Asia and Global Semiconductor and Tech Research

Andrew Lu

Equity Bottom-Up

Contemporary Amperex Technology (CATL) / Equity Bottom-Up

<ul><li>A leading EV battery vendor in China: CATL aims to be listed at Shenzhen Stock Exchange as A-share listing middle next year. The company will issue no more than 217.2mn new shares at IPO price of RMB$60.4 per share or US$1.98bn IPO size (US$19.8bn market cap).</li><li>ASP free fall will be a major concern: Affected by ASP decline of likely 30% y/y to below US$210/kWh in 2H17 from US$309/kWh in 2016 and US$224/kWh in 1H17, we expect 2017E sales growth to decelerate massively. We attribute ASP decline to 1) Competition from China peers and global leaders; 2) Some EV subsidies cut; 3) Pricing pressure from EV car vendors.</li><li>Margin contraction inevitable: Given expecting EV battery cost per kWh decline of 15-20% y/y for next few years is less than price decline of 20-30% y/y, we expect gross margin contraction to 37% in 2018E and 35% in 2019E from 44% in 2016.</li><li>Valuation is demanding: The preliminary IPO price is suggesting over 40x 2018/2019E EPS and 6x book value at lower ROE of &lt;10% (after US$1.98bn cash dilution). We thus see CATL is overvalued over peers' unless the company can deliver much stronger than expected 2H17 sales/earnings. </li><li>Strong performance expected before the lock-up period ends: Despite the demanding valuation, CATL stands out in China and global with higher operating margin, technology leadership, better yield rate, production efficiency, rich EV battery clients portfolio, and shares gain. Due to limited shares free float available post-IPO, we expect strong performance over the next 6 months (post-IPO) until approaching the lock-up period of 12 months for key shareholders.</li></ul>

A leading EV battery vendor in China: CATL aims to be listed at Shenzhen Stock Exchange as A-share listing middle next year. The company will issue no more than 217.2mn new shares at IPO price of RMB$60.4 per share or US$1.98bn IPO size (US$19.8bn market cap).ASP free fall will be a major concern: Affected by ASP decline of likely 30% y/y to below US$210/kWh in 2H17 from US$309/kWh in 2016 and US$224/kWh in 1H17, we expect 2017E sales growth to decelerate massively. We attribute ASP decline to 1) Competition from China peers and global leaders; 2) Some EV subsidies cut; 3) Pricing pressure from EV car vendors.Margin contraction inevitable: Given expecting EV battery cost per kWh decline of 15-20% y/y for next few years is less than price decline of 20-30% y/y, we expect gross margin contraction to 37% in 2018E and 35% in 2019E from 44% in 2016.Valuation is demanding: The preliminary IPO price is suggesting over 40x 2018/2019E EPS and 6x book value at lower ROE of &lt;10% (after US$1.98bn cash dilution). We thus see CATL is overvalued over peers' unless the company can deliver much stronger than expected 2H17 sales/earnings. Strong performance expected before the lock-up period ends: Despite the demanding valuation, CATL stands out in China and global with higher operating margin, technology leadership, better yield rate, production efficiency, rich EV battery clients portfolio, and shares gain. Due to limited shares free float available post-IPO, we expect strong performance over the next 6 months (post-IPO) until approaching the lock-up period of 12 months for key shareholders.

CATL IPO - Riding on Global and China EV Battery Demand

China

Shaanxi J&R Fire Protection Co., Ltd develops, produces and sells fire protection products. The Company's products include aerosol automatic fire extinguishing equipment, chemical products and fire engineering systems.

Shaanxi J&R Fire Protection Co, Ltd. (300116 CH)

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CATL IPO - Riding on Global and China EV Battery Demand

A leading EV battery vendor in China: CATL aims to be listed at Shenzhen Stock Exchange as A-share listing middle next year. The company will...

Andrew Lu