Goldman Sachs initiates coverage of China's battery sector: ESS drives a new cycle, quality growth wins

Overview

This is a Goldman Sachs comprehensive research report, The 720, with a focus on the initiation of coverage of China's battery sector. Its core view is that China's battery industry is entering a cycle increasingly driven by ESS: EV demand remains the industry's foundation, but ESS is becoming a key variable influencing marginal supply-demand dynamics, earnings quality, and investor expectations. The report also covers cross-market themes including Australian metals and mining, Asia Pacific banks, All Ring, Kakao Corp, Sino Biopharmaceutical, Japanese SMIDs, Victory Giant, Japanese real estate, China's FX and rates, US internet companies, Amazon, Microsoft, the US macroeconomy, and Freeport-McMoRan.

Core views

The report's most important view is that “EVs anchor baseline demand, ESS determines marginal volatility, and quality companies win.” In China's battery sector, Goldman Sachs favors companies with cost, technology, ecosystem, and forward-integration advantages, believing that these companies can capture greater project value and achieve more stable earnings quality during the ESS upcycle. CATL is identified as a core Buy, as it is not only the world's largest battery manufacturer but may also improve its valuation and earnings quality through BESS, long-term service agreements, and energy solutions businesses. In contrast, the report remains cautious about supply-demand resets, pressure from new supply after ESS demand normalizes, and cyclical pressure on companies with low-quality growth.

Analysis framework

The report combines a sector-cycle framework with comparisons of corporate quality: it first assesses whether ESS demand can sustain the current upcycle, then evaluates supply-demand reset risks when new supply meets normalized demand, and finally selects companies capable of maintaining high-quality growth through cost, technology, market share, ecosystems, and service models. For other covered themes, the report applies analytical frameworks involving commodity prices and cost inflation, financial connectivity policies, AI infrastructure demand, office supply and demand, the macro interest-rate path, and segment-based valuation.

Methodology notes

• Industry cycleESS-driven supply-demand cycle framework

  EVs as baseline demand and ESS as the marginal swing factor

  The report divides China's battery industry into the EV battery base and marginal ESS demand, focusing on the sustainability of the ESS upcycle, rebalancing risks following supply expansion, and differences in companies' ability to navigate the cycle.

• Corporate qualityHigh-quality growth screening

  Cost, technology, ecosystem, market share, and long-term service capabilities

  The report favors companies that can improve earnings quality and valuation through technological and cost leadership, ecosystem development, forward integration, and long-term service agreements.

• Valuation methods12-month target price and total-return potential

  Upside implied by target prices

  The report assigns 12-month target prices of HK$946 and Rmb566 to CATL-H and CATL-A, respectively, implying 51% and 57% upside; 12-month target prices are also used to express investment views on other themes.

• Goldman Sachs internal frameworkGS Factor Profile

  Growth, financial returns, valuation multiples, and composite percentiles

  The disclosure section explains that Goldman Sachs uses growth, financial returns, valuation multiples, and composite indicators to compare stocks' positions relative to the market and industry peers.

Asset mapping & comparison

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

• CATL-A/CATL-H

  Core Buy in China's battery sector

  Strengths

  The world's largest battery manufacturer, with advantages in cost, technology, ecosystem, and forward BESS integration; both ESS and EV market shares have room to increase.

  Weaknesses

  Faces risks from new industry supply, ESS demand normalization, and cyclical volatility.

  Comparison

  Relative to Chinese battery peers, Goldman Sachs believes CATL has a deeper moat and stronger support from earnings quality and valuation.

  Risks

  The ESS upcycle falling short of expectations, intensifying energy-storage price competition, and supply expansion pressuring margins.

• Zenergy

  Buy in China's battery sector

  Strengths

  Classified among the preferred companies capable of maintaining high-quality growth.

  Weaknesses

  The report excerpt does not provide detailed financial or operational weaknesses.

  Comparison

  Positioned more toward quality growth than Sell-rated companies such as Gotion and Farasis.

  Risks

  Sector supply-demand rebalancing, ESS demand volatility, and intensifying competition.

• Gotion

  Sell in China's battery sector

  Strengths

  The report excerpt does not provide clear strengths.

  Weaknesses

  Rated Sell by Goldman Sachs, implying relatively weaker ability to navigate the cycle or a less favorable risk-return profile.

  Comparison

  Not preferred relative to CATL and Zenergy.

  Risks

  Supply-demand reset, price competition, and pressure on earnings quality.

• Farasis

  Sell in China's battery sector

  Strengths

  The report excerpt does not provide clear strengths.

  Weaknesses

  Rated Sell by Goldman Sachs and potentially more exposed to industry-cycle and competitive pressures.

  Comparison

  Lower certainty of quality growth relative to Buy-rated companies.

  Risks

  Pressure from new supply after ESS demand normalizes and margin contraction.

• EVE, CALB, Rept

  Neutral in China's battery sector

  Strengths

  Remain within the coverage universe of China's battery industry chain.

