Recently, Contemporary Amperex Technology Co., Limited, commonly referred to as CATL, unveiled its third-quarter financial report, showcasing a staggering net profit of 36 billion yuan for the first three quarters of the year, marking a substantial year-on-year increase of 15.6%. This growth positions the company on track to potentially exceed a net profit of 50 billion yuan by the end of the year, thus solidifying its status as the most profitable manufacturing enterprise in the A-share market.

Despite this impressive profit surge, it is noteworthy that the revenue for the same period only reached 259 billion yuan, representing a 12% decline compared to the previous yearThis juxtaposition of soaring profits amidst declining revenues prompts an exploration of the underlying causes.

To understand the reasons behind this revenue downturn, one must first delve into the intricacies of the power battery supply chain

At the top of this hierarchy are lithium mining enterprises, with leading players including Ganfeng Lithium and Tianqi LithiumThese companies extract lithium, primarily in the form of lithium carbonate, from salt lakes and mineral sites, supplying downstream manufacturers of anode and cathode materials such as Dodo Nano and Shanshan TechnologySubsequently, CATL procures these materials to manufacture battery packs, which are ultimately sold to automotive producers like Tesla, NIO, and Leap Motor.

The sales volume of power batteries is intrinsically linked to the performance of the new energy vehicle (NEV) marketAs NEV sales increase, so too does the demand for power batteriesAccording to CATL’s semi-annual report, global NEV sales reached an impressive 5.64 million units from January to May 2024, reflecting a robust year-on-year growth of 21.5%.

With this growth in global NEV sales, one might question whether CATL's market share is diminishing

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Contrary to that assumption, the data indicates a different scenario: the global power battery usage in the first five months of the year amounted to 285.4 GWh, representing a commendable year-on-year increase of 23%. CATL’s market share, during this period, stands at 37.5%, which is a 2.3 percentage point increase from the previous year.

Despite the overall industry growth and a rising market share, CATL’s revenue has experienced a declineThe primary reason for this is straightforward—product pricing has seen a decreaseThe recent surge in power battery prices was largely driven by escalating costs of lithium resourcesHowever, as the upstream prices of lithium have begun to drop, it naturally follows that the prices of power batteries have also decreased.

Therefore, although CATL has seen an increase in battery sales volumes, the reduction in selling prices has resulted in an overall revenue drop

This trend reflects broader industry challenges that cannot be sidesteppedCompanies that demonstrate genuine competitive strength are capable of maintaining premium pricing that offsets the drops in raw material costs, allowing them to enhance gross margins even in a declining price environment.

Is CATL capable of such pricing power? The financial data suggests a definitive yesEven amid a 12% fall in revenue, CATL's net profit has surged by nearly 16%, indicating a substantial increase in the company's gross marginFor the first three quarters of the year, CATL managed to achieve a remarkable gross margin of 28%, an increase of 6 percentage points year-on-yearThis has effectively raised the net margin by 5 percentage points compared to last year.

Amidst falling upstream costs, CATL has demonstrated the ability to negotiate better procurement prices while sustaining high premiums on its products sold to downstream customers

This unique position allows for a scenario where although sales prices decline, the profit margins widen, which is indicative of a company with strong competitive advantages.

Looking closer at CATL's operational cash flow, the figures present a compelling narrativeThe company reported operational cash inflows of 336.5 billion yuan, significantly surpassing its revenue figureOf this, 317.5 billion yuan stemmed from cash receipts for sold goods and provided services, surpassing the previous year's figuresConsequently, CATL's operating cash flow net inflow reached an impressive 67.4 billion yuan for the first three quarters, a substantial rise of 15 billion yuan compared to last year, despite a revenue shortfall of more than 35 billion yuan.

When compared to other leading players in the industry, CATL’s gross margins stand approximately 11 percentage points higher than those ranked second to fourth, indicating that CATL is uniquely positioned to outperform its peers in the current market landscape.

Given the analysis above, it is reasonable to forecast that CATL's performance in the coming year will not only recover but set new records

As lithium carbonate prices stabilize, the corresponding effect on power battery prices should stabilize as wellFurthermore, the demand for global NEVs continues to rise and is expected to grow by an additional 20% next year.

Last year, CATL's net profit stood at 44 billion yuan, with projections for this year estimating around 51 billion yuanNext year, the company is anticipated to reach a remarkable 60 billion yuan in net profit, likely making it the first manufacturing enterprise in the A-share market to exceed profits of 50 billion yuan.

There is a prevalent misconception in the public domain which suggests that Chinese enterprises, our own included, are large but not strongIn this context, 'large' refers to revenue scale while 'strong' pertains to profit scaleRevenue is a reflection of global market share, while profit illustrates pricing power and brand influence

For instance, Apple boasts revenues nearing 400 billion US dollars with nearly 100 billion dollars in net profit, while Huawei's current revenue sits at a fraction of that.

Taking a glance at Microsoft, with revenues of approximately 250 billion US dollars and profits nearing 90 billion dollars, or Google with revenues of 300 billion dollars and net profits of 80 billion dollars, one can see that American tech giants achieve staggering revenue and profit figuresThere is a pressing need for more companies like CATL in China; those leading their respective sectors not only achieve high revenue but also high-profit margins.

Conversely, the photovoltaic (solar energy) sector in China demonstrates significant promise yet suffers in profitabilityDespite controlling more than 70% of global production capacity, many enterprises within this sector are struggling financially, often selling products at rock-bottom prices leading to losses