China battery industry: Overseas ESS demand and export-led EV growth support China battery volumes, while margin pass-through and capacity controls shape the next phase

Overview

This China battery-sector earnings review assesses where demand is concentrating after 1H26/2Q26 results, how margins are recovering, how far order visibility extends, and how tax and capacity policies may alter the supply outlook through 2027-28. Goldman Sachs sees strong demand support but a more differentiated earnings and valuation picture across companies.

Core views

Demand growth diverged sharply by end-market and overseas exposure. Most battery makers recorded record revenue and shipments in 1H26/2Q26, supported by EV and energy-storage-system demand. CATL nearly doubled ESS sales volume year on year in 1H26, while its power-battery volume increased 50%, adding 109GWh—close to the combined 1H26 volume of the Tier-2/3 companies under coverage. For EV batteries, direct exports benefited from overseas OEM model launches, while Chinese automakers' overseas expansion lifted indirect exports; China NEV exports rose 138% year on year in 1H26. Domestic vehicle sales declined 14%, but average battery-pack size rose 17% versus 2025, supporting battery demand. Commercial-vehicle electrification also accelerated, with eHDT penetration rising to 35% from 28% in 2025 and installation volume up 91% year on year. ESS was the clearest source of outperformance for companies with overseas exposure. The report cites SNE Research data showing overseas ESS growth of 93% year on year, compared with 49% in China. Shipments to Europe and the US rose 70-80%, while shipments to the Middle East, Oceania and Southeast Asia more than doubled. Global residential ESS shipments more than doubled, and commercial, industrial and utility-scale ESS shipments increased 50-60%. REPT and CALB benefited from stronger overseas ESS exposure, whereas domestic performance was more mixed: EVE benefited from supplying integrators, while Gotion lagged after selectively giving up low-margin domestic utility-scale orders. The report also notes that the gap between China ESS tendering and installation volumes is normal because grid connection is often back-end loaded toward year-end. Margins improved sequentially in 2Q26 and 1H26 but remained under year-on-year pressure. Excluding new-capacity ramp-up costs, delayed raw-material pass-through and lower export rebates were the main reasons. Companies said metal-price linkage mechanisms were largely finalized by end-2Q26 and generally expect further sequential improvement in 3Q26 and 2H26, conditional on passing through the battery consumption tax. Goldman Sachs believes CATL's sequential margin compression was more likely due to mix—higher domestic exposure and a larger ESS cell rather than system mix—than weaker pricing power. Utilization was generally 80-90% in 1H26, and planned production indicated roughly 50% year-on-year growth and more than 20% quarter-on-quarter growth during the 3Q26 peak season. Demand visibility is improving into 2027, particularly for ESS. Several suppliers have orders extending into 1Q27, and some customer feedback implies 40-50% ESS demand growth next year, including requests for dedicated production lines. CATL, EVE and REPT are increasing system exposure because systems offer 20-30% higher value than cells and around 5-10 percentage points higher gross margins. Residential and commercial-and-industrial ESS demand is expected to remain strong, with Europe supported by improved project economics and orders improving in Southeast Asia, Latin America and the Middle East. For EV batteries, Goldman Sachs expects 2027 to be the first meaningful volume-ramp year for many overseas OEMs, benefiting suppliers such as EVE and Gotion. Policy and supply will determine how much volume growth translates into profitability. Most makers had raised prices since September to pass through most of the consumption tax, but the report expects a timing mismatch to expose 3Q26 margins; some companies viewed pass-through of only about half of the tax as the worst acceptable outcome. Indirect exports may require battery makers to pay tax before reimbursement by EV exporters, adding working-capital and negotiation issues. Capacity approvals have effectively been suspended since June under a whitelist approach, with ESS a regulatory focus intended to curb irrational price competition. Meanwhile, manufacturers are moving toward 588Ah, 648Ah, 684Ah and larger ESS cells from 2H26 through 2027. Early yield challenges may pressure cost and margins, but larger-format cells are expected to improve profitability over time. Goldman Sachs lowered 2027-28E EPS forecasts for Tier-2/3 manufacturers, citing new-capacity ramp-up costs, adverse mix shifts toward lower-margin domestic business and limited pricing power in products such as consumer batteries following the VAT-rebate phase-out. The 2026E changes were relatively modest except for Gotion, where one-off investment gains lifted estimates. The institution cut 12-month target prices by 8-31% because of lower earnings and lower target EV/EBITDA multiples for slower 2027-28 growth, partly offset by moving the valuation base year to 2027E. It maintains ratings: CATL-A/H remains its top Buy, Zenergy remains Buy, EVE, CALB and REPT are Neutral, and Gotion and Farasis remain Sell. For CATL, Goldman Sachs highlights scale, technology, cost competitiveness, a resilient EV-battery earnings base and a shift from cells into integrated energy solutions. It argues that BESS integration can support market-share consolidation, greater project-value capture, recurring service revenue, higher margins and a potential valuation re-rating. Its sum-of-the-parts valuation assigns CATL-A power batteries 11x 2026-27E EBITDA and values BESS through a discounted 2030E EV/EBITDA approach using an 18x exit multiple; CATL-H uses 20x 2030E EV/EBITDA for power batteries and a 25x BESS exit multiple. This produces 12-month targets of RMB565 for CATL-A and HK$947 for CATL-H.

