Research and Outlook on the CR2477 battery Industry

I. Industry Overview

With the rapid development of the downstream new energy vehicle industry, the installed capacity of power lithium batteries has increased significantly; at the same time, due to the continuous increase in subsidy policies for the mileage of new energy vehicles and battery energy density, ternary lithium batteries have gradually become the mainstream of the market.

Lithium batteries are a secondary chemical battery (rechargeable chemical battery) with advantages such as high energy density, high operating voltage, light weight, small size, small self-discharge, no memory effect, long cycle life, and fast charging. At the same time, because they do not contain heavy metals such as lead and cadmium, are pollution-free, and do not contain toxic materials, they are called green new energy products and are the energy storage technology that best meets the development trend of new energy applications.

Lithium batteries are mainly composed of five parts, namely positive electrode materials, negative electrode materials, electrolytes, diaphragms, and packaging materials. The positive electrode material provides lithium ions for the battery, accounting for about 30% of the battery cost. Its performance directly determines the upper limit of the lithium battery capacity and is the core part of the industrial chain. Lithium battery positive electrode materials are mainly divided into lithium iron phosphate, ternary lithium, lithium manganate, lithium cobaltate, lithium titanate, etc. Among them, ternary lithium includes two categories: nickel cobalt manganese oxide NCM and nickel cobalt aluminum oxide NCA. As the proportion of nickel increases, the energy density of positive electrode materials also increases accordingly. my country's power batteries mainly use two positive electrode materials, lithium iron phosphate and ternary lithium. Lithium iron phosphate has high safety and relatively low energy density. It is widely used in the fields of new energy buses and special vehicles. Ternary batteries have high energy density and are used in the fields of passenger cars and special vehicles. With the continuous improvement of battery energy density and cruising range requirements, the penetration rate of ternary materials is growing rapidly.

In recent years, based on solving environmental pollution and energy crisis problems, new energy vehicles have developed rapidly, and the key to new energy vehicles is power lithium batteries; as new energy vehicles show a high-speed growth trend, in 2017, the application of lithium batteries in the field of power batteries exceeded consumer batteries for the first time, becoming the main factor in the growth of lithium battery demand. Specifically, driven by the rapid growth of the new energy vehicle market, China's installed capacity of power lithium batteries increased by 368.35% year-on-year in 2014, reaching 3.70GWh. As new energy vehicles continue to increase in volume, domestic demand for power lithium batteries has grown rapidly, but the growth rate has slowed down. In 2017, the CR2477 battery market was affected to a certain extent by factors such as the decline in new energy vehicle subsidies and the review of the vehicle model announcement catalog, but overall it still achieved a high growth. The installed capacity of power lithium batteries in 2017 was 36.20GWh, a year-on-year increase of 29.29%. From January to September 2018, the installed capacity of power lithium batteries was 28.78GWh, a year-on-year increase of about 94%. After the adjustment of subsidy policies, the industry continued to maintain a high-speed development trend. With the gradual implementation of national policies, as well as the improvement of lithium battery production technology, the reduction of costs, and the increase in the popularity of new energy vehicles and supporting facilities in the future, the demand for power batteries for new energy vehicles will continue to grow in the next few years.

In terms of battery types, the current domestic CR2477 battery types are mainly lithium iron phosphate batteries and ternary lithium batteries. In 2016, the installed capacity of lithium iron phosphate batteries accounted for 72.24%, and the installed capacity of ternary lithium batteries accounted for 22.25%; in 2017, affected by policies, the installed capacity of ternary lithium batteries increased significantly to 44.01%, and the installed capacity of lithium iron phosphate batteries decreased to 49.30%; from January to September 2018, the installed capacity of ternary lithium batteries further increased to 57.60%. Since the upper limit of the energy density of lithium iron phosphate batteries is not high, it will restrict the development of lithium iron phosphate batteries. Ternary materials have higher specific capacity and average voltage, which can further improve the energy density of batteries. In terms of current technology, only ternary batteries can meet the requirement of energy density reaching 260Wh/kg in 2020, so the ternary battery technology route is currently the best choice, and battery companies will continue to increase the layout of ternary batteries.

