A-share power battery giant Ningde Era. Goldman Sachs gave the Ningde Era purchase rating in the report. The target price for 12 months is 304 yuan, which means there is room for an increase of about 50% compared to the current price.

Analysts believe that the market underestimated the superior competitive advantage, battery profitability, and market position of the Ningde era. Compared with competitors, Ningde Era batteries have higher energy density and reliability, bringing the advantages of low cost and high premium, making Ningde Era the industry's leading gross profit level per unit.

Furthermore, analysts also believe that the Ningde era can still maintain a comparative advantage in global competition. Even if Europe and the US are driving self-sufficiency in the battery industry, the global market share of the Ningde era will only decline slightly. Furthermore, the price war in the Chinese automobile market is not expected to challenge the profitability of the Ningde era.

Ningwang Battery's technical advantages are stable, and the gross profit per unit is expected to continue to expand

First, judging from the core battery technology, Goldman Sachs believes that the Ningde era has an advantage in manufacturing high energy density and high quality batteries.

Analysts said that the energy density of power batteries is a key difference between various battery products. It can affect performance in various aspects from battery charging efficiency to cycle life, and is also the main reason for battery price premiums:

As far as lithium ternary lithium (NCM) batteries are concerned, the energy density of Ningde Era Kirin batteries is 2%-10% higher than competitive products. As far as lithium iron phosphate (LFP) batteries are concerned, the energy density of Ningde Era Shenxing batteries is also 30% higher than mainstream domestic products.

Analysts also found that judging from existing products, if ternary lithium batteries have a 24% premium, the battery pack weight can be reduced by 18%, which in turn can greatly improve driving range, braking distance, and handling. Goldman Sachs believes that this price differentiation proves that car companies are willing to pay a premium for higher energy density (that is, lower weight) batteries.

Goldman Sachs believes that increasing battery energy density can not only save costs, but also increase price premiums, thereby increasing gross profit per unit. Additionally, Goldman Sachs also pointed out that since batteries are installed in electric vehicles and energy storage facilities that are sensitive to safety issues, safety issues are critical. As can be seen from the warranty compensation rate, the Ningde Era not only has the largest shipment volume among power battery companies, but also has the best quality performance. It is difficult for peers to catch up with its quality advantages in the short term.

At the same time, analysts also believe that the continued high R&D investment in the Ningde era ensured the stability of its technical barriers:

The R&D expenditure of the Ningde era accounted for about half of the total R&D expenditure of the global power battery industry.

From lithium-ion batteries to all-solid-state batteries, the R&D product line of the Ningde Era covers mainstream, recent, and next-generation battery routes. As a result, the company is well positioned for technology migration, which has strengthened Goldman Sachs's confidence in its potential to grow its domestic market share.

Goldman Sachs, for example, said that the battery electrode coating process in the Ningde era could reflect its strong technical strength. This process was essential to ensure battery quality and capacity performance:

Coating challenges include the following aspects: 1) complex coordination, including adjusting the slurry flow rate, extrusion die width, and roller temperature to ensure a perfect coating; 2) high accuracy, since the substrate (copper coil) used for coating is only 4.5 microns thick and is coated on both sides of the copper coil; 3) high speed; to improve productivity, the copper coil moves at a speed of 80-100 meters per second, making it possible for a 4 km long copper coil to be coated in just one minute.

To avoid waste of materials and rework, Ningde Times deployed high-definition optical quality inspection tools to monitor production, monitor, and fine-tune manufacturing parameters in real time. Goldman Sachs deployed high-performance computers and algorithms to process massive amounts of data and accurately identify minor defects invisible to the naked eye.

Throughout the process, the Ningde Era set up as many as 6,800 quality control points (most of our peers less than 4,000) to produce reliable battery products. Any improvements will be synchronized to Ningde Era's 13 production sites around the world within a few hours.

In summary, analysts believe that with the upgrading of the battery product portfolio and the restoration of market share elasticity, the Ningde Era is expected to benefit from the sustainable trend of electrification in the global automotive industry. Goldman Sachs expects an average annual EPS growth rate of 26% in the 2024-2030 era, of which 21% comes from sales growth and 1% from unit gross profit expansion.

Thanks to cost savings and premium pricing brought about by high-energy density batteries, the unit gross profit of the Ningde era will increase from 188 yuan/kWh in 2024 to an estimated 200 yuan/kilowatt-hour in 2026-2030 (higher than the market consensus of about 160 yuan/kilowatt-hour).

Kirin and Shenxing Battery will be the key driving force for unit gross profit expansion in the Ningde era. The energy density advantage of their products will expand to 14%/16%/17% higher than competitors in 2024-2026, and will reach 21% in the long term (10% in 2023).

Global market share remains steady

Although countries in Europe and the US are promoting self-sufficiency in the battery industry, the expansion of these markets during the Ningde era may be limited. Goldman Sachs expects the share of the market outside of mainland China to fall from 26% in 2023 to 19% in 2030.

However, Goldman Sachs believes that this impact will be offset by the rise in domestic market share during the Ningde era. Its global market share is expected to decline only slightly, from 40% in 2023 to 37% in 2030

Looking at each region, Goldman Sachs determined that from 2025, European and American companies will increase dramatically in domestic power battery shipments and remain self-sufficient from 2026. It is expected that Ningde Era's share of the European market will drop from 41% in 2023 to 23% in 2030, and the US market share will drop to 6% from 18% in 2023.

However, in overseas regions other than Europe and the US, due to lack of local supply and tariff barriers, Goldman Sachs expects the Ningde era to continue to seize market share with superior product quality and cost competitiveness. The market share is expected to rise to 41% from 16% in 2023.

Looking at the core Chinese market, Goldman Sachs expects that due to reduced competitive pressure from BYD, the domestic market share in the Ningde era will rise from 48% in 2023 to 53% in 2030:

The Goldman Sachs China Auto Team predicts that BYD's compound shipment growth in 2024-2030 will remain at about 19%, in line with China's growing demand; therefore, Goldman Sachs expects market share pressure from BYD to ease.

Car companies' price war will not have much impact on “Ning Wang”

Regarding the market's common concern that the price war damages the profits of battery manufacturers, Goldman Sachs analyzed:

The impact of downstream electric vehicle price competition on the expected earnings of the Ningde Era in 2024-2025 is relatively limited (potential downside is 14%/13%, while Wall Street's unanimous expectations are more pessimistic). The reason is that battery prices are only partially under pressure.

In Goldman Sachs's scenario analysis, Goldman Sachs assumes that the Ningde era was affected by 16% of the battery weight in the BOM cost of new energy vehicles, which is fully reflected in the benchmark situation, leading to a 13%/14% decline in earnings per share in 2024-2025, respectively. However, given that the strong bargaining power of the Ningde era helped it pass costs upstream and downstream, Goldman Sachs believes the actual impact may be lower.