Battery Recovery Cycle: CATL as Top Pick, Trading Materials Stocks on Dips

Overview

J.P. Morgan released a 100-page in-depth report comparing the 2021-2022 battery 'super cycle' with the 'recovery cycle' starting in 2025. The report argues that the industry is now in an environment of diversified demand, anti-internal competition policies, and higher interest rates, ending the era of indiscriminate valuation expansion. Investment focus should shift from betting on price hikes to cash flow and profit realization driven by sales volume, with CATL recommended as the core long-term holding and range trading strategies suggested for materials suppliers and second-tier battery manufacturers.

Core views

Fundamental shifts in demand structure and drivers: The previous super cycle heavily relied on China's passenger EV sector (45% share in 2022) and aggressive capacity expansion. In the 2026 recovery cycle, passenger EV share has dropped to 24%, while energy storage (ESS) demand has surged to over 40% (including domestic and overseas), combined with diversified demand from commercial vehicles, enhancing the industry's profit resilience. Meanwhile, policy direction has shifted from local encouragement of expansion to central-level 'anti-internal competition' and fair reviews, curbing irrational price wars. Profit pool shifts downstream: In 2021-2022, upstream resources (e.g., lithium carbonate) captured the largest profits. In this cycle, despite lithium carbonate prices rebounding over 130% from the 2H25 bottom, absolute prices remain 40%-80% below historical peaks, making simple extrapolation of historical profits unrealistic. The profit pool is now concentrating toward battery manufacturers with scale, technology, high utilization, and strong cash flow. Financing data confirms this trend: about 80% of the over CNY105 billion in financing this cycle has flowed to battery manufacturers. Differentiated investment strategy: Core holding vs. range trading: CATL is the only company in the supply chain maintaining stable profit growth across cycles, recognized as the sole 'core asset' worth holding long-term due to its technological leadership and pricing power. For materials suppliers and second-tier battery manufacturers (e.g., CALB, PTL), growth relies more on sales volume and operating leverage rather than price elasticity. The report recommends a 'range trading' strategy for such stocks, buying at low valuations (e.g., 12-14x PE) and taking profits when price rebound expectations become crowded.

Analysis framework

The institution adopted a cross-cycle comparative analysis method. By horizontally dissecting differences between the two cycles across five core dimensions—macro environment (zero interest rates vs. high interest rates), demand structure (single driver vs. diversified drivers), policy direction (encouragement vs. anti-internal competition), capital expenditure (broad expansion vs. leader concentration), and price trends—the report concludes that this cycle lacks the foundation for broad valuation expansion. Building on this, combined with comparisons of profit recovery across supply chain segments, the report logically arrives at the conclusion of 'focusing on stock differentiation over sector-wide rallies' and formulates differentiated trading strategies accordingly.

Methodology notes

• Cycle and Sentiment FrameworkInflection Point Analysis

  Battery industry cycle stage and core contradiction evolution

  The report compares supply-demand, price, and policy characteristics of the historical super cycle and current recovery cycle to determine the industry's sentiment stage. In the previous cycle, the core contradiction was 'supply shortages leading to price surges'; in the current cycle, it has shifted to 'how to realize profits through sales volume under moderate price rebounds.'

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Cross-cycle profit pool shifts in the supply chain

  Analyzes the flow of profit pools across supply chain segments. The report notes that during super cycles of extreme shortages, profits concentrate in resource-rich upstream segments, while in periods of relative capacity sufficiency and standardized competition, profits shift toward downstream leaders (e.g., battery manufacturers) with scale effects, cost control, and customer stickiness.

• Valuation methodsPE/PEG valuation

  Macro interest rate environment's pressure on valuation multiples

  Valuation depends not only on profits but also on risk-free rates. The report notes that in the last cycle, the Fed rate was only 0.25%, supporting battery stocks' high P/E multiples of 40-80x; current rates at 3.75% with potential hikes suppress sector-wide valuations to 15-25x, requiring stock price gains to rely on substantive profit (EPS) recovery rather than mere multiple expansion.

Asset mapping & comparison

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

• CATL (300750.SZ / 3750.HK)

  Core beneficiary. The only company in the supply chain maintaining stable and substantive profit growth across cycles.

  Strengths

  Unmatched scale advantages, technological leadership, strong pricing power, stable unit profitability, and exceptional cash flow generation.

  Comparison

  While most other battery stocks remain 30%-80% below 2021 highs, CATL's share price has surpassed previous peaks.

  Risks

  If the Fed's rate hike pace accelerates earlier than expected, it may temporarily pressure long-cycle growth stock valuations.

• CALB (3931.HK)

  Tactical beneficiary. Attractive valuation with growth driven by sales volume and operating leverage.

  Strengths

  Attractive current valuation (12-14x PE), projected 2027 profit growth exceeding 40%, not reliant on price or unit profit surges.

  Weaknesses

  Lacks long-term compounding attributes; performance is more sensitive to price volatility, capacity utilization, and expansion expectations.

  Comparison

  Compared to CATL, it is a cyclical elasticity play; among second-tier battery manufacturers, it has relatively solid fundamentals.

  Risks

  If price rebounds fall short or industry competition intensifies again, it may face profit pressure.

• PTL (603659.SS)

  Tactical beneficiary. Lagging-valuation materials play benefiting from volume-for-price logic.

  Strengths

  Low valuation, 2027E profit growth expected over 40%, investment thesis based on sales growth rather than processing fee expansion.

  Weaknesses

  As a materials supplier, weaker pricing power than battery leaders; should still be viewed as a cyclical trading play rather than long-term core holding.

  Comparison

  Has advantages in segments like anodes but is constrained by overall supply chain pricing power shifting downstream.

  Risks

  Limited room for further price increases; processing fees unlikely to expand significantly.

Key data

• Energy Storage Demand Share>40%Energy storage (ESS) demand is projected to exceed 40% of total battery demand in 2026, up significantly from under 20% in 2022.
• China Passenger EV Demand Share24%Share of total battery demand in 2026 has dropped significantly from 45% in 2022, reflecting more diversified demand.
• Battery Industry Financing Concentration~80%About 80% of over CNY105 billion in financing this cycle comes from battery manufacturers, with CATL raising ~CNY77 billion.
• Raw Material Price ReboundOver 130%Lithium carbonate prices rebounded over 130% from the 2H25 bottom, but current prices remain 40%-80% below previous cycle peaks.

Impact & implications

The report argues that China's battery and materials industry has moved beyond the era of wild growth into a more rational and differentiated phase. The past model of relying on single explosive demand and frenzied expansion for valuation premiums has ended. Future excess returns will concentrate heavily in leading companies with genuine technological barriers, cost advantages, and globalization capabilities. For second- and third-tier companies and materials segments, market competition will intensify, requiring investors to establish strict trading discipline and capitalize on price expectation volatility through range trading rather than blind long-term holding.

Risks

• Macro interest rate risk: The Fed may hike rates earlier in late 2026 or early 2027, suppressing sector valuation expansion.
• Energy storage demand volatility risk: China's energy storage targets are set for 2027; if demand is front-loaded, 2028 installations may decline, pressuring 2027 battery shipments.
• Policy change risk: Including potential 2% increases in battery consumption tax, halving of passenger/commercial vehicle purchase tax subsidies, and reduced battery export tax rebates.

What to watch

• Monitor whether companies can realize stable cash flow and profits through sales volume rather than relying solely on price rebounds.
• Track capacity utilization changes and capital expenditure discipline of second- and third-tier battery manufacturers and materials companies.
• Watch the sustainability of domestic and overseas energy storage demand growth and policy implementation in 2027-2028.