Investment Rating - The report indicates a supportive outlook for the lithium up-cycle, with a forecast of approximately 20% year-on-year growth in lithium battery production for 2026, despite current pricing trends being higher than expected [1]. Core Insights - The EV market in China has experienced a decline in sales at the start of 2026, with retail and wholesale sales down by 16% and 23% year-on-year, respectively. However, UBS forecasts an 8% growth in the domestic EV market and a 15% increase in wholesale EV sales volumes driven by exports [2]. - The capacity pricing mechanism is expected to enhance the internal rates of return (IRRs) for Battery Energy Storage Systems (BESS), potentially increasing IRRs to around 7-8% as opposed to typical hurdle rates of approximately 6% [3]. - The report highlights that higher battery material costs, particularly for lithium, copper, and aluminum, are anticipated to increase the average cost of battery electric vehicles (BEVs) by approximately RMB 4,000 to RMB 7,000 [4]. - Technological advancements in solid-state batteries are being made, with companies like Samsung SDI overcoming hurdles related to dendrite formation, which is expected to positively impact lithium demand due to increased energy density [9]. Summary by Sections Lithium Market Outlook - The lithium battery production is projected to grow by about 20% year-on-year in 2026, supporting the current pricing and the forecasted lithium up-cycle [1]. EV Market Dynamics - Despite a challenging start to 2026 with significant sales declines, the domestic EV market is expected to grow by 8%, while exports are projected to drive a 15% increase in wholesale sales volumes [2]. BESS Investment Trends - Chinese state-owned enterprises (SOEs) are increasing capital expenditure on BESS, with a focus on capacity pricing mechanisms to improve IRRs, which could lead to a rise in BESS deployment to 230 GWh in 2026 [3]. Cost Implications - The increase in battery material costs is expected to raise BEV costs by RMB 4,000 to RMB 7,000, with cell materials constituting about 60% of BESS module costs [4].

Investment Rating - The report maintains a Buy rating for Shenzhen Kedali Industry and raises the price target to Rmb268.00 from Rmb218.00, indicating a potential upside of over 70% [1][6]. Core Insights - Shenzhen Kedali, as China's largest battery structural parts producer with approximately 50% market share, is expected to benefit significantly from strong downstream battery demand, forecasting a revenue CAGR of 34.5% from 2025 to 2027 [1][9]. - The company is actively expanding its overseas business, which is anticipated to become a key growth driver starting in 2027, with overseas revenue contribution expected to rise to 16% by 2027 from 9% in 2025 [3][28]. - The report highlights that Kedali's net profit is projected to grow at a CAGR of 38.0% from 2025 to 2027, with 2026 and 2027 net profit estimates being 11% and 27% above consensus, respectively [1][9]. Summary by Sections Revenue Growth - Kedali's revenue is forecasted to grow by 37.9% and 31.2% year-over-year in 2026 and 2027, respectively, significantly outpacing the average 17% growth for auto supply chain companies [2][9]. - The company has been operating at full capacity since Q4 2025 and plans to increase its production capacity by 30% in 2026 [2][9]. Overseas Expansion - The overseas business is expected to ramp up significantly from 2027, with plants in Hungary and Germany servicing orders from CATL's European plants [3][28]. - Kedali is currently the exclusive structural parts supplier to CATL overseas, which is projected to capture over 60% market share in Europe by 2027 [3][28]. Financial Projections - The report raises the 2026-30 profit forecasts by 12-38% due to higher revenue growth potential, with the price target implying a 29.6x PE for 2026, which is justified by strong demand and overseas expansion [4][47]. - Revenue projections for Kedali are revised upwards, with 2026 revenue now estimated at Rmb21,023 million, reflecting a 16% increase from previous estimates [32][34]. Market Positioning - Kedali's current PE is below its five-year average and lower than the average of A-share auto supply chain companies, indicating significant valuation upside potential [10][47]. - The report suggests that the market may be underestimating Kedali's earnings growth potential due to its strong ties with mainstream battery manufacturers and robust downstream demand [35][38].

Summary of Key Points from the Conference Call Industry Overview - The discussion centers around the impact of large-scale AI training workloads on the power grid, particularly focusing on the challenges faced by data centers and the potential risks of power outages due to rapid fluctuations in power demand [3][4][5][6][9][32]. Core Insights and Arguments 1. **Power Grid Stress**: The increasing demand from multi-gigawatt-scale data centers is stressing the century-old power grid, which was not designed to handle the unique load profiles of AI training workloads [3][4][5]. 2. **Load Fluctuations**: AI training workloads can cause instantaneous power consumption fluctuations of tens of megawatts, which can lead to significant challenges for grid stability [4][5][20]. 3. **Risk of Blackouts**: The worst-case scenario involves potential blackouts affecting millions of Americans if the power grid cannot cope with the rapid load changes from AI data centers [3][4][5]. 4. **Engineering Solutions**: Engineers have created temporary solutions like dummy workloads to smooth out power draw, but these can lead to annual energy expenses in the tens of millions [5][6]. 5. **Battery Energy Storage Systems (BESS)**: Tesa's Megapack system is highlighted as a leading solution for managing power quality issues in data centers, capable of rapid charging and discharging to respond to load fluctuations [6][67][69]. 6. **Demand Response Programs**: Participation in demand response programs can help data centers manage peak loads, but challenges remain in implementation and utility-side management [78][81][86]. 7. **Cascading Failures**: The risk of cascading blackouts is significant if large amounts of load disconnect from the grid simultaneously, as seen in previous incidents [38][56][65]. Additional Important Content 1. **Grid Design Considerations**: The discussion includes insights into the fragility of voltage and frequency in electric systems, emphasizing the need for a stable balance between supply and demand [10][13][15]. 2. **Historical Context**: The Texas winter freeze of 2021 is cited as an example of how extreme conditions can lead to significant grid failures [14][15]. 3. **Future Projections**: There is a forecast of over 108GW of large loads, primarily from data centers, looking to connect to the ERCOT grid, which exceeds the US's peak load of 75GW [28][31]. 4. **Technological Innovations**: The rise of new technologies, such as the 800V DC architecture, is expected to impact the supply chain and improve the management of power fluctuations in data centers [107]. This summary encapsulates the critical points discussed in the conference call, focusing on the implications for the power grid due to the demands of AI training workloads and the potential solutions being explored.