China batteries enter a selective recovery cycle, with the investment focus shifting from price hike expectations to earnings delivery

Overview

The report reviews the differences between the 2021-22 supercycle in China's battery supply chain and the recovery cycle since 2025, emphasizing that the current cycle should not be priced using the previous round's broad re-rating logic. The previous cycle was jointly driven by low interest rates, rapid EV penetration growth, aggressive capacity expansion, capital inflows, and surging raw material prices; this time, demand is more diversified, supply is more disciplined, and price increases are more moderate, shifting the investment focus from continued ASP gains to volume-driven cash flow and earnings delivery.

Core views

The core views are: first, this is a selective recovery rather than a replay of the supercycle, and the market should not simply extrapolate 2022 peak earnings and valuations; second, materials and second-tier battery stocks still offer phase-specific opportunities, but are better suited to range trading around valuation, ASP expectations, and EPS revisions; third, CATL is the only core holding in the supply chain that has demonstrated the ability to sustain profit growth through the cycle; fourth, subsequent share price performance will depend more on utilization, stability of unit profitability, cash flow quality, and pricing power, rather than broad valuation expansion.

Analysis framework

The report uses a cycle comparison method, comparing the two battery cycles across dimensions such as demand structure, policy environment, capacity expansion stance, financing structure, price elasticity, profit distribution, industry concentration, interest rate backdrop, and P/E valuation, while combining individual stock valuations, ratings, and current prices to propose an investment strategy for 2H26-2027.

Methodology notes

• Cycle Comparison2021-22 supercycle vs. 2025-current recovery cycle

  Determine the nature of this cycle through multidimensional comparison

  The report compares the two cycles item by item in terms of macro interest rates, demand drivers, policy support, supply expansion, financing flows, price increases, and profit pool distribution, concluding that the current cycle is more of a selective recovery.

• Valuation AnalysisP/E and EPS recovery framework

  Break down share price drivers using valuation multiples and earnings recovery

  The previous cycle was driven more by valuation expansion and price hike expectations, while this cycle requires continued EPS upgrades, volume growth, utilization improvement, and validation of cash flow quality.

• Supply Chain Profit PoolProfit migration from the resource end to the cell end

  Compare profit capture capabilities of different segments during the cycle

  In the previous cycle, the profit pool was significantly concentrated in upstream resources such as lithium, while this time the profit focus is more tilted toward leading cell makers with scale, technology, utilization, and pricing power.

Asset mapping & comparison

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

• CATL - A / CATL - H

  Top-pick core holding

  Strengths

  It has scale, technology leadership, pricing power, stable unit profitability, and superior cash flow. The report considers it the only major supply chain company capable of sustainably outperforming through the cycle.

  Weaknesses

  Its valuation and share price performance have already been stronger than most peers, placing higher demands on continued earnings delivery and sector leadership.

  Comparison

  Compared with materials and second-tier battery companies, CATL is more of a quality anchor and compounding asset rather than a pure ASP beta trade.

  Risks

  If battery shipments, unit profitability, overseas demand, or the policy environment fall short of expectations, the leader premium may compress.

• CALB 3931.HK

  Tactical Overweight

  Strengths

  Its valuation is relatively attractive, and 2027E earnings growth is mainly volume-driven, so the opportunity does not rely entirely on price or unit profit improvement.

  Weaknesses

  As a second-tier battery company, its earnings are more sensitive to utilization, prices, and capacity expansion expectations.

  Comparison

  Compared with CATL, it is better suited for valuation recovery and operating leverage trades during the recovery cycle, rather than as a long-term core holding.

  Risks

  If industry capacity expansion re-accelerates, price competition intensifies, or volume growth misses expectations, earnings recovery could come under pressure.

• Putailai 603659.SS

  Low-valuation lagged recovery opportunity

  Strengths

  The report treats it as a low-valuation laggard, with the opportunity coming from volume growth and operating leverage rather than purely from ASP increases.

  Weaknesses

  Profits in the materials segment are more sensitive to prices, processing fees, and customer bargaining power, making sustainability weaker than for leading cell makers.

  Comparison

  Compared with LFP cathode or separator price-hike trades, Putailai is more about a low-valuation earnings recovery thesis.

  Risks

  If the recovery in material prices cannot be converted into margin improvement, or downstream customer price pressure strengthens, valuation recovery potential will be constrained.

• Hunan Yuneng

  Representative of the previous phase's price recovery trade

  Strengths

  As an LFP cathode name, it benefited from the price recovery trade in 2025.

  Weaknesses

  If expectations become crowded later or processing fee expansion remains limited, further upside will require stronger earnings delivery.

  Comparison

  The report believes opportunities in such material stocks are shifting from pure price-hike beta to more disciplined range trading.

  Risks

  If the recovery in LFP cathode prices and processing fees slows, the share price may have already priced in too much optimism ahead of fundamentals.

• Yunnan Energy

  Reference for separator cycle trading

  Strengths

  In the previous cycle, its share price peaked in Sep-Oct 2021, leading or matching the rebound in separator prices from the bottom, showing that the market prices in price hike expectations in advance.

  Weaknesses

  Declines in wet-process separator CR3 and CR5 indicate more dispersed industry pricing power.

  Comparison

  In this cycle, separator stocks require validation of ASP, utilization, and margin recovery, rather than simply replicating the previous round's trajectory.

