China’s battery industry is entering a new ESS-driven cycle, with high-quality leaders more likely to weather volatility.

Overview

This report initiates Goldman Sachs coverage of China’s battery industry and seven battery companies. The core view is that China’s battery demand is moving from a single EV-driven phase to a new stage in which EVs serve as the long-term anchor and ESS acts as the incremental swing factor. Improving ESS project economics may bring demand forward in 2026-2027, but as new capacity returns, the industry may shift from tight supply to utilization pressure from 2028.

Core views

The report believes China’s total battery shipments will grow from approximately 1.80TWh to 3.64TWh by 2030E, representing a five-year CAGR of approximately 15%; EV battery shipments will continue growing at an approximately 17% five-year CAGR to 2.64TWh, providing the long-term demand base; ESS will accelerate more strongly in 2026-2027 and may become a negative swing factor after 2028. On the supply side, the ESS shortage is restoring manufacturers’ confidence in capacity expansion, with effective capacity expected to reach 4.60TWh by 2028E and capex approximately Rmb140bn by 2027E. On competition, the ESS market remains fragmented, but real-world operating performance, project returns and bankability will accelerate the exit of weaker suppliers, favoring leaders such as CATL with quality, dual-chemistry capabilities and system integration expertise.

Analysis framework

The report combines a top-down assessment of industry supply-demand cycles with bottom-up provincial BESS economics calculations. Demand estimates include theoretical BESS TAM, the penetration path following the shift from policy-mandated storage to economics-driven adoption, near-term activity indicators such as tenders/contracts/filings, as well as passenger EV electrification, exports, commercial vehicle electrification and larger battery packs. Valuation primarily uses EV/EBITDA, with differentiated treatment based on historical trading characteristics of A-shares and H-shares.

Methodology notes

• Market sizingBESS TAM bottom-up framework

  Estimate the storage scale required for renewable energy intermittency by province

  Theoretical BESS demand equals surplus renewable energy that could potentially be curtailed, less grid flexibility provided by existing thermal and hydropower; this is then aggregated based on differences in provincial power supply-demand and renewable penetration.

• Project economicsIRR threshold by province

  Assess the ESS penetration path using provincial IRR

  The report believes the endpoint of BESS adoption is determined by how many provinces can meet project return requirements, while the shape of the curve is determined by the speed at which each province reaches the economic threshold; capacity compensation mechanisms improve long-term return visibility.

• Valuation methodologyEV/EBITDA valuation

  Use EV/EBITDA to compare capital-intensive battery companies

  Goldman Sachs believes the battery industry is capital-intensive, making EV/EBITDA more suitable for cross-company and cross-region comparisons, with differentiated trading assumptions for A-shares and H-shares.

Asset mapping & comparison

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

• CATL-A/CATL-H

  Core Buy

  Strengths

  Possesses battery quality, dual-chemistry capabilities, and integrated storage system/cabinet/cell capabilities, giving it a strong opportunity to increase share through ESS consolidation while maintaining high utilization.

  Weaknesses

  Valuation requires support from the transformation of the BESS business model and delivery of long-term profitability.

  Comparison

  Relative to second-tier manufacturers, CATL has scale, customer and product advantages in both EV batteries and ESS.

  Risks

  ESS demand being brought forward and subsequently declining, utilization pressure from capacity expansion, and valuation re-rating falling short of expectations.

• Zenergy

  Buy

  Strengths

  The report describes it as one of the fastest-growing Chinese battery companies in the coverage universe and expects ROIC to exceed WACC.

  Weaknesses

  Smaller than CATL and still needs to demonstrate sustained quality and returns amid rapid growth.

  Comparison

  Along with CATL and EVE, it is considered one of the few companies capable of generating ROIC above WACC.

  Risks

  Intensifying ESS competition, capacity ramp-up and customer concentration risks.

• EVE Energy

  Neutral

  Strengths

  Growth is accelerating, and the report notes that its ROIC may exceed WACC.

  Weaknesses

  Near-term growth is offset by ESS competition risks after 2027.

  Comparison

  Higher quality than some second-tier companies, but with a less attractive risk-reward profile than CATL and Zenergy.

  Risks

  ESS competition, margin pressure and industry utilization declines.

• CALB

  Neutral

  Strengths

  Scale continues to expand.

  Weaknesses

  Lagging returns and rising leverage.

  Comparison

  Relative to leaders, scale growth has not yet fully translated into return quality.

  Risks

  Capacity expansion, declining utilization and financial leverage pressure.

• REPT

  Neutral

  Strengths

  High ESS exposure supports growth.

  Weaknesses

  Low returns and leverage constrain valuation re-rating.

