Looking at Contemporary Amperex Technology (300750.SZ) through Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US): The unavoidable cyclical fate.

Contemporary Amperex Technology, the leader in power batteries, announced at the end of December last year that it plans to raise at least $5 billion to list on the Hong Kong Stock Exchange. The last time Dolphin covered Ning Wang was in 2021 when Ning Wang received a lot of attention. After experiencing supply explosions, valuation and devaluation in the domestic market, Ning Wang, who fell from grace, is now considering listing on the Hong Kong Stock Exchange. Of course, the desire to go public is understandable, as encountering obstacles in overseas markets, listing on the Hong Kong Stock Exchange is a good platform to interact with international capital. Taking advantage of this opportunity, Dolphin also re-evaluates the track on which Ning Wang is located and Ning Wang's investment logic from a cross-industry comparative research perspective. This study of Contemporary Amperex Technology focuses mainly on the following issues: Ning Wang: Can a technology leader not escape the fate of the cycle? Why is it that even as a leader in batteries, there is no ability to transcend the cycle? As two manufacturing industry leaders, what are the investment logics of Contemporary Amperex Technology and Taiwan Semiconductor Manufacturing Co. Ltd.? In detail I. Ning Wang: Can a technology leader not escape the fate of the cycle? Looking at the historical stock price of Ning Wang, its market value dropped rapidly from a peak of 1.6 trillion at the end of 2021 to a cyclical low of only 640 billion at the beginning of 2024, before rising again to the current 1.1 trillion. And the TTM PE ratio also fell from a peak of 150 times to the current 23 times. The fundamental reason for the stock price decline lies in the slow pace of battery technology iteration, low competitive barriers, and rapid industrial overcapacity. By the end of 2021, Ning Wang's capacity utilization had reached its peak of 95% (also the stock price peak), but it continued to decline, with capacity utilization falling to only 65% in the first half of 2024. It can be seen that Ning Wang's stock price is strongly correlated with industry beta and lacks the ability to possess its own alpha and transcend the cycle during a downturn. II. Why is it that even as a leader in batteries, there is no ability to transcend the cycle? a. Supply side: The industry nature of batteries determines that the technological moat is not deep enough Comparing with Taiwan Semiconductor Manufacturing Co. Ltd., the leader in high-end chip manufacturing with the highest precision, in terms of research results: 1. The chip manufacturing industry has a fast technological iteration pace, and breakthroughs in each process generation can bring a significant improvement in chip performance. The chip manufacturing industry has a fast pace of process iteration, with new breakthroughs in processes occurring almost every 2 years, following Moore's Law in the semiconductor industry: when prices remain the same, the number of components that can be accommodated on an integrated circuit will double every 18-24 months, and performance will also double. Due to the unique nature of high-purity silicon, the higher the integration, the cheaper the price of transistors. The chip process directly affects the performance, power consumption, and cost of chips (for example, compared to 5nm chips, Taiwan Semiconductor Manufacturing Co. Ltd.'s 3nm chips have improved by about 10%-15% in the same power consumption, and power consumption will decrease by 25%-30% at the same performance). In summary, by maintaining absolute leadership in R&D investment, avoiding misjudgments in the path of technological iteration, the certainty of breakthroughs in the leading process is relatively high, and the rapid pace of technological iteration (approximately every 2 years) forms a strong technological moat. The industry leader can rely on the advanced process iteration to outperform competitors during the technological cycle, leading to the fact that only Taiwan Semiconductor Manufacturing Co. Ltd., Samsung, and Intel Corporation are advanced players, with Samsung and Intel Corporation gradually falling behind. b. The battery industry has a slow technological iteration pace, with a more linear iteration speed, making it difficult to achieve a breakthrough in the technological cycle: On the other hand, the battery industry also has a certain path of technological iteration. Battery density is proportional to the range, reflected in the energy density of the battery. Higher energy density means longer range for the battery. Battery technology has two major breakthrough directions: innovation in material systems and innovation in structural systems. A more advanced electrochemical system can enhance the energy of active substances, while a more streamlined system structure can help the battery pack achieve greater efficiency. However, innovation in material systems still follows the rules of the electrochemical industry, which is a slowly growing industry that requires long-term trial and error at the bottom level. Therefore, there will be several different technological paths being developed in parallel, and some paths may be eliminated during the development