In terms of price, the price of domestic power lithium batteries has been on a downward trend in recent years. According to the data from GGII, the price of power lithium batteries at the end of 2017 fell by 20-25% compared with the beginning of 2017. The price of lithium iron phosphate power battery packs fell from 1.8-1.9 yuan/Wh at the beginning of the year to 1.45-1.55 yuan/Wh at the end of the year, and the price of ternary power battery packs fell from 1.7-1.8 yuan/Wh at the beginning of the year to 1.4-1.5 yuan/Wh at the end of the year. On the one hand, the new production capacity in the industry is gradually released, and the competition is intensifying, which leads to a decline in lithium battery prices; on the other hand, affected by the rapid decline in subsidies for new energy vehicles, downstream vehicle companies require CR2477 battery companies to significantly reduce prices. Since 2018, the price of upstream raw materials has fallen sharply, and the price of power lithium batteries still has room to fall.

2. Upstream supply

Since 2017, the price of upstream raw materials has fluctuated greatly, which has brought certain challenges to the cost control of CR2477 battery companies.

The front-end resources of lithium batteries are mainly lithium carbonate and cobalt.

According to data from the United States Geological Survey (USGS), the current global lithium reserves are about 14 million tons, mainly concentrated in Chile, China, Argentina and Australia, of which Chile accounts for more than half of the reserves. China's lithium reserves account for about 22.10% of the global reserves. Domestic lithium reserves are large and not easily affected by international resources and environment, but my country's lithium resources are mainly concentrated in the northwest region and the Qinghai-Tibet Plateau, which are difficult to mine and easily cause damage to the natural environment. From the perspective of lithium carbonate prices, due to the rapid expansion of new energy vehicle production capacity in recent years, the production of lithium carbonate in China has generally been in short supply. In 2017, the price of lithium carbonate showed an upward trend. In August 2017, the price of lithium carbonate had a significant increase, mainly due to the gradual digestion of the previous new energy vehicle subsidy fraud news, the sales of new energy vehicles increased significantly year-on-year, and the sharp increase in demand caused a certain imbalance in the supply and demand of lithium carbonate in the short term. Since entering 2018, the price of lithium carbonate has shown a continuous downward trend. The main reason is that at the end of 2017, it experienced a significant increase in production, and the inventory of downstream power battery companies reached a high level, entering the stage of reducing inventory, and downstream demand did not support the price. Since April, the price of lithium carbonate has continued to fall, mainly due to the oversupply of industrial-grade lithium carbonate in Qinghai, which has dragged down the price of battery-grade lithium carbonate. At the same time, due to the high requirements for battery energy density, the market demand for high-nickel ternary materials has continued to increase compared with last year, and the demand for lithium carbonate has tended to be replaced by lithium hydroxide.

The global cobalt resources are concentrated, and nearly half of the resources are distributed in the Democratic Republic of the Congo. According to USGS statistics, the total global cobalt resource reserves in 2015 were 7.16 million tons, with reserves of 3.4 million tons in the Democratic Republic of the Congo, 1.1 million tons in Australia, and 500,000 tons in Cuba. China's reserves are only 80,000 tons, accounting for only about 1% of the world's cobalt resources. Since the second half of 2016, the political situation in the Democratic Republic of the Congo has been turbulent, resulting in stagnant growth in cobalt production. The Democratic Republic of the Congo promulgated a new mining law in March 2018, increasing mining taxes and state-owned components of mineral development, increasing mining costs, and increasing upstream uncertainty. Subsequently, the price of cobalt gradually entered a continuous downward channel. At the end of September, the average price of electrolytic cobalt in the market was around 490,000 yuan/ton, and it was still on a downward trend. The main reason was that the supply of cobalt gradually became loose due to the continuous increase in upstream production; and the price was in a downward channel, resulting in the passive replenishment of inventory in the downstream during the downward cycle.

