China has the world’s largest market for electric cars and wants its companies to dominate globally when it comes to the batteries that power these vehicles. That makes the initial public offering of a turbocharged player at the center of that effort well worth watching.
Privately held Contemporary Amperex Technology Co. Ltd (CATL) is one of China’s largest manufacturers of batteries for electric vehicles. It plans to raise about $ 2 billion in an IPO in the coming months in China, valuing the company at up to $ 20 billion and putting it in the big leagues of listed battery makers.
The company, based in coastal Fujian province, holds about a quarter of electric-vehicle battery market in China, according to its prospectus. Globally, it lags behind only fellow Chinese company BYD, partly owned by Warren Buffett and Panasonic, Tesla’s sole power supplier. Unlike BYD, which produces its own cars and buses, CATL is more of a pure-play battery maker.
CATL’s rise is partly because it landed on the right side of China’s constantly evolving “new-energy” policies. Beijing is now reining in direct subsidies to electric cars. Instead, it has taken to supporting battery manufacturing. The subsidies incentivize higher-end cars that have longer ranges and batteries with higher energy density, a place where CATL excels. Also helping: Foreign battery makers such as Samsung SDI and Panasonic have been held to higher standards than domestic peers to the point of effectively being pushed out.
In 2016, CATL produced batteries equivalent to 6.8 gigawatt hours, triple from two years earlier, and it supplies the likes of BMW, Volkswagen and Geely, its largest customer in the first half this year. The money raised from the IPO will go to building two new factories, expanding capacity by 24 GWh over three phases.
On the cost front, CATL has benefited from falling prices of key raw materials such as the electrolyte and separator—key components in a battery. Yet it more than doubled revenue in 2016, grabbing market share from BYD. Despite the lower average selling prices for its battery packs, gross margins are high, at 38%. That compares with 15% to 20% for Korean peers such as LG Chem and Samsung SDI.
Such heady margins will be hard to maintain. Beijing has set battery makers bold targets to catch up with more-advanced Japan for battery technology—like more than doubling traveling distance and energy density. To keep up with these ambitions, major investments will be needed to meet high-end capacity. At the implied IPO price of 60.4 yuan per share, CATL trades at more than 40 times earnings. That is well above its Chinese and Korean peers that average between 15 times and 20 times. It trades at 9 times 2016 sales, compared with no more than 4.5 times sales for any of its peers.
Fat margins may be less important to CATL than capturing market share. For the other big battery makers, this fast-growing rival could be a major source of pain.
Write to Anjani Trivedi at firstname.lastname@example.org