  Comparison

  Benefits from ESS upside, but quality and financial constraints are weaker than those of the top picks.

  Risks

  Competition and utilization pressure after ESS demand normalizes.

• Gotion High-Tech

  Sell

  Strengths

  The view could turn more positive if its domestic EV market share expands faster than expected.

  Weaknesses

  Exposed to low-end passenger EV competition, post-2028E ESS pressure and balance-sheet pressure.

  Comparison

  The report believes its valuation premium is difficult to justify.

  Risks

  Low-end EV price competition, ESS oversupply, leverage and earnings pressure.

• Farasis Energy

  Sell

  Strengths

  Has exposure to specific customer segments or niches.

  Weaknesses

  Customer recovery is uncertain, margin prospects are weak, and losses are expected to persist.

  Comparison

  Relative to other companies in the coverage universe, demand and earnings quality are weaker.

  Risks

  Customer recovery falling short of expectations, continued losses and excessive valuation requirements.

Key data

• China total battery shipments1.80TWh currently to 3.64TWh by 2030EThe report expects shipments to approximately double from current levels by 2030E.
• China EV battery shipments2.64TWh by 2030E; 17% 5-year CAGREVs remain the long-term demand anchor, with exports and commercial vehicles contributing more than 70% of incremental demand.
• China ESS battery shipments0.95TWh/1.13TWh in 2026E/2027E; about 0.93-1.00TWh in 2028E-2030EThe report believes the ESS adoption path may be brought forward, with demand normalizing after 2027E.
• Theoretical BESS TAM1.1TW/4.5TWh by 2030EBased on the assumption of 3.5TW of renewable energy capacity in China by 2030.
• Cumulative BESS installation forecast3.4TWh by 2030E; 76% penetration versus theoretical TAMAnnual installations are expected to peak in 2028E, while battery shipments are expected to peak one year earlier in 2027E.
• Provincial economics15 provinces meet minimum 6% IRR requirement; 3.0TWh or 66% of theoretical 2030 TAMThree provinces have IRRs above 12%, three are at 10-12%, two at 8-10%, and seven at 6-8%.
• Project activity indicatorsYTD tendered 376GWh, +102% yoy; contracted 262GWh, +23% yoy; pipeline about 1.9TWhTendering, contracting and filing data are used to track domestic BESS demand momentum.
• Industry effective capacity4.60TWh by 2028EThe ESS shortage is driving the return of capacity expansion in 2026-2027E.
• Industry capexabout Rmb140bn by 2027EThe report believes expansion could translate into utilization pressure after 2028E.
• CATL-H valuation12-month TP HKD946; current share price HKD652; upside 45%The valuation table shows CATL-H’s target price and upside.

Impact & implications

The implication for portfolios is that the battery industry is not simply on a structural upward trajectory; rather, ESS introduces greater cyclicality. Strong conditions in 2026-2027 may improve revenue and earnings elasticity, but supply releases and ESS demand normalization after 2028 could weigh on utilization and margins. Stock selection should therefore shift from pure growth toward quality growth, ROIC above WACC, more stable customer and product mixes, and companies with system integration capabilities and technology-route optionality.

Risks

• Capacity compensation mechanisms below expectations or uncertainty over their duration could weaken ESS project economics.
• If provinces that have not yet issued local policies introduce more favorable mechanisms, ESS penetration could exceed the report’s forecast; conversely, policy uncertainty could suppress demand.
• Changes in lithium resource supply and demand could cause short-term battery cost inflation or deflation, altering project tendering and installation schedules.
• If long-duration energy storage technologies become cost-competitive, they could change BESS returns and technology routes.
• Capacity expansion in 2026-2027E could lead to industry utilization and margin pressure after 2028E.
• Second-tier manufacturers may face greater competition, capacity absorption and balance-sheet risks after ESS demand normalizes.

What to watch

• Progress in the introduction of provincial capacity compensation mechanisms and the degree of preferential treatment relative to national standards.
• Whether ESS project IRRs continue to meet key thresholds such as 6%, 10% and 12%.
• BESS project tendering, contracting and filing volumes, especially the subsequent conversion of 376GWh of YTD tenders, 262GWh of YTD contracts and the approximately 1.9TWh pipeline.
• Whether monthly China ESS battery shipments track the path of approximately 0.95TWh in 2026E and approximately 1.13TWh in 2027E.
• Progress toward industry effective capacity of approximately 4.60TWh by 2028E and the resulting changes in utilization.
• CATL’s progress in ESS market share, system integration and dual-chemistry capabilities such as sodium-ion batteries.
• The resilience of the EV demand anchor, including global passenger vehicle electrification, Chinese OEM exports, commercial vehicle electrification and larger battery packs.