Analysis framework

Goldman Sachs combines 1H26/2Q26 results calls, corporate access, supply-chain conversations, company data and SNE Research data. It assesses demand by battery end-market and geography, examines shipment, utilization, pricing and margin trends, then incorporates tax, export-rebate and capacity-policy effects into earnings forecasts, EV/EBITDA-based valuations and company-specific investment cases.

Methodology notes

• Industry AnalysisSupply-demand framework

  Battery demand and supply analysis

  The report compares EV and ESS demand by geography and end-market, then assesses utilization, capacity approvals and new-cell formats to judge supply, competition and profitability.

• Industry AnalysisVolume-price decomposition

  Volume, pricing and margin analysis

  Shipment growth, exports, pack upsizing, tax pass-through, raw-material linkage and product mix are used to explain revenue and margin outcomes.

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  CATL sum-of-the-parts valuation

  CATL's power-battery and BESS operations are valued separately to reflect their different growth and profitability profiles.

• Valuation methodsEV/EBITDA valuation

  EV/EBITDA target-price methodology

  The report applies forecast EV/EBITDA multiples to estimate target prices for several covered battery companies.

Asset mapping & comparison

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

• CATL-A (300750.SZ) / CATL-H (3750.HK)

  Top Buy across Goldman Sachs' China battery coverage

  Strengths

  Leading scale, technology and cost competitiveness; resilient EV-battery earnings; BESS integration and ecosystem build-out.

  Weaknesses

  Sequential margin compression from mix effects.

  Comparison

  CATL's 109GWh incremental power-battery volume was close to combined 1H26 volume of covered Tier-2/3 players.

  Risks

  Slower global EV or ESS demand, raw-material inflation, slower BESS integration, overseas execution and trade-policy risks, and stronger competition.

• Zenergy (3677.HK)

  Buy-rated EV-battery supplier

  Strengths

  Share gains, customer diversification, utilization improvement, early ESS expansion and expected fastest EBITDA growth in coverage.

  Weaknesses

  Smaller scale than leading peers.

  Comparison

  The report views its valuation as discounted relative to its growth outlook and peers.

  Risks

  Softer China EV or ESS demand, cost volatility, domestic competition and ESS capacity-ramp execution.

• EVE Energy (300014.SZ)

  Neutral-rated diversified battery producer

  Strengths

  Consumer-battery cash-flow anchor, strong ESS and commercial-vehicle positions, and above-WACC returns.

  Weaknesses

  Rising ESS competition and potentially weaker supply-demand balance after 2027E.

  Comparison

  Lower gearing than Tier-2 peers.

  Risks

  Demand variability, raw-material volatility, pricing competition, overseas expansion and large-cylindrical-battery adoption.