process due to inherent flaws. For example, from the previously eliminated lead-acid batteries, nickel-cadmium batteries, and lead-acid batteries to the current layout of sodium-ion batteries, semi-solid-state batteries, and solid-state batteries by battery industry leaders. Although innovations in material systems generally have disruptive effects, they usually take at least 10 years from laboratory verification to mass production. Therefore, over the past 30 years, it has taken considerable time to achieve breakthroughs in battery materials and technologies.There has been no fundamental change in the technology route, and it still mainly relies on the basic system of lithium batteries.Therefore, in the short term, before any major changes occur in the battery material system route, and with the high security requirements in the industrial chain applications, the innovation of battery manufacturers is focused on structural systems. The increase in energy density of batteries is still a relatively slow process (high energy density and safety inherently have certain conflicts). So even for leading companies like Contemporary Amperex Technology, whether it's NCM or LFP batteries, the increase in battery density in recent years is mainly due to innovations in structural systems (from CTP 1.0 to CTP 3.0). The annual average CAGR increase in battery energy density is only around 5%, leaving enough time for other battery manufacturers to catch up relatively well. It's difficult for a technological blow to occur during the technological cycle, so the technological moat is not very deep. b. On the demand side: The end-use enterprises of batteries are also facing supply surpluses, continually trending towards "demand degradation." Looking at the application scenarios of products from Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, smart phones and high-performance computing are the most important application scenarios, accounting for 88% of revenue. These two application scenarios (especially the HPC industry, but there may be AI phones in the future after the smartphone industry) have an almost endless demand for high-performance chips because high-performance chips will further promote the emergence of downstream product new formats, help expand the overall market demand for terminals, and consolidate the industry position of end-use enterprises, possibly further increasing market share. Looking closely at the two largest customers in the smart phone and HPC sectors of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, they are industry leaders Apple Inc. and NVIDIA Corporation, both of which have created strong competitive barriers with their ecological closed loops and technological superiority. Their overall gross profit margin reached 46% and 75% in the latest quarter, allowing for enough profit to be reinvested back into the upstream supply chain, especially in the core factor affecting chip performance - chip process. This allows Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR to maintain a high gross margin and engage in rapid iteration and trial of process technology, forming a positive cycle. On the other hand, in the battery industry, although application scenarios also have good extensibility like chips, bringing potential market space increments, the expansion of application scenarios in the battery industry is currently limited by the slow iteration speed of battery energy density and the lack of sufficient economic viability. Therefore, it has only unlocked scenarios like smartphones, two-wheel electric vehicles, and electric passenger/commercial vehicles. Currently, the penetration rate of new energy commercial vehicles remains low, with the penetration rate of new energy commercial vehicles expected to reach about 20% in 2024, mainly due to the heavier weight of commercial vehicles (such as trucks), which leads to higher electricity consumption and the need for higher battery energy density and charge capacity compared to passenger vehicles. Therefore, it is estimated that, with the current linear increase rate of battery energy density, the commercial vehicle market is the next scene where CATL can unlock penetration rates (following the sequence of electric buses/light trucks/heavy trucks). However, the scenario of low-altitude economics, and even electric aircraft, is still far in the future, requiring a switch to the next generation of technology routes (solid-state batteries). From the current battery revenue composition of CATL, power batteries still account for 80% of battery revenue, with shipments still primarily for passenger cars, so CATL's main customers are still new energy vehicle companies. However, within the new energy vehicle companies, although Tesla, Inc. is still the largest customer of Contemporary Amperex Technology, the actual gross profit margin from selling cars has declined to less than 20% and even dropped to below 15% at its lowest point. The reason is simple: in the end-use enterprise of power batteries, new energy vehicles, during the first half focused on the electrification-led new energy era, the core innovation of the three electricity's has basically reached its end, resulting in an inability to fundamentally lag in terms of performance, increasingly severe homogenization, and even being reduced to an assembly plant for automotive