In terms of positive electrode materials, the national output of positive electrode materials for lithium batteries in 2017 was 323,000 tons, a year-on-year increase of 49.54%. Among them, the output of lithium iron phosphate was 101,000 tons, a year-on-year increase of 36.49%; the output of ternary materials was 126,000 tons, a year-on-year increase of 93.85%. With the growth of the scale of CR2477 battery production, the output of positive electrode materials has increased year-on-year. In April 2017, the "Medium- and Long-Term Development Plan for the Automobile Industry" issued by the Ministry of Industry and Information Technology required the power battery monomer specific energy to reach 300Wh/kg and the system specific energy to reach 260Wh/kg. The energy density of power batteries based on lithium iron phosphate is difficult to meet this requirement, and ternary materials have become a deterministic trend. In 2017, the output of ternary materials increased significantly, exceeding the output of lithium iron phosphate, occupying the first place in the market.

From the price point of view, the price of lithium iron phosphate has been on a downward trend in recent years, mainly due to insufficient downstream demand and overcapacity. Due to favorable policy factors and rising raw material prices, the price of ternary materials has increased significantly since April 2017, reaching a high in May 2018 and then falling back, mainly due to the downward trend of lithium and cobalt raw material prices.

In terms of other major raw materials, the negative electrode material is mainly graphite, and the price remains stable due to the support of the cost side; the price of lithium hexafluorophosphate, the raw material of diaphragm and electrolyte, has shown an overall downward trend, among which the price of diaphragm has a more obvious decline since March 2018, mainly due to the decline in subsidies for downstream new energy vehicles and the increase in diaphragm supply; the price of lithium hexafluorophosphate has dropped sharply, mainly due to the sharp increase in new production capacity leading to increasingly fierce market competition.

3. Downstream demand

New energy vehicles continue to maintain rapid growth, providing good support for the development of power lithium batteries

As an important application field of power lithium batteries, the development of new energy vehicles has a great impact on the lithium battery industry. As the global energy crisis and environmental pollution become increasingly prominent, the development of energy-saving and environmental protection-related industries has been highly valued, and the development of new energy vehicles has become a global consensus. Not only have governments of various countries announced time plans to ban the sale of fuel vehicles, but major vehicle manufacturers have also released new energy vehicle strategies one after another. Since 2012, China's new energy vehicle production and sales have shown a clear upward trend, with 2015 being the largest production and sales growth rate. Under the influence of increased incremental supply, the industry has tended to grow steadily after 2016. In 2017, the production and sales scale of new energy vehicles in my country were 794,000 and 777,000 respectively, with growth rates exceeding 50%. From January to September 2018, the production and sales scale of new energy vehicles in my country were 735,000 and 721,000 respectively, up 73% and 81% year-on-year respectively. The substantial growth of new energy vehicles has driven the rapid development of the CR2477 battery industry.

IV. Competition pattern

Industry concentration is increasing rapidly, and an oligopoly competition pattern is taking shape

With the decline of state subsidies for new energy vehicles and the increase in technical requirements for obtaining subsidies, some battery companies with backward technology or high costs have gradually been eliminated by the market, and industry concentration is constantly increasing. At present, the domestic CR2477 battery market has formed three echelons: in 2017, CATL surpassed BYD (002594, stock bar) to become the industry leader of domestic power lithium batteries. BYD is changing from a self-sufficient model to a model of supplying other vehicle companies. The above two companies constitute the industry's "first echelon"; the "second echelon" is composed of Guoxuan High-tech (002074, stock bar), Farasis, Lishen, BYD and other companies, which are important participants in the industry; the "third echelon" is composed of other companies. These companies face the pressure of survival of the fittest in the fierce competition in the industry.

In terms of market share, the top ten CR2477 battery companies accounted for 72.35% of the total installed capacity in 2017, of which CATL accounted for 28.70%, BYD accounted for 14.98%, and the two accounted for 43.68% in total; from January to September 2018, the top ten companies accounted for 87.07% in total, of which CATL accounted for 41.10%, BYD accounted for 23.86%, and the two accounted for 64.96% in total, and the market concentration has increased significantly. At the same time, the competition in the CR2477 battery industry is still intensifying, and leading companies are deeply binding with vehicle companies through technology upgrades and the establishment of joint ventures to expand orders and market share. In the four first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen, the most important sales markets for pure electric vehicles in China, except for Shenzhen, where BYD is headquartered, CATL has achieved in-depth cooperation with local strong vehicle companies in the other three cities (such as BAIC, SAIC, and GAC), grabbing a considerable market share, further promoting the growth of its market share. The pattern of industry oligopoly competition is taking shape, and the living space of other market participants is constantly being compressed.

