Since early January 2025, sentiment in the A-share market has recovered, with the ChiNext Index surging by more than 10%, outperforming the broader market. Among them, the ChiNext New Energy Index has performed even more prominently, with a cumulative increase of 13%, recording significant excess returns and reigniting market confidence in the new energy industry.

[The darkest moment has passed, and dawn has reappeared]

Since 2023, China's new energy vehicles have seen several "price reduction waves". While automakers have engaged in fierce competition, it has also swept through upstream and midstream enterprises such as power battery and lithium carbonate manufacturers.

The price of power batteries has fallen from a peak of 1 yuan/Wh at the beginning of 2023 to the current 0.3 yuan/Wh, a decline of up to 70%. Meanwhile, lithium carbonate has fallen from a peak of 600,000 yuan/ton to the current 75,000 yuan/ton, with a cumulative decline of up to 87%.

▲Lithium carbonate main futures trend chart, source: Chocie

With prices continuously declining, business operations and profitability have generally suffered significant setbacks. For example, the gross profit margins of second-tier battery manufacturers such as EVE Energy and Guoxuan High-Tech have fallen from a peak of over 30% to around 17% now.

The photovoltaic industry chain has also experienced similar trends, with prices of polysilicon, silicon wafers, solar cells, and modules mostly falling by more than 70%. According to statistics, the main photovoltaic industry chain lost over 60 billion yuan in 2024, and corporate debt exceeded 3 trillion yuan. Among them, in the first three quarters, 39 out of 121 listed photovoltaic enterprises reported net profit losses.

Currently, the capacity clearing of China's new energy industry chain is still ongoing, but there are signs of bottoming out and improvement in the industry's overall operations. This is also one of the important factors why the ChiNext New Energy Index has outperformed the broader market recently.

The ChiNext New Energy ETF Huaxia (159368), which tracks the above index, is issuing its shares on the last day today. This ETF fund primarily covers new energy sectors such as power batteries and photovoltaic equipment, with key holdings represented by CATL, Sungrow Power Supply, and Inovance Technology, which together hold more than 40% of the shares.

Specifically, on the demand side, industrial policies continue to intensify, such as the promotion of new energy vehicles in rural areas and trade-in programs, driving the domestic market to maintain high growth momentum.

According to the China Association of Automobile Manufacturers, in the first two months of 2025, domestic sales of new energy vehicles reached 1.025 million units, a year-on-year increase of 34.3%, exceeding market expectations. In addition, in March, Chinese enterprises' production plans for power batteries and energy storage batteries amounted to 99GWh, coupled with 9GWh of consumer batteries, totaling 108GWh, a year-on-year increase of 27%, maintaining high growth rates.

Furthermore, new energy enterprises have chosen to go abroad in search of incremental growth. For example, JinkoSolar has invested in building a factory in Saudi Arabia, and Junda shares plan to increase production capacity in Oman to capture overseas untapped markets.

Looking at the supply side, anti-"involutionary" competition, guided by regulatory authorities and self-discipline within the new energy industry, has begun to show results, with the addition of low-quality capacity slowing down.

In December 2024, 33 enterprises covering about 90% of the capacity in various links of photovoltaic manufacturing signed a self-discipline convention on voluntary production control in Yibin City, Sichuan Province. It is also worth noting that the comprehensive rectification of "involutionary" competition was written into the 2025 government work report for the first time, suggesting that there may be policy intensification to curb the trend of involution.

As a result, the imbalance between industry supply and demand has been alleviated, and prices across various links in the industry chain have returned to the bottom region of previous cycles, with expectations of a bottoming out and recovery in the future.

Moreover, China's new energy industry chain has undergone a baptism of overcapacity in the past few years, with prices plummeting, profitability declining, and the capital market fully pricing it through continuous adjustments.

It can be seen that the darkest moment for China's new energy industry has passed, and dawn has reappeared. The market is gradually trading the big logic of industry operating improvements.

[Only in adversity can the true nature of a leader be revealed]

During the trough period of the new energy industry, there is always a group of outstanding enterprises that stand out, with their competitiveness not decreasing but increasing, and their performance still able to maintain growth against the trend, significantly surpassing the industry average. Reflected in the capital market, their share prices are more resilient and have not followed the 70% retracement of mainstream industry enterprises.

In the power battery sector, CATL is the undisputed global leader with strong market competitiveness. In 2023 and the first three quarters of 2024, the company's net profit attributable to shareholders increased by 43.6% and 15.6% year-on-year, respectively, maintaining double-digit growth.

In the power battery market, the duopoly of CATL and BYD remains solid. In 2024, CATL's domestic market shipments reached 246GWh, with a market share of up to 45%, an increase of 1.89% compared to 2023. BYD, ranked second, had annual shipments of 135GWh, with a market share of 24.74%, a slight decline of 2.5% compared to 2023.

▲CATL vs. BYD battery shipment monthly ratio, source: Shengan Securities

In the competition between the two giants, CATL holds a clear advantage. Against this backdrop, CATL's advantages in large-scale procurement and other areas are even more prominent, and its profitability is significantly higher than that of other second- and third-tier manufacturers, allowing its net profit to maintain decent growth.

