What was strong about the third-quarter results?

  • Kedali’s net profit in the third quarter of 2026 was 584 million yuan, up 41% year on year and 21% quarter on quarter, exceeding Morgan Stanley’s expectations. Year-on-year growth accelerated significantly from 23% in the first half. Net profit for the first three quarters totaled 1.53 billion yuan, up 29% year on year.
  • The third-quarter net profit margin reached 10%, in line with the company’s target. Morgan Stanley believes the company has maintained steady growth that is relatively rare in the battery and materials sector, and that these results have not changed its core investment thesis.

How does faster revenue growth compare with expansion in the battery industry?

  • Third-quarter revenue was 5.77 billion yuan, up 46% year on year, faster than the 39% growth in the first half. Revenue for the first three quarters was 15 billion yuan, up 41% year on year. Morgan Stanley sees this performance as consistent with the company’s full-year revenue growth target of 30%–40%.
  • On a quarter-on-quarter basis, the company’s third-quarter revenue grew 14%, while China’s battery output grew 19% over the same period. Industry output expansion provided a supportive demand backdrop, but the company’s quarter-on-quarter revenue growth was lower than the increase in industry output; the two did not translate proportionately.

Why does the improvement in profitability remain constrained despite the recovery in gross margin?

  • Third-quarter gross margin was 21.1%, up 0.7 percentage points quarter on quarter. Morgan Stanley attributes the recovery to economies of scale and a lower base caused by rising aluminum prices in the second quarter. Revenue growth combined with the recovery in gross margin to bring quarterly gross profit to 1.21 billion yuan, up 18% quarter on quarter.
  • The recovery was mainly quarter on quarter: third-quarter gross margin was still 2.6 percentage points below its year-earlier level, and gross profit grew 30% year on year, slower than revenue growth of 46%. Greater sales scale provided stronger support for gross profit growth, while gross profit per unit of revenue remained below the year-earlier level.
  • Increased research and development spending also raised expenses. Third-quarter expenses under the combined selling and administrative expense measure totaled 500 million yuan, up 167 million yuan year on year and 75 million yuan quarter on quarter, driven mainly by research and development expenses. The expense ratio rose to 8.7%, up 0.3 percentage points both year on year and quarter on quarter, offsetting part of the improvement in gross profit.

What does Morgan Stanley’s valuation depend on?

  • Morgan Stanley maintains its Overweight rating and a target price of 216 yuan. The target price uses a discounted cash flow model with forecasts through 2035, a cost of equity of 12.2%, and a perpetual growth rate of 2% beyond the forecast period. The valuation is based on long-term cash generation capacity.
  • Growth potential depends on both battery demand and the value of structural components: faster-than-expected domestic sales growth of power batteries and entry into the supply chains of more overseas battery manufacturers are upside factors identified by the bank. Weaker-than-expected battery sales growth or a decline in the value of structural components per GWh of batteries would weaken growth. Therefore, alongside battery output growth, the amount of structural-component revenue generated per unit of battery demand is also critical.