components. This has led new energy vehicles to gradually become ordinary manufacturing industries, unable to construct core competitive barriers. Furthermore, the new energy vehicle market began experiencing oversupply in early 2022, continuing to intensify in 2023 and 2024, essentially moving from supply-driven to demand-driven logic. Observing the distribution of new energy vehicles at different price levels, when the industry shifts from supply-driven to demand-driven (2021 vs. 2024), the share of new energy vehicles above 200,000 yuan instead showed a decline, with those priced between 100,000-200,000 yuan becoming the absolute mainstream, continuously increasing their share almost to the "half of the new energy vehicle market." Therefore, under the evolution of this trend, it is difficult for new energy vehicle companies to achieve high-endization and brand appeal to obtain high gross profit margins. They are mainly moving towards brand downgrading, initiating a "quantity over quality" mode, such as Xiaopeng Mona, Leda/Yinghuoche, Ideal L6, Tesla, Inc. "Model 2.5." However, the elimination competition of new energy vehicles has not yet ended. According to Goldman Sachs Group, Inc., even though half of the new energy vehicle companies are already in a situation of negative operating cash flow, new energy vehicle manufacturers are still expanding their production capacity in 2024 (capex growth of 35% YoY), without seeing a balance of supply and demand in the industry.As the situation begins to improve, competition will only become more intense.So the new energy vehicle industry is still in the process of elimination, especially as the intelligence has not yet matured and has not fundamentally affected the sales volume and profit side of selling cars, the profit space of new energy vehicle companies themselves is continuously being compressed, unable to have enough profit space to feedback to the upstream industry chain. Even new energy vehicle companies will try to compress the profit space of the upstream industry chain as much as possible, especially for upstream automotive components with weak technological barriers. As a result, the most striking thing is that the chip track continues to have a high demand for high-performance chips in the HPC and smartphone sectors (such as at a dinner in Taiwan, when Huang Renxun will actively propose a price increase for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR), indicating that the industry structure is moving towards demand upgrading (advanced processes account for a continuously increasing proportion, with Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's 7nm and below process shipments accounting for 70%). Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's own technological barriers are high, and its advanced processes have a crushing advantage, continuing to be driven by the supply side. As for the power battery, as the main application area is still in electric passenger cars, new energy vehicle companies have not opened a significant performance gap in the first half of the electrification competition, unable to construct core competitive barriers, leading to oversupply: 1. The overall structure of new energy vehicles is moving towards a downward pricing route, as "trading price for volume" has become the mainstream trend in the industry; 2. The gross profit margin of most new energy vehicle companies continues to decline. Therefore, the new energy vehicle industry is showing a trend of "demand degradation": car companies will try to compress battery costs as much as possible, resulting in low energy density of the battery, but at the same time, the demand for lower-cost LFP batteries continues to increase, rising from 33% in 2019 to 75% in 2024, reaching a peak in December 2024, with LFP battery installation rates as high as 81%. Therefore, it can be seen that as long as the battery material system route has not switched, low-cost LFP batteries have become the absolute mainstream of the industry. c. Industry attributes: The battery industry has lower heavy asset attributes compared to the chip manufacturing industry, with low barriers to capacity expansion funding and no obvious scale effect advantages. From the balance sheet perspective, the chip manufacturing industry has significantly stronger heavy asset attributes compared to battery manufacturing, with Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR fixed asset ratios remaining between 50% and 60% annually, while the leading battery manufacturer CATL's fixed assets and construction in progress account for only around 20%. In terms of the Capex/Revenue ratio of the leading battery and chip manufacturers, even at the peak of capacity expansion, the battery industry's ratio can only reach a maximum of 34%, while in a downturn, the ratio drops to less than 10%. In contrast, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's Capex/Revenue ratio peaked at 53% during its capacity expansion peak, and even at the low point of the cycle, this ratio would not drop below 30%. This means that the chip manufacturing industry has higher barriers to capacity expansion funding, with higher investment per unit of capacity for more advanced processes. On the other hand, the funding barrier for capacity expansion in the battery industry is relatively lower. In terms of