V. Industry Concerns

Structural Overcapacity

Due to the rapid growth of the new energy vehicle industry, major lithium battery manufacturers have increased their capacity layout for power lithium batteries, resulting in their capacity growth rate continuing to be higher than the sales growth rate of new energy vehicles. According to the summary of the capacity of domestic CR2477 battery companies by the Prospective Industry Research Institute, by the end of 2017, the nominal capacity of power lithium batteries exceeded 170GWh, but the overall capacity utilization rate was less than 40%. However, the overcapacity in the CR2477 battery market is a structural overcapacity with tight supply and overcapacity. The rise of ternary lithium batteries and the decline of other lithium batteries have wasted the capacity of lithium iron phosphate batteries, lithium manganese oxide batteries, lithium titanate batteries, etc., resulting in insufficient supply of high-end capacity and insufficient orders for low-end capacity.

Downstream Collection Pressure Increased

CR2477 battery companies usually give downstream car companies 30 to 90 days of payment period. Since 2016, affected by the adjustment of the new energy vehicle subsidy policy, the cash flow of downstream vehicle manufacturers has temporarily tightened and payment has been delayed, which has increased the collection pressure of CR2477 battery companies. Generally speaking, battery companies and vehicle companies adopt a "3-6-1" payment period model, where 10%-30% of the advance payment is paid in advance after signing the contract, 50%-60% is paid within 2-3 months after the goods arrive, and the remaining 10% is paid as a warranty deposit within 12 months after delivery. In most cases, the due amount will be paid later. At present, the overall accounts receivable turnover days of the lithium battery industry exceed 4 months, which has a certain impact on the cash flow of CR2477 battery companies.

Lithium battery scrapping and recycling problems

According to relevant industry data, with the rapid development of the new energy vehicle industry, by 2020, the scrap volume of power lithium batteries in my country will reach 32.2GWh, about 500,000 tons; by 2023, the scrap volume will reach 101GWh, about 1.16 million tons. However, there are still many difficulties in battery recycling in China. First of all, the technical standards of battery companies have not yet been unified, and the types of power batteries are different. This is the main difficulty faced by battery recycling companies in the recycling and disassembly process. The detection is difficult, which increases the risk of reuse. Secondly, the domestic power battery recycling technology is not comprehensive enough, the recycling cost is relatively high, the input-output ratio is relatively low, and the recycling value is weak. In addition, some unqualified enterprises arbitrarily dispose of the waste batteries through methods that do not meet the requirements after recycling the waste batteries, causing serious environmental pollution. With the continuous strengthening of environmental protection supervision, the above-mentioned unqualified recycling companies have begun to be closed one after another, which has narrowed the battery recycling channels.

VI. Industry Policy

Power lithium batteries are the core components of new energy vehicles. In order to accelerate the industrialization process of new energy vehicles, the state has issued a series of relevant policy documents to vigorously support the healthy and rapid development of my country's new energy vehicles and CR2477 battery industries.

Focus on the development of new energy battery industry

The Ministry of Industry and Information Technology, the National Development and Reform Commission, the Ministry of Science and Technology, and the Ministry of Finance issued the "Action Plan for Promoting the Development of the Automotive Power Battery Industry" in March 2017, proposing to promote the development of my country's power batteries in three stages: in 2018, improve the cost performance of existing products and ensure the supply of high-quality batteries;In 2020, a new generation of lithium-ion power batteries based on existing technology will be widely used; in 2025, new system batteries using new chemical principles will strive to achieve technological change and development testing.

The Ministry of Industry and Information Technology, the National Development and Reform Commission, and the Ministry of Science and Technology issued the "Medium- and Long-Term Development Plan for the Automobile Industry" in April 2017, proposing to use new energy vehicles and intelligent networked vehicles as breakthroughs to accelerate cross-border integration, build a new industrial ecology, drive industrial transformation and upgrading, and achieve development from large to strong. By 2020, the annual production and sales of new energy vehicles will reach 2 million, the power battery monomer specific energy will reach 300Wh/Kg, and the system specific energy will reach 260Wh/Kg. By 2025, new energy vehicles will account for more than 20% of automobile production and sales.

