June 11 (NBD) -- China's installed power battery capacity on new-energy vehicles (NEVs) hit up to around 3.76GWh in April 2018, up 77.63 percent from the previous month and 261.56 percent from a year ago. 

BYD Co Ltd (002594.SZ) took the lead in the battery industry in the month with an installed capacity of 1.34GWh, taking up 35 percent of the market. This marks the first time within the past 12 months that the electric car maker has grabbed the top spot in terms of the monthly installed battery capacity from Chinese battery giant Contemporary Amperex Technology Co Ltd ("CATL", 300750.SZ). 

The strong performance in the battery market brought a glimmer of hope to the Shenzhen-based auto manufacturer, which reported a weak performance in the first quarter of this year. 

BYD's deep dive into power battery sector 

Hurt by China's subsidy reduction for NEVs, BYD saw its net profits for the first three months of this year drop by 83.09 percent year over year. Recurrent net profits were -329 million yuan (-51.35 million U.S. dollars), a significant fall from 446 million yuan (69.6 million U.S. dollars) for the same period of last year. 

In this case, SkyRail and battery are expected to be two strong growth engines for the electric car maker, according to a report by China Business Network. 

According to the company's fiscal report for 2017, the urban rail transit business represented by SkyRail will be one of its important development directions in the future. 

On May 23, BYD secured a cross-sea SkyRail project worth 689 million U.S. dollars in Brazil. Seven days later, it was granted another SkyRail project by Bataan of the Philippines. 

However, the profitability model of SkyRail remains to be observed. 

Business news portal Caixin reported BYD's SkyRail project in central China's Hengyang has been called off by the National Development and Reform Commission after less than one month of construction as it hasn't gained the necessary approval, and hasn't seen a sign of resumption in construction work. 

In response, a person-in-charge with BYD denied the report claiming that construction hasn't begun. 

In the battery segment, BYD is currently pushing ahead with the spinoff of its battery unit, which is expected to be completed in late 2018 or early 2019, Shen Xi, deputy manager of BYD's EDV battery unit, said at a recent automobile supply chain innovation forum in South China's Shenzhen city. 

According to International Finance News, because of the intensified competition in the NEV market, BYD's vehicle output and sales as well as the battery business slowed down. Seeing abundance in power battery capacity, the carmaker is planning to expand the scope of supply to other vehicle manufacturers beyond itself. 

Not only so, the power battery market witnessed huge changes in recent two years. Aggressive moves by battery behemoths like CATL pressured BYD to make a difference. 

Last Friday, BYD made an announcement agreeing to adjust the targeted raised amount for a lithium iron phosphate battery expansion project from 6 billion yuan (936.56 million U.S. dollars) to 5 billion yuan (780.47 million U.S. dollars), and 1 billion yuan (156.09 million U.S. dollars) will be raised for another lithium-ion power battery project in northwest China's Qinghai province with a designed annual capacity of 12GWh. The company also said in the filing its lithium-ion power batteries will be sold at home and abroad, a signal that more efforts will be made to increase battery sales. 

Head-to-head competition with CATL

Demand for power batteries has been soaring following China's favorable policies towards NEVs. Data shows power battery shipments jumped sharply to 39.2GWh last year from 0.79GWh in 2013. 

Huge market changes lead to fierce competition. 

Last year, CATL became the world's largest EV battery supplier with a market share of 17 percent around the globe. 

The battery maker filed for IPO at ChiNext in late 2017, expecting to raise 5.46 billion yuan (852.58 million U.S. dollars), of which about 1.41 billion yuan (219.47 million U.S. dollars) will be used to fuel its battery R&D and production. The company's stocks started trading Monday, finished the day with a 44 percent rise. 

Meanwhile, China axed subsidies for NEVs and also raised stricter requirements for energy density of EV battery systems. 

This pushes BYD to bank on the EV battery business for a business transformation. 

Technically, the company focuses on the development of lithium iron phosphate and ternary lithium batteries so as to keep abreast with CATL in terms of energy density and production capacity. On the business front, its battery unit will be split and will likely get listed in 2022 or 2023. 

Caitong Securities Co., Ltd. said with CATL gaining a dominant position in the battery market, auto manufacturers are seeking for an alternative supplier to guarantee battery supply and to improve premium. BYD chose the right time to supply batteries to other companies. This is a win-win decision for the electric car maker itself as well as other auto manufacturers. 

Selling batteries to other companies will be a new profit growth point, and the re-valuation of its battery unit after the spinoff will also help lift BYD's overall valuation. Based on CATL's IPO scale, Caitong Securities predicted the company's independent battery unit will have an intrinsic value of more than 100 billion yuan (15.61 billion U.S. dollars). 

Which company to win?

BYD's power battery capacity reached 16GWh last year and the figure is projected to reach 39GWh by 2020, according to Caitong Securities. In contrast, CATL led the industry in 2017 with a lithium-ion battery capacity of 17.09GWh, and its capacity is estimated to surpass 50GWh by 2020, said Huachuang Securities. 

It could be seen the two companies will go toe to toe with each other over the next two years. 

When it comes to the number of clients, BYD is absolutely in a weak position as it was the sole consumer of its batteries in the past. A document released by the Ministry of Industry and Information Technology in April shows only Dongfeng Motor Corporation adopted BYD's batteries in two of its commercial vehicles, marking BYD's first move to cast off its self-consumption system. By contrast, CATL is serving a lot of automobile companies. In the bus area, the battery maker is highly recognized by Zhengzhou Yutong Bus Co Ltd (600066.SH) and also provides batteries to Xiamen King Long United Automotive Co Ltd and CRRC Corp Ltd (601766.SH), while in the passenger car area, it has obtained big orders from Geely Automobile Holdings Ltd (00175.HK), BAIC Group, and Volkswagen. Moreover, it teamed up with SAIC Motor Corporation Limited (600104.SH) to set up a EV battery joint venture. 

With regard to raw materials, BYD has built a joint venture with QingHai Salt Lake Industry Co., Ltd. (000792.SZ) to ensure stable raw materials supply, while CATL guarantees the supply of lithium and cobalt through the acquisition of Canadian lithium firm North American Lithium Inc., a procurement deal with top cobalt producer Glencore, as well as purchase of a controlling stake in Chinese Li-ion battery recycler Guangdong Brunp Recycling Technology Co Ltd. 

Caitong Securities, CITIC Securities, China Merchants Securities, and China Securities all showed an upbeat attitude towards BYD's power battery business, while Huachuang Securities, Shanghai Securities, Ping An Securities, and many other securities firms view CATL as a leader in the battery industry, holding that the battery maker will help boost the industry's reform after its IPO.  

 

Email: lansuying@nbd.com.cn

Editor: Lan Suying