sales cost structure, the chip manufacturing industry and the battery manufacturing industry are completely different. In the chip manufacturing industry, manufacturing costs dominate, with depreciation and amortization costs representing the highest proportion. Therefore, the core elements of production and manufacturing for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR are equipment and production lines. In the battery manufacturing industry, raw materials upstream are the largest component of sales costs, with manufacturing costs representing a lower proportion and depreciation and amortization costs having a relatively small impact on production costs. Therefore, the core element of controlling costs for Contemporary Amperex Technology is managing raw material costs, which requires high demands on materials supply chain management. As mentioned before, in heavy asset businesses, the higher the heavy asset model attribute, when terminal demand continues to grow, the advantages of scale effects become more obvious, depreciation per unit decreases, profit margins are released, and ROE levels are increased. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR clearly fits this logic. Three. As leading manufacturers in the manufacturing industry, how do the investment logics of Contemporary Amperex Technology and Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR differ? Based on the above analysis, it can be seen that the success of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR can mainly be attributed to: a. Terminal application companies such as Apple Inc. and NVIDIA Corporation, possess high competitive barriers (whether it be technological/ecological barriers) and high gross profit advantages, with sufficient profit space to feedback to the upstream industry chain; b. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's advanced chip process is the most critical factor in the upstream industry chain that affects the performance of terminal products (chips). Breakthroughs in the process will further promote the emergence of new business models for downstream products, expand the overall market space for terminals, and consolidate the market position of terminal enterprises.c. The advanced process technology barriers of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR are very high, and the core moat capability of technology iteration speed and certainty constitutes the ability to defend and even achieve further market share expansion; It is important to satisfy all three points at the same time. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, with its strong technological barriers, not only has the ability to go beyond its own alpha (guaranteeing a continuous increase in market share and obtaining high product premiums with advanced process technology differences), but also has the ability to promote industry beta (advanced process technology promotes the emergence of new downstream formats, the continuous expansion of the chip manufacturing market space, and the industry has been following the logic of demand upgrades). However, if only points a and b are met and the technological barriers of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR are not high, terminal enterprises, even with sufficient profit margins, will be more inclined to vertically integrate, control the most core products in the upstream supply chain in their own hands, and achieve higher levels of profitability and ensure the stability of the supply chain. The higher the technological barriers in the upstream industry chain, the more specialized division of labor and cooperation is needed. Intel has always adopted the IDM model (completing all aspects of chip design, manufacturing, and packaging testing), but because of the slow upgrade of advanced processes, the competitiveness of the final chip products is insufficient. Even in the CPU market where they excel, they have been losing market share. Therefore, from the historical evolution of the chip industry, the Fabless model (only focusing on chip design, outsourcing production to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR) is evidently more suitable for terminal application enterprises than the IDM model (vertical integration model). This is also reflected in the current high-end process players: the market share of Samsung and Intel chip manufacturing has gradually been taken over by Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, and the market share of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR continues to rise. On the other hand, in the battery manufacturing industry, even the leading battery manufacturer Ningwang has not been able to go beyond its own alpha. The main reasons are as follows: a. In the competition dominated by electrification in the first half, the technological gap in the core "three electric" has become small. Terminal application enterprises (new energy vehicle companies) themselves do not have high competitive barriers. In the situation of continuous oversupply and no marginal improvement in sight, "cost-volume trade-off" and "brand sinking" have become the mainstream trends in the new energy vehicle industry (new energy vehicles priced between 100,000 and 200,000 yuan). As the price of new energy vehicles continues to decline, car manufacturers will consider cost control as