Raising the threshold for production scale

The "Automotive Power Battery Industry Standard Conditions" and "Lithium-ion Battery Industry Standard Conditions" issued in 2015 put forward requirements for the production scale of power batteries from the policy level. The "Automotive Power Battery Industry Standard Conditions" (draft for comments) issued in November 2016 further put forward higher requirements for production scale: the annual production capacity of lithium-ion power battery monomer enterprises shall not be less than 8 billion watt-hours; the annual production capacity of system enterprises shall not be less than 80,000 sets or 4 billion watt-hours; the annual production capacity of monomer enterprises and system enterprises producing various types of power batteries shall meet the above requirements respectively.

Gradually declining subsidies for new energy vehicles

In recent years, the national subsidy policy for new energy vehicles has shown a trend of tightening subsidy amounts and gradually increasing subsidy thresholds. At present, my country's current new energy vehicle subsidy policy is the "Notice on Adjusting and Improving the Financial Subsidy Policy for the Promotion and Application of New Energy Vehicles" issued in February 2018. According to cost changes and other conditions, the subsidy standards for new energy passenger vehicles are adjusted and optimized, and the subsidy standards for new energy buses and new energy special vehicles are reasonably reduced. With the further adjustment of subsidy policies, the energy density of battery systems has become the core adjustment factor for the level of subsidies. At the same time, the threshold of the recommended vehicle catalogue has been raised and adjusted dynamically, which will help guide power batteries to products with better comprehensive performance, eliminate inferior production capacity, and accelerate the integration of the battery industry, which will be conducive to the development of industry-leading enterprises with strong financial and technical strength.

Double credit policy officially released

In September 2017, the Ministry of Industry and Information Technology, the Ministry of Finance, the Ministry of Commerce, the General Administration of Customs, and the General Administration of Quality Supervision, Inspection and Quarantine jointly issued the "Parallel Management Measures for Average Fuel Consumption of Passenger Car Enterprises and New Energy Vehicle Credits". The measures will be implemented from April 1, 2018, and the new energy credit requirements will be implemented from January 1, 2019. The policy will implement parallel management of fuel consumption credits and new energy credits for automobile manufacturers. While developing energy-saving vehicles to reduce fuel consumption, automobile manufacturers can also meet the corresponding new energy credit requirements by producing a sufficient number of new energy vehicles. The measures require that enterprises with an annual production or import volume of more than 30,000 traditional energy passenger vehicles have a new energy vehicle credit ratio of 10% and 12% in 2019 and 2020, respectively. As the subsidy policy gradually declines and withdraws, the double-point method will form a market-oriented long-term development mechanism to promote the sustainable development of the new energy vehicle industry. The new energy vehicle industry will enter a new stage of market-oriented and product-driven development.

In summary, the state has supported leading enterprises in the CR2477 battery industry by raising the threshold of production scale and supporting the best and the strongest; it has introduced a prudent subsidy policy, which has promoted the rapid development of the new energy vehicle and CR2477 battery industries in recent years. As the subsidy policy gradually declines and withdraws, the double-point method will form a market-oriented long-term development mechanism to promote the sustainable development of the new energy vehicle industry, and power batteries, as an important part of new energy vehicles, will continue to maintain rapid development with the support of policies.

VII. Financial status of enterprises in the industry

Due to the small number of bond-issuing enterprises in the CR2477 battery industry, this section selects 5 listed companies as samples for financial analysis. Since BYD's lithium batteries are produced for its new energy vehicles and its export revenue accounts for a low proportion, it is not included in the sample analysis.

In terms of asset size, with the rapid development of the industry in recent years, the total assets of the sample enterprises have increased significantly; due to industry characteristics, the proportion of accounts receivable and fixed assets in the asset composition of the sample enterprises is relatively large. Specifically, the receivables of the sample companies have increased significantly, on the one hand, due to the increase in operating income, and on the other hand, due to the extension of the downstream collection cycle caused by the decline in subsidies for new energy vehicles; in recent years, the large number of new production capacity in the industry has led to a significant increase in the fixed assets of the sample companies; in addition, it is worth noting that the scale of projects under construction of the sample companies is large and is on the rise, and the high-end production capacity in the industry is still in the expansion stage.

