China battery industry shifts from shipment outperformance to a new capex upcycle

Overview

This report reviews FY25 results disclosed to date by Chinese battery companies and compares year-to-date industry demand performance with J.P. Morgan's forecasts. The key conclusion is that the industry experienced shipment beats, relatively stable unit profitability and improved operating cash flow in 2025; entering 2026, global EV and ESS demand remains strong, especially in energy storage where demand is materially above forecasts, while capacity utilization has recovered to high levels, driving a new battery capex cycle.

Core views

The report's top picks are CATL-A and Wuxi Lead. CATL benefits from technological leadership, earnings resilience, higher exposure to premium models and conservative accounting treatment; Wuxi Lead benefits from downstream battery makers' expansion, growth in equipment orders and the technology migration cycle. CALB's 2026 shipment guidance was raised, and strong ESS and commercial-vehicle battery demand led to a 17% upward revision to 2026 earnings forecasts and a higher target price, but valuation is considered fair, so the rating remains Neutral.

Analysis framework

The analytical framework includes industry demand tracking, shipment mix decomposition by vehicle class and application, comparison of unit gross profit and unit net profit, cash flow and ROE analysis, assessment of government subsidies and accounting policy differences, judgment on capacity utilization and the capex cycle, and company-level valuation and risk assessment.

Methodology notes

• Industry demandEV and ESS battery demand forecast comparison

  Compare the 2026 full-year forecast with actual 2M26 performance to identify upside and downside demand risks.

  The report compares global EV sales, global EV and ESS battery demand, China passenger NEV retail sales, European NEV sales, China commercial vehicle battery demand and global ESS demand to determine whether real industry momentum is ahead of forecasts.

• Earnings qualityUnit profit and accounting-policy adjustments

  Use unit gross profit, unit net profit, subsidy mix, R&D capitalization and depreciation policy to judge sustainable earnings.

  The report argues that reported profit alone is insufficient; it is necessary to assess the contribution of government subsidies, warranty provisions, the proportion of expensed R&D and the pace of depreciation. CATL's accounting policy is more conservative, so cash flow is a more reliable reflection of core earnings.

• Capex cycleCapacity utilization and equipment orders

  High capacity utilization and order activity can signal a battery makers' expansion cycle.

  Capacity utilization at leading battery makers rebounded in 2025, with CATL at 97% for the full year and 103% in 2H25. Combined with under-construction capacity and equipment makers' orders, this supports the view that capex in 2026 could beat expectations.

• Valuation methodsTarget P/E method

  Derive stock target prices using 2026E P/E multiples.

  CALB's target price is based on approximately 21-22x 2026E PER; Wuxi Lead - A's target price is based on 35x 2026E P/E; Wuxi Lead - H's target price is based on 28x 2026E P/E.

Asset mapping & comparison

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

• CATL-A

  One of the sector's top picks, benefiting from technological leadership, earnings resilience and migration toward premium-model exposure.

  Strengths

  Leading EV+ESS shipments, with 2025 shipments of 661GWh, up 39% y/y; unit net profit of about RMB0.10/Wh and stable over the long term; strong operating cash flow, and the only battery maker that continues to generate positive free cash flow; government subsidies account for 15% of net profit, below the 40-50% level of peers.

  Weaknesses

  It is increasingly difficult to further expand market share and profitability from such a high base, and the company is still exposed to the global EV demand cycle.

  Comparison

  Compared with most second-tier battery makers, CATL is stronger in unit gross profit, unit net profit, cash flow and accounting conservatism.

  Risks

  Global EV demand falling short of expectations, deviations in capex or capacity deployment pace, and price or margin pressure from competition.

• CALB (3931.HK)

  Rated Neutral, with target price raised to HK$36, benefiting from a higher shipment outlook and strong ESS and commercial-vehicle demand.

  Strengths

  Delivered 116GWh in 2025, above guidance, and raised 2026 shipment target to 180-200GWh; ESS target is 70-80GWh and commercial vehicle battery target is 30-35GWh; domestic market share rose from 1% in 2017-18 to 7-8% in 2023-25.

  Weaknesses

  ROE remains low, at about 4% in 2025; unit net profit and earnings stability are weaker than CATL's; valuation is considered to already reflect much of the improvement.

  Comparison

  Earnings quality and cash flow remain weaker than CATL's, but CALB is better positioned than makers heavily exposed to low-end passenger vehicles to benefit from ESS and overseas expansion.

  Risks

  China EV demand weaker than expected and unit profit below expectations; upside risks include stronger China EV demand, better global ESS demand and earnings improvement from scale expansion.

• Wuxi Lead - A (300450.SZ)

  Rated Overweight, target price Rmb62, and a major beneficiary of the battery capex upcycle.

  Strengths

  Downstream battery makers are operating at high capacity utilization, increasing expansion demand; the company holds a dominant market share in lithium battery equipment; new orders in 1Q26 rose about 60%, and full-year new order growth may exceed the initial forecast of 30%.

  Weaknesses

  Performance is highly dependent on downstream battery makers' capex timing, and intensifying competition in lithium battery equipment can pressure pricing and margins.

  Comparison

  Compared with battery manufacturers, Wuxi Lead has more direct exposure to order leverage from expansion capex; its valuation premium is considered supported by market share and cyclical benefits.

  Risks

  Battery makers expanding less than expected, intensifying competition in equipment, and insufficient replacement demand due to slower technology progress.

• Wuxi Lead - H (470.HK)

  Rated Overweight, target price HK$56, and like the A-share listing, benefits from the battery equipment capex cycle.

