Why did profit per unit fall despite revenue growth?

  • CATL’s revenue rose 59% year on year in the third quarter of 2026, but net profit fell from 22.6 billion yuan in the second quarter to 21.2 billion yuan. Sales volumes rose from 226 GWh to 262 GWh over the same period, while net profit per unit fell from 100 yuan per kilowatt-hour to 81 yuan.
  • Morgan Stanley breaks the pressure on profit into six factors: lithium inventory losses, foreign-exchange losses, consumption tax, lower value-added tax rebates, customer rebates and changes in product mix. The bank estimates that together they created quarter-on-quarter pressure of about 29 yuan per kilowatt-hour before tax and 24 yuan after tax.
  • Of these, changes in product mix created an earnings gap of about 2 billion yuan: domestic electric-vehicle lithium iron phosphate batteries and energy-storage cells accounted for a larger share, while overseas revenue fell from 31% of the total in the first half of 2026 to about 22% in the third quarter.

Which pressures may ease, and which will remain?

  • Morgan Stanley regards lithium inventory and foreign-exchange losses as one-off factors, while the effects of customer rebates and product mix could reverse. The bank expects growth in overseas energy-storage projects to drive a partial improvement in the mix from the fourth quarter of 2026, with recovery continuing in 2027, but it does not assume a full reversal.
  • The ability to pass on the new consumption tax varies by market. Domestic electric passenger-car batteries are mainly priced on a cost-plus basis. Given weak sales, the bank believes it is difficult to offset the tax burden through price increases alone; energy-storage and electric commercial-vehicle projects are negotiated individually, and lower lithium costs create room to pass on part of the tax burden.
  • Energy storage also faces pricing constraints: procurement places greater weight on upfront costs, and the economic consequences of differences in battery quality may not become apparent for years, potentially limiting CATL’s ability to maintain its historical price premium. Morgan Stanley believes domestic energy-storage competition and profit margins have bottomed, while an increase in integrated energy-storage projects could improve the product mix.

How much were earnings forecasts cut?

  • Morgan Stanley lowered its 2026 net profit forecast by 6% from its previous estimate to 89.4 billion yuan, and cut its 2027 and 2028 forecasts by 7% and 10%, respectively. The revisions mainly reflect the bank’s more conservative product-mix assumptions after third-quarter margins came in below expectations.
  • Even with an expected improvement in the mix, the bank forecasts adjusted net profit per unit falling from 92.5 yuan per kilowatt-hour in 2026 to 85 yuan in 2027 and 81 yuan in 2028. The further compression in 2028 mainly reflects the lagged effect of the higher consumption tax introduced in September 2027.
  • If the company bears the entire burden of the consumption tax and reduced value-added tax rebates, the bank estimates net profit at 94 billion yuan in 2027 and 112 billion yuan in 2028, respectively 9.5% and 10.5% below its baseline forecasts.

Why downgrade the Hong Kong shares while retaining Overweight on the A shares?

  • Morgan Stanley maintained its Overweight rating on the A shares, cutting its target price from 500 yuan to 335 yuan. It downgraded the Hong Kong shares from Overweight to Equal-weight and cut their target price from 705 Hong Kong dollars to 390 Hong Kong dollars. The bank lowered its 2027 expected EV/EBITDA valuation multiple from 13 times to 8.5 times.
  • The Hong Kong rating change also involves the A/H valuation gap: the report said the Hong Kong shares traded at a premium of about 30% to the A shares at the time, while liquidity in the Hong Kong shares was under pressure and discounts on H shares of other dual-listed companies had widened. The bank cut its target H/A premium assumption from 20% to zero and expects the gap could narrow further over the next three months.
  • The bank remains optimistic about global electrification and advances in battery technology, and uses its revised forecasts to estimate an A-share dividend yield of 4.8% over the next 12 months. However, it believes market sentiment may remain cautious until margins recover visibly; whether the quality advantage in energy storage can continue to translate into a price premium is also key to its long-term assessment.