• CALB (3931.HK)

  Neutral-rated battery producer

  Strengths

  Scale, broadening OEM base, commercial-vehicle exposure and capacity expansion.

  Weaknesses

  Domestic-China skew, scaling ESS business, rising leverage and forecast ROIC below WACC.

  Comparison

  More exposed to competition and utilization risk than companies with stronger overseas exposure.

  Risks

  Power-battery and ESS demand variability, cost pass-through lags, commercial-vehicle and BESS competition, and CATL patent litigation.

• REPT BATTERO Energy (0666.HK)

  Neutral-rated ESS and commercial-vehicle battery producer

  Strengths

  ESS exposure, capacity expansion and support from Tsingshan Holding Group.

  Weaknesses

  Thinner profitability, high China exposure, ESS concentration, elevated capex and likely rising leverage.

  Comparison

  Lower expected valuation multiple than its historical average due to a slower growth profile.

  Risks

  ESS demand variability, raw-material pass-through lags, overseas execution and geopolitical risks, and core-ESS pricing pressure.

• Gotion High-Tech (002074.SZ)

  Sell-rated EV-battery producer

  Strengths

  No.4 domestic EV-battery position and Volkswagen partnership offer overseas optionality.

  Weaknesses

  Price-sensitive economy-EV exposure, concentrated customers, weaker unit profitability, rising leverage and below-WACC ROIC.

  Comparison

  The report considers its above-peer valuation difficult to justify.

  Risks

  Stronger EV or ESS demand, raw-material deflation, domestic share gains and faster overseas development.

• Farasis Energy (688567.SH)

  Sell-rated niche EV-battery supplier

  Strengths

  Export-heavy mix and potential LFP expansion.

  Weaknesses

  Concentrated customer base, limited demonstrated mass-market customer acquisition, insufficient scale to absorb depreciation and amortization, and expected net losses.

  Comparison

  The report considers the valuation demanding despite expected gradual margin recovery.

  Risks

  Stronger global EV demand, premium-EV penetration, customer wins, ESS expansion and solid-state-battery commercialization.

Key data

• CATL ESS sales volume growthNearly doubled year on year in 1H26Illustrates the strength of ESS demand for a leading supplier.
• CATL power-battery volume growth+50% year on year; +109GWhThe incremental volume was close to combined 1H26 volume of covered Tier-2/3 players.
• China NEV export growth+138% year on year in 1H26A key driver of indirect battery exports.
• Overseas ESS market growth+93% year on yearCompared with +49% for the China ESS battery market.
• Battery-maker utilization80-90%General average in 1H26.
• Planned production growthAround +50% year on year and over +20% quarter on quarterIndicated for the 3Q26 peak season.
• Target-price revisions-8% to -31%Driven by earnings revisions and lower target multiples.

Impact & implications

The report argues that overseas ESS exposure, export channels, customer diversification and system integration differentiate the sector's earnings potential. Demand visibility supports volume growth into 2027, but margin recovery depends on tax and cost pass-through, while capacity controls and larger ESS cells may support longer-term industry consolidation. Goldman Sachs therefore favors CATL and Zenergy over several smaller peers with weaker profitability, domestic exposure, leverage or execution risk.

Risks

• Global EV or ESS demand could differ materially from the report's expectations.
• Raw-material cost volatility and delayed cost or tax pass-through could pressure margins.
• Competition, pricing pressure, capacity additions and utilization changes could weaken profitability.
• Overseas expansion carries execution, trade-policy, regulatory and geopolitical risks.
• BESS integration and new large-format-cell commercialization may progress more slowly than expected.

What to watch

• Whether battery makers can fully pass through consumption-tax costs and export-rebate changes, particularly in 3Q26.
• ESS order visibility, customer requests for dedicated production lines and evidence of 40-50% demand growth in 2027.
• Exports tied to overseas OEM launches and Chinese automakers' overseas expansion.
• Implementation of capacity-approval controls and the pace of large-format ESS-cell commercialization.
• Utilization, new-capacity ramp-up costs and the mix shift between domestic, export, cell and system business.