Upgraded to “Outperform”: A New Product Cycle Fuels Three Years of High Growth

Overview

Morgan Stanley released a report upgrading its rating on CATL’s H-shares from “Equal Weight” to “Overweight,” designating the stock as its Top Pick in the sector. The firm also raised its H-share target price by 17% to HK$815 and its A-share target price by 6% to RMB 595. The underlying rationale is that the company is entering a robust new-product cycle driven by technological innovation, particularly the commercial deployment of sodium-ion batteries and solid-state batteries. These developments are expected to significantly enhance earnings visibility over the next three years and support continued expansion of market share.

Core views

New product cycles are reshaping the growth trajectory: The research report argues that CATL is not merely responding passively to demand, but rather proactively creating markets through a self-reinforcing cycle of “innovation–demand.” Two next-generation technologies are poised for large-scale deployment: first, sodium-ion batteries (Naxtra), which, as a market‑leading MVP, leverage low cost, high safety, and superior low‑temperature performance to drive widespread adoption in entry‑level passenger cars, light commercial vehicles, and energy storage applications, with a potential market size of approximately 1,000 GWh; second, solid‑state batteries, targeting the luxury electric‑vehicle segment with ultra‑long range (around 1,500 km for sedans) and enhanced safety, offering a potential market of roughly 350 GWh and delivering higher profit margins. Earnings visibility has improved markedly: Thanks to the ramp-up of these new technologies, the firm has raised its forecast for the compound annual growth rate (CAGR) of earnings from 2026 to 2028 from 25% to 30%. Specifically, battery sales are expected to grow by 34% in 2026 and 24% in 2027. Notably, the energy‑storage business is viewed as a critical AI‑enabled pillar; with surging demand from data centers for highly reliable energy storage, energy‑storage sales are projected to post a CAGR of 37% between 2026 and 2028. Meanwhile, the electrification penetration rate of electric trucks—particularly light‑duty models—is anticipated to accelerate rapidly, rising from 10% in 2025 to 55% by 2028, with sodium‑ion batteries playing a pivotal role in this transition. Valuation and premium adjustments: In light of the improved medium‑term earnings outlook, the report has shifted its valuation base year to 2027 while maintaining the target EV/EBITDA multiple at 17x, benchmarked against LG Energy Solution. Additionally, given global investors’ structural preference for industry leaders and the supply‑demand imbalance between H‑shares and A‑shares, the target premium of H‑shares over A‑shares has been increased from 10% to 20%, supporting a substantial upward revision of the H‑share price target.

Analysis framework

The research report employs an analytical framework of “technology diffusion plus scenario‑specific penetration.” First, drawing on the semiconductor industry’s “Moore’s Law,” it highlights that battery energy density has been improving by roughly 20% every two years—a long‑term trend—thereby underscoring the inevitability of technological advancements such as solid‑state batteries. Second, it dissects the pain points across various application scenarios: for instance, in the light commercial vehicle segment, it focuses on the winter‑induced degradation of lithium‑ion batteries, demonstrating how sodium‑ion batteries can unlock latent economic arbitrage opportunities—namely, the price differential between gasoline and electric power—by addressing key reliability challenges. Finally, by integrating macro‑level policies (such as trade‑in subsidies) with micro‑level order data (e.g., from Changan Automobile and Haibosichuang), the report assesses the readiness of these technologies for commercial deployment, thereby projecting growth trajectories for both sales volume and profitability.

Methodology notes

• Industry/ Sector Analysis FrameworkPenetration Rate S-Curve

  Technology Adoption Lifecycle

  The research report, by analyzing the evolving penetration rates of sodium-ion batteries in light commercial vehicles and entry-level passenger cars, forecasts that they will follow an S-shaped growth trajectory similar to that of LFP batteries. In particular, once the challenge of low-temperature performance is addressed, their market penetration could reach 90% within five years.

• Valuation MethodologyEV/EBITDA valuation

  Enterprise Value Multiples Valuation

  Given that most global battery manufacturers remain at or below the break-even point, the price-to-earnings (P/E) ratio offers limited analytical value. Accordingly, this research report employs the EV/EBITDA multiple to assess CATL’s scale, profitability, and technological leadership, using LG Energy Solution as the global benchmark.

• Industry/ Sector Analysis FrameworkOthers

  Battery Moore’s Law

  The research report posits that the battery industry exhibits a “Moore’s Law”‑like trend, with energy density improving by roughly 20% every two years. This empirical pattern is invoked to elucidate the evolutionary trajectory of emerging technologies such as solid-state batteries, as well as their structural underpinning for sustained cost reductions and performance enhancements over the long term.

Asset mapping & comparison

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

• CATL (3750.HK / 300750.SZ)

  Benefits: As a technology leader in sodium-ion and solid-state batteries, the company stands to gain directly from the commercialization of new products and an expansion in market share.

  Strengths

  Leading in technological innovation (a practitioner of the “battery Moore’s Law”), with a fully integrated industrial chain, pronounced economies of scale, and a diversified customer base.

  Comparison

  Compared with second-tier battery manufacturers, CATL enjoys a decisive edge in R&D investment and technological reserves, enabling it to bring new technologies into mass production more rapidly.

  Risks

  Geopolitical risks may affect U.S. market exposure; broad-based inflation in raw material costs could temporarily weigh on gross margins.

Key data

• 2026–28E Earnings CAGR30%Raised from the previous forecast of 25%, reflecting the contribution of the new product cycle.
• Potential Market for Solid-State Batteries~350 GWhBased on the China–Europe luxury car market, assuming a 30% penetration rate.
• Potential Market for Sodium-Ion Batteries~1,000 GWhCompared with the global battery sales volume of 662 GWh in 2025, the potential is substantial.
• Energy storage sales CAGR (2026–2028E)37%Benefiting from AI data centers and global energy security needs
• China’s electric light-truck penetration rate (2028E)55%By 2025, this figure will be only 10%, and sodium-ion batteries are set to accelerate this trend.

Impact & implications

The research report argues that CATL is transitioning from a pure‑play battery manufacturer into a “universal energy partner.” By addressing the entire demand spectrum, from premium vehicles (using solid‑state technology) to the mass market (with sodium‑ion batteries), and by capitalizing on the AI‑driven surge in computing power in the energy‑storage sector, the company’s growth ceiling has been further expanded. For investors, this implies greater certainty around the company’s medium‑ to long‑term growth prospects, with its valuation likely to be repositioned from that of a cyclical stock to a growth play. Given their liquidity and global allocation appeal, H‑shares command a higher premium over A‑shares, which is justified.

Risks

• Geopolitical tensions could impair the company’s U.S. business exposure or weigh on market sentiment.
• A broad-based increase in raw material costs could put pressure on gross margins in the short term.
• If second-tier battery manufacturers achieve technological breakthroughs, it could intensify competition, leading to a loss of market share and downward pressure on profit margins.
• The penetration rate of electric vehicles and energy storage applications has fallen short of expectations.

What to watch

• Policy incentives and the progress of large-scale vehicle integration for sodium-ion batteries in the Chinese market.
• The status of order wins and actual delivery performance for solid-state batteries in luxury vehicle models.
• Changes in the order backlog for energy storage systems at the Data Center (AIDC).
• Winter operating data for electric light commercial vehicles in northern cold regions, along with the real-world performance of sodium-ion batteries.