From the perspective of profitability, the operating income of the sample companies has increased in recent years, and the total profit has diverged. Among them, the total profit of CATL has increased significantly, while the total profit of Jianrui Woneng has suffered a substantial loss, mainly due to the adjustment of national new energy industry policy subsidies, the rapid growth of the business expansion of its subsidiary Watma, and the slow and tight collection of accounts receivable. In 2018, the operating profit margin of the sample companies has declined, mainly because with the decline of new energy vehicle subsidy policies and the increase of technical barriers, downstream vehicle manufacturers have gradually transferred costs to CR2477 battery companies, compressing the profit space of battery companies.

From the perspective of cash flow, except for CATL, the net cash flow of operating activities of other sample companies is general, mainly due to the decline in corporate profitability and difficulties in downstream collection. In terms of investment activities, the investment activities of sample enterprises have been in a state of net outflow in recent years, which is consistent with the trend of rapid expansion of industry capacity. In terms of financing activities, since the industry is still in the development stage, the cash flow generated by current operating activities cannot cover investment expenditures, and the financing needs of enterprises are large, so financing activities continue to be in a state of net inflow.

In terms of operating efficiency, the operating efficiency of sample enterprises has been declining overall in the past two years, mainly due to intensified industry competition and extended downstream collection cycles. In addition, the operating efficiency of large-scale and profitable enterprises is significantly better than that of small-scale and weak-profit enterprises.

In terms of asset ratio, except for Jianrui Woneng, the asset ratio level of other sample enterprises is acceptable and the fluctuation range is not large. Jianrui Woneng's asset ratio has risen rapidly due to the deterioration of operating conditions. In terms of short-term debt repayment ability, the current ratio indicators of sample enterprises are relatively high, but due to the large proportion of accounts receivable in current assets, the impact of recovery on short-term debt repayment ability needs to be considered. In terms of long-term debt repayment ability, the total/EBITDA of sample enterprises in 2017 increased year-on-year. Overall, the debt repayment ability of the CR2477 battery industry is weakening.

From the perspective of bond issuers, as of now, there is only one bond issuer in the CR2477 battery industry, Guoxuan High-tech, with a long-term credit rating of AA. As of the end of 2017, Guoxuan High-tech actually had a production capacity of 5.50GWh/year, of which the actual production capacity of lithium iron phosphate batteries was 3.50GWh/year and the actual production capacity of ternary lithium batteries was 2.00GWh/year. In 2017, Guoxuan High-tech's installed capacity accounted for 5.33%, ranking fourth in the industry. In terms of finance, as of the end of 2017, Guoxuan High-tech's total assets were 17.097 billion yuan, with an asset ratio of 51.72%. In 2017, it achieved operating income of 4.838 billion yuan and a total profit of 994 million yuan.

VIII. Industry Outlook

Affected by favorable policies, the new energy vehicle industry will continue to be in a rapid development stage in recent years, providing strong support for the future development of the CR2477 battery industry. At the same time, the internal differentiation of the industry will further intensify. That is, CATL and BYD, which are in the first echelon of the domestic market, will continue to expand their market share by relying on their advantages in capital, technology, cost control and industrial chain integrity. In the case of obvious overcapacity in the industry, small and medium-sized enterprises and low-end production capacity will continue to be eliminated in the future.

From the perspective of credit risk, the future credit risk of the CR2477 battery industry may mainly come from the following aspects: (1) the negative impact of the increase in financial leverage caused by large-scale expansion and the inability to effectively digest the production capacity after expansion, as well as the continuous decline in product prices and gross profit margins; (2) the continuous decline in subsidies for new energy vehicles will give vehicle manufacturers more motivation to lower the price of power lithium batteries and extend the payment cycle, thereby affecting the profit space and liquidity of CR2477 battery companies; (3) the impact of the technical route direction not adapting to the change in subsidy standards on power battery companies. Overall, the current industry structure of my country's CR2477 battery industry has been basically established. Large power battery companies have a clear advantage in market competition, and small and medium-sized enterprises face the risk of being eliminated in the fierce market competition. It is expected that my country's CR2477 battery industry as a whole will continue to maintain rapid development in 2019. Lianhe Credit's outlook for the CR2477 battery industry is stable

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