Storage-driven battery cycle, with quality and ROIC determining winners

Overview

This is the first coverage on the China battery industry. The core view is that the industry is shifting from a purely EV-driven phase to a new stage where ESS becomes the marginal supply-demand swing factor. EV demand remains the long-term base, but improved project economics for ESS may pull forward demand in 2026E-2027E, and subsequent supply expansion and demand normalization from 2028E may then create utilization pressure. On investment, the report favors companies that can sustain high-quality growth through cycles, maintain ROIC above WACC, and have stronger product quality and system integration capability.

Core views

First, ESS is becoming the key swing factor in China battery demand; the report expects high 2-year compounded growth in 2026E-2027E, but this front-loaded demand also means the outlook may become a drag after 2028E. Second, the supply side will re-expand after short-term tightness; rising effective capacity and capex may push the industry from tight balance into utilization pressure. Third, ESS batteries are more fragmented than EV batteries, yet performance differences are directly tied to project returns and bankability, so leading players may integrate share faster. Fourth, stock selection should focus on quality growth and high ROIC; the report gives Buy to CATL-A/CATL-H and Zenergy and is cautious on Gotion and Farasis.

Analysis framework

The report uses a combined top-down and bottom-up framework: demand is separated into ESS and EV. The ESS side estimates provincial renewable curtailment gap, capacity compensation, energy arbitrage, and ancillary service-driven project IRR to derive TAM and penetration paths; the EV side covers global passenger EV electrification, Chinese OEM exports, commercial EV electrification, and rising battery pack capacity. On the supply side, it tracks effective capacity, capex, utilization, and market share changes. For valuation, EV/EBITDA is the primary multiple, with differentiated treatment for A-share and H-share trading characteristics.

Methodology notes

• Demand estimationProvincial bottom-up BESS TAM model

  Theoretical BESS demand is the potentially curtailment-prone renewable energy curtailment offset, after subtracting existing grid flexibility from thermal and hydro sources, yielding storage demand.

  The report aggregates provincial renewable installed capacity, power supply-demand, BESS returns, and policy mechanisms to estimate China's 2030E theoretical BESS TAM at 1.1TW/4.5TWh.

• Project economicsIRR threshold and capacity compensation framework

  Capacity compensation, energy arbitrage, and ancillary services jointly determine BESS project returns; provinces that can meet the minimum IRR threshold will release investment demand more quickly.

  The report estimates that 15 provinces can meet a 6% minimum IRR requirement, covering 66% or 3.0TWh of 2030E theoretical BESS TAM, and expects high-IRR regions to cause front-loaded installation.

• Valuation methodsEV/EBITDA

  Use EV-to-EBITDA to assess capital-intensive battery firms for comparability across companies and regions.

  The report uses EV/EBITDA as the main valuation metric for the sector and applies different historical trading and discount/premium treatments for A-shares versus H-shares.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CATL-A/CATL-H

  Core buy candidates

  Strengths

  They have leading battery quality, dual chemistry competency, optionality in sodium-ion storage, and integration from system to container to cell level; the report believes they are better positioned to capture ESS share and sustain higher utilization.

  Weaknesses

  Valuation is relatively sensitive to expectations on BESS business model transition, utilization, and long-term profitability.

  Comparison

  Compared with second-tier ESS suppliers, CATL has stronger advantages in quality, scale, customer trust, and system capabilities.

  Risks

  ESS demand below expectation, pressure on pricing and margins from supply expansion, changes in BESS project economics, and upstream lithium price volatility.

• Zenergy

  Buy candidate

  Strengths

  The report cites it as one of the fastest-growing China battery companies in coverage and one of the few with expected ROIC above WACC.

  Weaknesses

  Scale is smaller than leading peers; growth monetization depends on ESS demand and capacity ramp-up.

  Comparison

  Compared with most second-tier peers, Zenergy is seen as more attractive due to quality growth and valuation discount.

  Risks

  Intensifying ESS competition, demand front-loading followed by normalization, and impacts on margins from capacity expansion or customer mix changes.

• EVE, CALB, Rept

  Neutral candidates

  Strengths

  They have certain growth momentum and may benefit in the short term from ESS demand and capacity ramping.

  Weaknesses

  Acceleration could be offset after 2027E by increased ESS competition, return pressure, or leverage constraints.