  Weaknesses

  Not identified by the report as the strongest quality-growth opportunities.

  Comparison

  Positioned between the CATL/Zenergy Buy-rated companies and the Gotion/Farasis Sell-rated companies.

  Risks

  Industry-cycle risk, price competition, and market-share changes.

• Australian metals and mining

  Commodity price and cost theme

  Strengths

  Copper-price tailwinds benefit the base-metals sector.

  Weaknesses

  Iron ore, aluminum, and lithium face near-term downside risks, while inflation in diesel, equipment, and labor costs is rising.

  Comparison

  The report upgraded Whitehaven Coal to Neutral, downgraded Fortescue Metals Group to Sell, and reinstated a Buy rating on BlueScope Steel.

  Risks

  Falling commodity prices, persistent cost inflation, and rising capital expenditure.

• Hong Kong banks

  Beneficiaries of financial connectivity

  Strengths

  Expansion of renminbi business facilitation and 11 other measures should support offshore renminbi liquidity and balance-sheet growth.

  Weaknesses

  Affected by macroeconomic growth, interest rates, and the pace of policy implementation.

  Comparison

  BOCHK is viewed as the primary near-term beneficiary because it is Hong Kong's sole renminbi clearing bank.

  Risks

  Policy implementation slower than expected and renminbi-related business growth falling short of expectations.

• Amazon, Microsoft, Alphabet, Meta Platforms

  US AI and cloud infrastructure theme

  Strengths

  AI computing demand, cloud growth, advertising automation, and agentic applications support long-term growth.

  Weaknesses

  Higher capital expenditure creates depreciation and EPS pressure, while investors remain concerned about capex and competition.

  Comparison

  The report maintains Buy views on Alphabet, Meta, Amazon, and Microsoft.

  Risks

  Returns on AI capital expenditure below expectations, cloud-demand volatility, and regulatory and competitive pressures.

Key data

• CATL-H 12-month target priceHK$946Implies approximately 51% upside.
• CATL-A 12-month target priceRmb566Implies approximately 57% upside.
• CATL China ESS battery market share forecastIncrease from 20% in 2025 to 40% in 2030EThe report believes CATL's share of China's ESS battery market could double.
• CATL China EV battery market share trendApproaching 50% by 2030EEV batteries remain the core earnings anchor for structural expansion.
• Hong Kong renminbi business facilitation quotaIncrease from RMB200bn to RMB500bnNew measures from the PBoC, HKMA, and SFC are viewed as structurally positive for Hong Kong banks.
• Grade-A office rent in Tokyo's five central wards¥40,247/tsubo, up 13.2% year over yearThe JLL meeting indicated that Tokyo's office supply-demand balance remains extremely tight.
• Vacancy rate in central Tokyo0.7%The report expects the vacancy rate to remain below 1% through 2030.
• FOMC policy rate3.5%-3.75%The June meeting minutes showed that all participants supported keeping rates unchanged.

Impact & implications

For investors, the key issue in China's battery sector is no longer simply EV shipment growth, but the resilience of ESS demand, project value capture, service revenue, and the pace of supply expansion. If ESS demand remains strong and leaders such as CATL advance energy-solutions integration, their earnings quality and valuations could be re-rated; if new supply is released in concentrated fashion as ESS demand normalizes, the industry could experience a supply-demand reset, putting weaker companies under greater pressure. Across asset classes, the report also points to the coexistence of support from copper prices and inflation in mining costs, benefits to banks from Hong Kong's financial connectivity, and continued support from AI infrastructure for capital expenditure and revenue growth at major US technology companies.

Risks

• After ESS demand normalizes, new supply could trigger a supply-demand reset in China's battery industry.
• Price competition in the battery industry could compress margins, making it more difficult for weaker companies to maintain high-quality growth.
• The Australian mining sector faces downside risks to iron ore, aluminum, and lithium prices, as well as inflation in diesel, equipment, and labor costs.
• Weaker Chinese macroeconomic growth could affect risk appetite; the report notes rising risk that 2Q real GDP growth could fall below 4.5% year over year.
• Rising AI capital expenditure by major US technology companies could create depreciation pressure and lead to downward revisions to earnings forecasts.
• Regulatory disclosures indicate that research views may change and do not constitute personalized investment advice.

What to watch

• Whether China's ESS battery shipments and CATL's domestic ESS market share increase as expected.
• The match between the pace of new battery-supply releases and the normalization of ESS demand.
• CATL's progress in forward BESS integration, long-term service agreements, and project value capture.
• Whether China's EV battery demand and CATL's China EV battery market share approach approximately 50% by 2030E.
• Growth in renminbi-related balance sheets and clearing income at Hong Kong banks after the PBoC, HKMA, and SFC financial connectivity measures are implemented.
• Trends in copper, iron ore, aluminum, and lithium prices and mining-cost inflation.
• Whether China's policy response relies more on accelerated fiscal measures and targeted credit easing.
• Whether capital expenditure on AI infrastructure by Amazon, Microsoft, and others converts into cloud revenue and profit growth.