  Risks

  If declining industry concentration leads to insufficient price transmission, earnings elasticity may be weaker than what share prices imply.

• Upstream resources and lithium materials

  Profit winners in the previous cycle, with limited upside elasticity this time

  Strengths

  They benefited from extreme raw material inflation in the previous cycle, with significant expansion in the profit pool.

  Weaknesses

  Although prices have rebounded from the bottom in this cycle, they are still 40%-80% below the previous peak, and financing and profit focus have shifted toward the cell end.

  Comparison

  Compared with the resource-end-led profits of 2021-22, this cycle puts more emphasis on the scale and cash flow advantages of leading cell makers.

  Risks

  If the market extrapolates previous peak earnings, it may overestimate the current cycle's earnings elasticity at the resource end.

Key data

• Previous cycle valuation peakabout 40-80x 2022E P/EBattery stocks peaked in 2H21, with share prices typically pricing in price hike expectations ahead of ASP or earnings peaks.
• Current valuation levelmostly around 15-25x 2027E P/EExcept for a few names such as CATL, most companies' share prices are still 30%-80% below their 2021 peaks.
• 2022 demand structureChina passenger EVs accounted for about 45% of demandThe previous demand narrative was more concentrated on the rapid rise in China passenger EV penetration.
• 2026 demand structureChina passenger EVs account for about 24%, with ESS expected to exceed 40%This round is driven by multiple engines including EVs, commercial vehicles, China ESS, and overseas ESS, making it more resilient but with a more dispersed narrative.
• Previous cycle financing scaleabout Rmb150bnIn 2021-22, leading companies raised funds through A/H placements, IPOs, and GDRs, with about half coming from battery companies and about 20% from upstream raw material companies.
• Current cycle financing structurehas exceeded Rmb105bn, about 80% from battery companiesCATL has raised about Rmb77bn in this round, accounting for about 70% of the supply chain's total financing to date, indicating that capital and pricing power are concentrating in leading cell makers.
• Lithium price elasticity comparisonIn the previous cycle, lithium carbonate rose by more than 1300%; in this cycle, it has risen by more than 130% from the 2H25 bottomAlthough the increase in this round is significant, the latest price is still 40%-80% below the previous cycle's peak.
• Materials price recoveryLiPF6 rose 97% in this cycle, LFP cathodes rose more than 80%, and wet-process separators rose 28%LFP cathode processing fees rose only 16%, and graphite anodes have not seen an upward pricing cycle.
• Previous cycle profit peak exampleGanfeng-A 4Q22 quarterly net profit Rmb6.1bnIn the previous cycle, the profit pool was significantly concentrated in upstream resources; currently, most supply chain companies are still 20%-80% below their previous profit peaks.
• Industry concentration changeWet-process separator CR3/CR5 down 10ppt/15ppt respectivelyDeclining concentration in some segments means pricing power is more dispersed, so one cannot assume broad-based price hike capability across the entire supply chain.
• Interest rate backdropFed funds were about 0.25% in 2021; currently about 3.75%Higher interest rates weaken the valuation expansion room for long-duration growth assets, making this cycle more reliant on earnings delivery.
• Current prices and ratings of covered companiesCALB 3931.HK HK$29.22/OW; CATL - A 300750.SZ Rmb424.00/OW; CATL - H 3750.HK HK$744.50/OW; Putailai 603659.SS Rmb30.63/OWPrice benchmark is the closing price on May 29, 2026, unless otherwise stated in the report.

Impact & implications

The investment implication is to lower expectations for one-way re-rating across the whole sector and focus instead on sustainable utilization, stable unit profitability, cash flow, and pricing power. Materials and second-tier battery stocks can participate when valuations are low, volumes are growing, and operating leverage is being delivered, but they should not be treated as long-term compounding assets; CATL, due to its through-cycle earnings growth record and cash flow advantage, should enjoy higher portfolio priority.

Risks

• Declines in China's EV replacement subsidies, halving of purchase tax incentives, export tax rebate adjustments, or potential battery consumption tax increases may affect demand and profits.
• After the 2027 energy storage target, ESS installations may decline in 2028, which could affect 2027 battery shipment expectations in advance.
• A renewed acceleration in industry capacity expansion could weaken supply-demand improvement and price recovery.
• In some material segments, declining concentration has made pricing power more dispersed, so price increases may not necessarily translate into lasting margin improvement.
• A higher interest rate environment limits valuation expansion room, making share prices more dependent on EPS upgrades and cash flow delivery.
• Stronger customer bargaining power and shorter capacity delivery cycles may suppress the valuation ceiling of this cycle.

What to watch

• Whether expectations for materials and second-tier battery stocks become crowded in 2H26-1H27, with attention on buy-the-dip and take-profit windows under high expectations.
• Whether CATL's unit profitability, cash flow, shipment share, and technology leadership continue to validate its core holding status.
• Whether multiple demand engines including EVs, commercial vehicles, China ESS, and overseas ESS can support growth sustainability in 2027-28.
• Whether battery and materials price recovery can further flow through to EPS rather than stopping at an ASP rebound.
• Policy changes related to EV subsidies, purchase tax, export tax rebates, battery consumption tax, and ESS subsidies.
• Changes in utilization, pricing discipline, and competitive dynamics after new industry capacity additions become concentrated among leaders and second-tier players.