  Comparison

  Compared with CATL and Zenergy, the report sees lower certainty on cycle-proofing via ROIC and quality growth.

  Risks

  ESS normalization after 2028E, lower utilization, and margin compression.

• Gotion, Farasis

  Sell candidates

  Strengths

  May have share opportunities in certain sub-segments or during short-term capacity-release phases.

  Weaknesses

  Gotion faces pressure from low-end passenger EV competition, post-2028E ESS pressure, and balance-sheet strain; Farasis has uncertain customer recovery and weaker margin outlook.

  Comparison

  Relative to higher-ROIC leaders and quality-growth peers, the report believes their valuation multiple is difficult to sustain.

  Risks

  If domestic EV share expands faster than expected, customer recovery outperforms, or ESS demand is stronger, the bearish view could be revised.

Key data

• China total battery shipments1.80TWh to 2030E 3.64TWhThe report expects total shipments to nearly double by 2030E, with stronger growth in 2026E-2027E, flattening by 2028E, and re-acceleration in 2029E-2030E.
• ESS growth pace2026E/2027E total ESS battery shipments 0.95TWh/1.13TWhAbove 0.62TWh in 2025; then 2028E-2030E normalize to about 0.93-1.00TWh.
• EV battery demand2030E 2.64TWh, 2025E-2030E CAGR 17%Supported by passenger EV electrification, Chinese OEM exports, commercial EV electrification, and higher battery pack capacities.
• Theoretical BESS TAM2030E 1.1TW/4.5TWhBased on an assumption of China renewable installed capacity reaching 3.5TW by 2030E.
• Cumulative BESS installation2030E 3.4TWhEquivalent to 76% penetration of theoretical TAM.
• Effective capacity2028E 4.60TWhShort-term ESS tightness is pushing manufacturers to re-expand, which may create utilization pressure after 2028E.
• Industry capital expenditureAround Rmb140bn in 2027EThe report says industry capex will reach a new high.
• BESS project tenders376GWh year-to-date, year-over-year +102%Monthly average 63GWh, annualized about 752GWh, and may exceed 900GWh based on historical seasonality.
• BESS project signings262GWh year-to-date, year-over-year +23%Monthly average 44GWh, annualized about 524GWh, and may reach 671GWh based on historical seasonality.
• ESS project backlogAbout 1.9TWhAs of end-May, backlog size is broadly consistent with the report's 2026E-2027E signed-project forecast of 1.6TWh.

Impact & implications

For the industry, ESS increases near-term demand flexibility but also amplifies cycle volatility: improving project economics are expected to pull forward investment and deliveries in 2026E-2027E, while subsequent supply expansion and demand normalization may depress utilization. For stocks, competitive focus shifts from pure capacity and price to quality, bankability, system integration, and ROIC, with leaders and companies with strong-quality growth likely to earn valuation premiums. Companies with heavier low-end EV exposure, stretched balance sheets, or uncertain customer recovery face greater downside risk.

Risks

• If the remaining 17 provinces that have not yet announced local capacity mechanisms introduce more favorable policies, BESS penetration and demand could be higher than forecast; if the persistence of capacity compensation is uncertain, project economics could deteriorate.
• Lithium resource supply-demand changes could cause short-term inflation or deflation in battery costs, altering tender pace and the shape of the BESS penetration curve.
• If long-duration storage technology gains cost competitiveness, it could improve ESS project returns and change assumptions around the mainstream 4-hour duration profile.
• If capacity expansion in 2026E-2027E exceeds demand growth, utilization, pricing, and margin pressure may appear earlier or intensify after 2028E.
• If EV electrification, exports, commercial EV electrification, or battery pack capacity growth underperform, it would weaken the long-term demand anchor.

What to watch

• Speed, level, and duration of provincial capacity compensation implementation.
• Monthly changes in BESS tender, signing, and filing data.
• The pace at which ESS battery shipments and project backlog convert into actual installations.
• Changes in battery effective capacity expansion, capex, and industry utilization.
• Progress of CATL in ESS share, system integration, sodium-ion storage, and BESS business-model transition.
• The impact of lithium prices and battery cost changes on project IRR and investment appetite.
• Trends in China passenger EV penetration, NEV exports, and commercial EV electrification.