In the photovoltaic sector, Sungrow Power Supply is also an "outlier".

Among leading enterprises, in the first three quarters of 2024, Longi Green Energy suffered a net loss of 6.5 billion yuan, and Tongwei Co. Ltd. suffered a loss of 3.97 billion yuan. However, Sungrow Power Supply's profit for the same period was 7.6 billion yuan, a year-on-year increase of 5.2%, a significant increase of 269% compared to 2022Q3. In addition, the company's profitability has strengthened in recent years, rising from 22.25% in 2021 to 31.32% in 2024Q3.

In the same sector, under the same sky, joys and sorrows are not the same.

Sungrow Power Supply's main product is inverters, which are key equipment that converts the direct current generated by solar photovoltaic modules into alternating current. They are known as the "heart" of photovoltaic power generation systems.

From 2018 to 2023, Sungrow Power Supply's photovoltaic inverter shipments climbed from less than 20GW to 125.4GW, and its global market share rose from 14% to over 23%. In 2023, Huawei and Sungrow Power Supply firmly occupied the top two market shares, with Jinlang Technology ranking third and Shangneng Electric rising to fourth, indicating a global market dominated by China.

Based on high power density and efficiency requirements, as well as control technology and intelligence thresholds, the technical barriers for photovoltaic inverter products are relatively high. In contrast, the barriers for polysilicon, silicon wafers, solar cells, and module products are relatively low. Not only can players within the industry integrate upstream and downstream, but capital outside the industry can also relatively easily enter the sector and take a share.

In addition, Sungrow Power Supply's energy storage business has grown significantly, from 540 million yuan in 2019 to 17.8 billion yuan in 2023, with its share of revenue rising from 4% to 25%. The rise of the second growth curve has also driven the company's overall business to maintain decent growth.

Under the challenges and pressures faced by the new energy industry chain, the trend of the strong getting stronger is becoming increasingly apparent, and outstanding leading enterprises are even more evident in adversity.

[Winning by default in a sector is no longer possible]

Before 2021, the A-share market experienced aggressive sector-based styles, especially in new energy sectors such as new energy vehicles and photovoltaics, which saw bull market rallies with several-fold increases in succession. At that time, the new energy industry as a whole was in an accelerated growth phase, with a Davis double-click effect on both performance and valuation, which can be described as a wonderful period for investing in an industrial sector.

In the future, it is unlikely that the new energy industry will be able to reproduce such a miracle. Why is that?

According to brokerage institutions, the life cycle of an industry can be divided into five stages based on penetration rate and penetration rate acceleration:

1. The introductory phase from 0% to 5%, where the penetration rate increases slowly, and enterprises basically cannot achieve profitability;

2. The accelerated growth phase from 5% to 25%, where the profit growth rate of leading enterprises often exceeds 100%, and the dynamic PE can rise to 60-120 times as a whole.

3. The decelerated growth phase from 10% to 50%, where market competition intensifies, investment risks increase, the profit growth rate center of leading enterprises falls to 50%, and the PE falls back to the 15-45 times center.

4. The maturity phase from 50% to 80%, where the penetration rate increases slowly, the competition landscape stabilizes, product development matures, the profit growth rate falls to the 20%-30% center, and the PE returns to the 15-25 center.

5. The decline phase from 80% to 100%, where the profit growth rate falls to the 10% center, and the PE returns to the 10-20 times center.

The valuation levels, investment difficulty, and returns at different stages of an industry are different. Currently, the new energy industry as a whole has entered a maturity phase, with a significant decline in growth rates and valuations returning to very low levels. Coupled with the fact that the industry is still in a state of overcapacity, market clearing still requires patience, and it is difficult to see significant improvements in operations in the short term.

It can be expected that in the future, the A-share new energy industry will also have few opportunities to enter into a holistic opportunity with both performance and valuation soaring. The era of betting on single sectors such as power batteries and photovoltaics to win by default has become history.

To grasp opportunities in the new energy industry in the future, only by selecting excellent leading enterprises or excellent cross-sector ETF funds can one maintain good returns. Among them, the ChiNext New Energy ETF Huaxia (159368) is worth paying attention to, as today (March 11) is the last day of its issuance.

It is also worth mentioning that the fund manager, Huaxia Fund Management, has an equity ETF management scale exceeding 670 billion yuan, with its average scale ranking first in the industry for 19 consecutive years and being the only company in China to be awarded the "Passive Investment Golden Bull Fund Company" for 8 consecutive years.

In short, it's time to re-examine the new energy industry and it is no longer advisable to view it through the lens of the "severe overcapacity" viewpoint that was prevalent in the market over the past two years, as this may cause one to miss some opportunities.

Disclaimer

The content related to listed companies in this article is based on the author's personal analysis and judgment based on information publicly disclosed by the listed companies in accordance with their legal obligations (including but not limited to temporary announcements, periodic reports, and official interactive platforms, etc.). The information or opinions in this article do not constitute any investment or other business advice. Market Value Observation shall not be liable for any actions taken as a result of adopting this article.

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