Is CATL still a BUY in November 2021?

Key Points

  • Tesla began to sign contracts with junior mining companies to build new mining projects that would increase the supply of some critical resources for batteries.
  • Tesla wants to diversify its supply chain risks further and reduce its overreliance on EV battery suppliers.
  • The overall fundamentals of CATL are still strong, with a diverse client base and similar deals like the battery supply deal with Tesla to December 2025 in the pipeline.

(Reading time: 6 minutes)

2 months ago, we at ChineseAlpha analysed CATL (SZSE:300750) to determine whether it makes an attractive investment. Back then, we concluded that CATL is a BUY, mainly because:

  1. Electric batteries become increasingly price competitive to internal combustion engines as economies of scale, scope, and learning play out; CATL is prepared to scale and lead the Chinese charge.
  2. CATL is strengthening its market position by becoming a supplier of lithium iron phosphate batteries for TESLA, challenging Panasonic’s supremacy in the market leader’s supply chain.
  3. The battle to be the dominant EV manufacturer is worth hundreds of billions of US dollars and CATL is spreading its eggs by entering new strategic partnerships.

However, since then, several significant events have taken place – which is why we want to give an update on our opinion on CATL as an investment in November 2021.

1. What happened in the past months?

The Issue

Tesla has recently secured a lithium supply contract with Ganfeng Lithium Co, the world’s largest producer of battery-grade lithium [1].

Ganfeng signed a three-year lithium supply agreement with Tesla that starts in 2022.

Tesla has become increasingly involved in the raw material supply chain for battery cells and has been the main driver of accelerating the transition to electric transportation.

The automaker has been securing the supply of lithium, nickel, cobalt, and other minerals for its battery cell suppliers despite only now starting the production of its own cells.

Tesla’s Strategy

Tesla started to deal with established mining companies and began to sign contracts for off-take agreements with junior mining companies looking to build new mining projects that would increase the supply of some critical resources for batteries. However, these contracts are more volatile as the projects need to make it to production and they often face challenges (example: a North Carolina lithium project by Piedmont Lithium had a supply agreement with Tesla fell behind schedule due to them not being able to submit its mining permit application on time [2]).

Adding to that, recent deals with other lithium hydroxide suppliers (including Yaan Lithium, a wholly-owned subsidiary of Yahua) indicate Tesla’s “huge demand” for battery-grade lithium hydroxide, “particularly in view of the ramp-up of Model Y production” in Shanghai, according to Daiwa Capital Markets analysts [3].

We do need to note that Ganfeng Lithium is a different beast as it is the world’s largest lithium producer and securing long-term contracts with large producers like Ganfeng is crucial for automakers (including Tesla) looking to produce large volumes of electric vehicles to drive cost down with the economies of scale.

Battery manufacturers and automakers are all trying to secure those contracts as lithium prices are rising.

2. Complication

What does this deal mean to CATL?

CATL has been a long term battery supplier for Tesla’s Shanghai Factory, securing a spot in Tesla’s supply chain by being the first to provide the electric vehicle market leader with LFP (lithium iron phosphate battery) packs. 

As nickel prices have rallied over the past year and competition over secure, long-term supply becomes increasingly fierce, the American car manufacturer has been the first to hedge against potential nickel and cobalt shortages proactively and to diversify its electric vehicle offering to include LFP powered vehicles amid increasing yearly demand for electric vehicles.

As one of the suppliers for Tesla’s hybrid model supply chain of multichannel sourcing and in-house battery production, CATL should pay closer attention to this deal. The Ganfeng deal is very likely that Tesla wants to diversify its supply chain risks further and reduce its overreliance on EV battery suppliers. In the meantime, it should be noted that CATL also supplies batteries to other Chinese EV makers, including NIO Inc., XPeng Inc. and Li Auto Inc. as well as traditional brands such as Daimler AG’s Mercedes-Benz. As a result, it already has a global EV battery market share of 30%, and more than half the market in China, according to analysts [4].

3. Our Take

CATL remains a BUY

Looking at both information, we can conclude that CATL’s stock price will take a slight hit due to sentiment in the short run. On the bright side, the overall fundamentals of CATL are still strong, with a diverse client base and similar deals like the battery supply deal with Tesla to December 2025 in the pipeline [5], CATL is still a BUY for us, as mentioned in our previous CATL analyses

“CATL has great future potential as worldwide battery demand is increasing at an exponential rate and it is well-positioned within the supply chain network of major global car manufacturers. It is a buy. CATL is bent on European expansion because it expects huge growth in the European electric vehicle market in response to the EU’s tighter CO2 requirements for 2030. Overall, CATL has a very strong story for the next 3 – 5 years and buying a major battery manufacturer is a great play if the electric vehicle market growth continues on the foreseeable trajectory.”

Disclaimer: Our content is intended to be used solely for informational and educational purposes, and not as investment advice. Always do your research and consider your personal circumstances before making investment decisions. ChineseAlpha is not liable for any losses that may arise from relying on information provided.

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