their core strategy (especially for car companies positioning themselves in the mass market, such as BYD Company Limited and Geely), especially in cost control for the most important products in the upstream supply chain, the battery, leading to a continuous degradation logic in the industry (the proportion of low-energy density but lower-cost LFP batteries continues to rise). b. Although batteries are the most important factor in the upstream value chain of electric vehicles (directly affecting driving range), the pace of technological iteration is relatively slow, and unlocking new formats requires revolutionary innovations in material systems (such as next-generation solid-state batteries). In the current format, there is no fundamental difference in the performance of batteries from various manufacturers, especially in low-energy density LFP batteries, which means that car manufacturers basically cannot increase their market share or create more demand by using Ningwang's batteries to improve the performance of their end products. c. Ningwang's technological barriers are constrained by the chemical properties of the battery industry. It is difficult to achieve breakthroughs in technology cycles, and the slow increase in energy density of batteries gives newcomers enough time to catch up. This is also reflected in the battery industry, where Ningwang's market share of power batteries in China reached its peak in 2021 (the turning point from supply being less than demand to supply being greater than demand in the battery cycle), but then showed a downward trend. The reasons for Ningwang's declining market share can be seen as follows: Ningwang has a leading advantage in NCM batteries, which have higher energy density and higher technological barriers. Although NCM batteries are more expensive, high-end models have high premiums to absorb the higher battery costs. Therefore, Ningwang's market share in the domestic NCM power battery market continues to rise, and it has maintained its share in the high-end market (by 2023, Ningwang's market share in high-end models above 300,000 yuan reached 68%, with overwhelming advantages). However, in the overall decline in demand in the new energy vehicle industry and the trend towards LFP batteries in power batteries, Ningwang's market share in LFP batteries is rapidly declining (from 50% in 2021 to 37% in 2024). This is mainly due to the fact that vehicle models using LFP batteries are generally mid-to-low-end models, more price-sensitive, focusing on cost control of batteries, while the energy density and technological barriers of LFP batteries are not as good as NCM batteries. As mentioned earlier, in cases where the technological barriers are not high (such as LFP batteries with slow iteration speed) but the most core and valuable products in the upstream supply chain are used, terminal car manufacturers tend to prefer vertical integration to ensure their cost and pricing advantages, especially for car companies positioned in the mass market, where cost-effectiveness remains the core competitive advantage of current models. Lower costs also mean a higher chance of survival in the selection process of car manufacturers.slovenian: Koliko je ura?And the market share lost by the King of Ning in the LFP power battery market, a part of it was seized by second-tier battery manufacturers with a price advantage, and another part was seized by vehicle manufacturers' self-developed and self-produced batteries. Therefore, for the investment logic of Contemporary Amperex Technology, the Dolphin believes that if the demand for power batteries by new energy vehicle manufacturers is still the mainstream trend, cost advantage will be more important than product premium. The ways to achieve cost advantage in the battery industry are as follows: 1. Control of upstream raw material costs: mainly achieved through vertical integration of upstream raw materials, and the leading position of the King of Ning has the right to premium in the upstream, thereby obtaining lower procurement costs; 2. Use of lower-cost material routes: Contemporary Amperex Technology's "Xiaoyao" battery, released in October 2024, introduces lithium-sodium AB battery system integration technology, mainly used in plug-in hybrid models. After the launch of the "Xiaoyao" battery, industry recognition is high, and it has been designated for brands including Ideal, Avida, Deep Blue, Qiyuan, Nezha, etc. It is expected that by 2025, nearly 30 extended-range models will be equipped with the "Xiaoyao" battery. In the long term, the breakthrough of next-generation solid-state batteries and solid-state batteries, achieving a leap in energy density, is more important for unlocking new application scenarios and expanding the overall market space for the battery industry. Therefore, the Dolphin believes that in the short term, the investment logic for Contemporary Amperex Technology lies in observing the industry's pace of capacity clearance, which is more of an industry beta-level logic. In the long term, whether Contemporary Amperex Technology's alpha logic can be built more depends on the breakthrough of next-generation battery technology. The latter part is still a narrative of walking and watching. This article is reprinted from the "Dolphin Investment Research" public account, GMTEight Editor: Jiang Yuanhua.