West Niu Securities: Upgraded CALB (03931) rating to "Buy" with a target price raised to 16.64 Hong Kong dollars.

West Cow Securities released a research report stating that it has raised profit forecasts for CALB (03931) and upgraded its rating to "buy," while also increasing the target price to HK$16.64 per share. The firm sees positive signals from the recent financial performance and communication with the group, especially in terms of i) improving profit margins and cash flow expectations, and ii) the ability for the group to continue ideal growth even after a decrease in customer concentration. Key points from West Cow Securities include: Maintaining full-year shipping targets: In the first half of the 2024 fiscal year, CALB achieved total revenue of RMB 12.47 billion, a slight growth of 1.4% compared to the same period last year. Sales of power batteries decreased by 6.3% year-on-year, while sales of energy storage system products increased by 43.2%, further increasing their share of total revenue to 22.0%. The decrease in power battery sales was mainly due to a decline in average selling prices offsetting the positive impact of increased sales volume. However, the selling price of power batteries in the market has gradually stabilized since June, with the rate of decline significantly reduced due to a low base effect, and the penetration rate of new energy vehicles reaching fifty percent on the demand side, indicating that the market supply-demand imbalance is not worsening. Based on communication with the group, the group remains optimistic about shipping in the second half of the year and next year, maintaining expectations for full-year shipping volume, with the contribution of overseas projects expected to be reflected in 2026/27. Furthermore, the group's dependence on a single customer continues to decrease, with the proportion of contributions from major customer carmakers remaining at around 10%-20%, while projects with other well-known domestic and foreign manufacturers are actively progressing, expected to further diversify customer concentration. In terms of energy storage, the group has made significant breakthroughs with large clients, with current order quantities and visibility ideal, expecting full-year shipping volume to exceed 20GWh. Significant increase in gross margin is surprising: CALB achieved a good gross margin of 15.6% in the first half of the fiscal year, unaffected by changes in customer mix or market conditions. On the contrary, economies of scale continue to be realized, and the cost-to-production ratio is increasing, driving the overall gross margin of the group, with power battery sales having a relatively high gross margin. The group currently has no intention to actively lower prices, and under non-extreme circumstances, product prices have a mechanism linked to raw material costs, so price changes in the medium to long term will not have a significant impact on profits. Therefore, driven by economies of scale, the group's gross margin is expected to continue to steadily rise, leading to a return to a healthier profit level. Capacity and personnel planning: The group expects effective capacity for the full year of 2024 to be around 100GWh, maintaining a reasonable level of annual growth of about 30GWh. With the optimization of the group's automated production, the number of production personnel has been reduced, and the proportion of future growth is expected to be lower than the growth in capacity. Although West Cow Securities believes that the group is still in the investment phase and will continue to need to increase loans to support its cash flow operations, i) more reasonable investment and automation improvements, ii) improvements in profit margins will effectively reduce the group's cash flow pressure.