The Zhitong Finance App learned that Everbright Securities released a research report saying that currently the lithium battery sector has a low historical valuation and is at the bottom of the cycle. The industry's supply continues to shrink, financing is tight, and the expansion capacity is insufficient, and the operating rate may bottom up the profit cycle. From a cyclical perspective, the 25-year production capacity cycle is expected to rise, and profits are expected to recover in most areas; strong sustainability in energy storage demand and recovery in growth under European carbon emission constraints are expected to drive lithium battery demand to maintain a 25% growth rate in 25 years. The lithium battery industry may reach an inflection point in 2025. Investors are advised to focus on leaders in various sectors with excellent patterns and leading costs.

The main views of Everbright Securities are as follows:

I. Cyclical Perspective

1) Production cycle: Supply contraction continues. The capital expenditure of the 24H1 lithium battery industry was 64.6 billion yuan, down 20% year on year from 23H1. It has been reduced year on year for 4 quarters, and capital expenditure has shown an accelerated contraction trend. 24H1 capital expenses/depreciation amortization reached a record low of 2.7. The industry's capital expenditure focus is skewed upstream. The ability to expand is limited. Judging from the ability to earn cash in various areas, only leading companies have the ability to expand. The sales cash ratio for cathodes, electrolytes, etc. is negative. Against the backdrop of future subsidies and tightening of financing, profit quality and “hematopoietic” capacity are the cornerstones of expansion. Supply expansion capacity is concentrated in leading companies, and internal segmentation in the battery sector is expanding.

2) The production capacity cycle relays the inventory cycle, and profit is out of the bottom: Fluctuations in lithium prices have led to large fluctuations in unit profit in this cycle. Currently, the impact on lithium prices is weakening, and the capacity utilization rate determines the end of the cycle. The 24-year inventory cycle dominates profit recovery, the 24H2 capacity utilization rate continues to rise, and processing costs for leading lithium iron cathode companies are expected to rise restoratively. The 25-year capacity cycle is expected to rise, and profits in most areas are expected to recover.

The battery cost curve is steeper. Against the backdrop of low lithium price fluctuations, the impact of capacity utilization on battery costs dominates.

The bank determined through cost models and sensitivity analysis that the current third-tier battery companies have lost cash costs, and the operating rate has a great impact on the cost gap. In the downward cycle of the industry, the gap in the capacity utilization rate of enterprises widened, and the cost curve became steeper; since 24Q2, capacity utilization rates have rebounded, second-tier companies' profits have improved, and due to economies of scale, the bank believes that profit improvements will continue.

Looking ahead to the trend of poor profits among battery companies in the future, the bank believes that the key is the sustainability of demand and incremental space (determining the level of capacity utilization; the higher the gap narrows), the degree of product differentiation (determining the price difference), and that new technologies such as solid-state batteries and high voltage fast charging will determine the direction of the competitive gap.

2. Growth perspective.

Under neutral conditions, global demand for lithium batteries is expected to be 1228, 1,531 GWh in 24-25, with a growth rate of 27% and 25%.

24 years: Energy storage (67%) > Chinese electric vehicles (32%) > American electric vehicles (10%) > European electric vehicles (0%).

25 years: Energy storage (40%) > European electric vehicles (25%) > Chinese electric vehicles (22%) > American electric vehicles (15%).

Demand forecast difference 1: Europe's 25-year carbon emissions assessment point. The bank estimates that when European NEV sales were about 25%, 40%, and 50% year-on-year growth, respectively, the average carbon emission values were above, close to, and exceeded the target values. At that time, the NEV penetration rates were about 26%, 29%, and 32%, respectively.

Demand expectations gap 2: The affordability of optical storage drives the sustainability of energy storage. This round of sharp decline in optical storage LCOE is driving rapid growth in energy storage demand, and elasticity is more obvious in emerging markets such as Asia, Africa, and Latin America, which have a relatively low economic level and are more sensitive to the economy. Taking into account the economic level, lighting conditions, power supply structure, and electricity price level, the bank believes that demand for energy storage in the emerging markets of Asia, Africa and Latin America will continue to boom.

European fiscal and foreign policy risks make demand less predictable, making supply more difficult to be a rigid constraint, but more predictable. According to estimates of the balance between supply and demand, all aspects of lithium battery surpluses have been reduced in 25 years, and production capacity clearance is nearing completion.

Recommended attention: Ningde Times (300750.SZ), Everweft Lithium Energy (300014.SZ), Zhongwei (300919.SZ), Shangtai Technology (001301.SZ), Hunan Yuneng (301358.SZ), Kodaly (002850.SZ), German Nano (300769.SZ).

Risk analysis: macroeconomic risks, European dynamic demand falling short of expectations, overseas trade protection and policy risks, etc.