  Strengths

  Benefits from downstream expansion, technology migration and equipment replacement cycles; target price is based on 28x 2026E P/E.

  Weaknesses

  Also depends on downstream battery makers' capex, and faces equipment-industry competition and margin pressure.

  Comparison

  Shares the same fundamental logic as Wuxi Lead - A, but trades in a different market with a different valuation multiple.

  Risks

  The main risks are slower battery-maker expansion, orders coming in below expectations and intensifying competition.

• BYD

  Highly exposed to China's passenger vehicle battery demand and faces structural risks from slowing demand for low-end models.

  Strengths

  Has a sizable base of passenger vehicle battery-related shipments in China, and its faster depreciation policy can partially offset the impact of R&D capitalization on profit.

  Weaknesses

  61% of shipments are concentrated in China's passenger vehicles; the share of capitalized R&D rose in 2025, which may inflate reported profit and increase future amortization pressure.

  Comparison

  Compared with CATL, CALB and EVE, BYD has greater exposure to China's passenger vehicle segment.

  Risks

  Persistent weakness in China PV NEV retail sales, changes in subsidy and purchase tax policies, and declining demand for low-end models.

• EVE

  Relatively benefits from a higher share of ESS shipments, but earnings trends are under pressure.

  Strengths

  About 59% of 2025 shipments were allocated to ESS, while exposure to China passenger vehicles was only 16%, indicating a more diversified demand structure.

  Weaknesses

  Unit gross profit fell from RMB0.12/Wh in 2022 to RMB0.06/Wh in 2025, and unit net profit fell from RMB0.04/Wh to RMB0.02/Wh; the proportion of expensed R&D declined to about 88% in 2025, and higher capitalization may affect earnings quality.

  Comparison

  Its demand structure is better than that of firms heavily dependent on China passenger vehicles, but earnings stability is clearly weaker than CATL's.

  Risks

  A slowdown in ESS demand, future amortization pressure from R&D capitalization, and drag from EV battery margins.

• Gotion High-Tech

  Faces significant demand headwinds due to high exposure to A00/A0 low-end models.

  Strengths

  Has some presence in low-end model battery supply.

  Weaknesses

  More than 50% exposure is in the A00/A0 segment, and subsidy phase-out plus demand migration toward mid- to high-end models will weigh on growth.

  Comparison

  Compared with CATL, CALB and EVE, it benefits less from the upside in mid- to high-end models and ESS.

  Risks

  Declining low-end NEV demand, price competition, and pressure on earnings and market share.

Key data

• 2026 global EV and ESS battery demand forecastup 27% y/yActual 2M26 growth was 38% y/y, above the full-year forecast.
• Global ESS demand performance2M26 up 132% y/yFar above J.P. Morgan's forecast of 45% y/y growth in 2026.
• China passenger NEV retail sales2M26 down 26% y/yThis constitutes a downside risk to battery demand related to China's passenger vehicle market.
• Battery installation share of B-class and above models45% in 2M26Up from less than 30% in 2025, showing a shift in demand toward mid- to high-end models.
• CATL 2025 EV+ESS battery shipments661GWh, up 39% y/yThe company continued to hold the industry's leading shipment position.
• CATL unit net profitabout RMB0.10/WhStable from 2022-2025 after excluding one-off items and government subsidies, and clearly above most second-tier players.
• CATL capacity utilization97% in 2025, 103% in 2H25Shows tight supply-demand conditions and supports the view of rising capex.
• CALB target priceHK$36Raised from HK$30 previously, implying about 9% upside versus the current HK$33 share price.
• Wuxi Lead - A target priceRmb62Based on 35x 2026E P/E, versus a current price of Rmb47.55.
• Wuxi Lead - H target priceHK$56Based on 28x 2026E P/E, versus a current price of HK$42.40.

Impact & implications

At the industry level, the drivers of demand growth are shifting from pure shipment growth to structural upgrading and an expansion cycle: energy storage, overseas markets and commercial vehicle batteries provide upside optionality, while China low-end passenger vehicle demand and subsidy withdrawal create divergence. At the company level, firms with technological leadership, strong cash flow, conservative accounting policies and exposure to premium models or energy storage are better positioned; equipment makers may gain order leverage in the next expansion cycle.

Risks

• China EV demand may be weaker than expected, especially since China passenger NEV retail sales had already declined 26% y/y in 2M26.
• If global ESS demand cannot sustain high growth, it will weaken battery makers' shipment and expansion logic.
• Unit profit may fall short of expectations, and price competition or cost pressure could erode earnings.
• Differences in government subsidies, R&D capitalization, warranty provisions and depreciation policies may cause reported profits to diverge from true earnings quality.
• If battery makers slow expansion, equipment makers such as Wuxi Lead will be directly affected through weaker orders.
• Intensifying competition in the lithium battery equipment industry may lead to pricing pressure and margin compression.

What to watch

• Whether global ESS demand in 2026 continues to grow significantly faster than the full-year forecast of 45%.
• Whether the decline in China PV NEV retail sales continues, and whether the share of B-class and above models keeps rising.
• Whether shipments, unit net profit and cash flow from CATL, CALB, EVE and other makers remain in line with forecasts.
• Whether capacity utilization and under-construction capacity at leading battery makers continue to support expansion.
• Whether Wuxi Lead's 2026 new order growth continues to exceed the initial 30% expectation.
• How changes in subsidy mix, R&D capitalization ratio and depreciation policy affect earnings quality.