Core Viewpoint - LG Energy Solution (LGES) has signed a $4.3 billion contract for lithium iron phosphate batteries, potentially supplying around 50 GWh, with Tesla as the likely customer, indicating a strategic shift in Tesla's supply chain away from reliance on Chinese suppliers [1][2][3]. Group 1: Contract Details - LGES signed a contract worth 5.9442 trillion KRW (approximately $4.3 billion) with a term from August 2027 to July 2030, with the possibility of a four-year extension [2]. - The contract value is estimated to be about one-fourth of LGES's projected sales for 2024 [2]. - The lithium iron phosphate batteries will be supplied from LGES's factory in Michigan, which is the only production base for this type of battery in North America [2][6]. Group 2: Tesla's Supply Chain Strategy - Tesla's energy business has been heavily reliant on Chinese suppliers, including CATL and BYD, for battery products [3]. - Due to U.S. tariffs on Chinese batteries, Tesla is accelerating the construction of a lithium iron phosphate battery cell manufacturing plant in Nevada, which will initially produce on a small scale [6]. - The potential production capacity gap at Tesla's plant, combined with tariff impacts, may have prompted the shift to LGES for battery supply [6]. Group 3: Competitive Landscape - LGES has a first-mover advantage in the U.S. lithium iron phosphate battery market, as competitors like Samsung SDI and SK On have not yet entered this space [8]. - LGES plans to increase its lithium iron phosphate production capacity in Michigan to 17 GWh by the end of 2025 and over 30 GWh by the end of next year, with large project developers already reserving this capacity [10]. - The recent HR1 legislation in the U.S. strengthens barriers against foreign entities entering the battery market, favoring companies with established domestic production capabilities like LGES [10].

Core Insights - CATL officially listed on the Hong Kong Stock Exchange on May 20, marking a strategic upgrade from a battery component manufacturer to a system solution provider, aiming to become a zero-carbon technology company [1][3] - The company has completed its zero-carbon technology layout, focusing on three core areas: global zero-carbon transportation, global zero-carbon electricity, and global industrial new energy transformation [3] Group 1: Zero-Carbon Technology Layout - The first focus area is global zero-carbon transportation, targeting a trillion-dollar market by promoting battery swapping and standardization to create a closed-loop ecosystem for the entire lifecycle [3] - The second area is global zero-carbon electricity, where CATL is developing zero-carbon grid technology to address issues like weak flexible control capabilities in power grids, with its energy storage system (ESS) projected to contribute 16% to revenue and achieve a gross margin of 26.8% by 2024 [3] - The third area involves promoting the new energy transformation of industrial systems, collaborating with companies like Kweichow Moutai to create a "zero-carbon ecosystem" [3] Group 2: Global Expansion and Financials - CATL raised HKD 35.7 billion (approximately USD 4.6 billion) in its Hong Kong IPO, the largest globally this year, with funds allocated for accelerating local expansion in Europe and establishing a joint venture with Stellantis in Spain [3] - The company is also in discussions with another European automaker to build a fourth factory and plans to export batteries to the U.S. during a 90-day low tariff window following the recent U.S.-China tariff reduction announcement [3] - As the world's largest electric vehicle battery manufacturer, CATL holds nearly 40% market share, serving major clients like Tesla and Ford, with its market valuation increasing from approximately USD 8.5 billion at its 2018 Shenzhen listing to around USD 166 billion currently [3]

Investment Rating - The report maintains a "Buy" rating for Kstar and Envicool, while Kehua is rated as "Neutral" [2][11]. Core Insights - The data center supply chain in China is experiencing strong demand, with expectations for continued capacity expansion through 2025 and potentially into 2026, despite challenges such as overseas chip supply constraints [1][5]. - The report has revised earnings per share (EPS) estimates downward by 17%-31% for Kstar, Envicool, and Kehua, primarily due to uncertainties in domestic solar inverter and energy storage system (ESS) demand, as well as intense pricing competition [1][7]. - Kstar is favored over Kehua due to its faster long-term growth potential, better margin profile, and more attractive valuation metrics [2][5]. Kstar Summary - Kstar's sales and net income for 4Q24 decreased by 9% and 76% year-over-year, respectively, while 1Q25 showed a 14% increase in sales but a 17% decrease in net income [5][8]. - The company anticipates 30%-50% year-over-year order growth from domestic internet and telecom customers in 2025, with significant opportunities for customer base expansion [6][9]. - Kstar's total revenue is projected to grow from Rmb 4.159 billion in 2024 to Rmb 9.642 billion by 2030, with a net income increase from Rmb 394 million to Rmb 1.455 billion over the same period [10]. Envicool Summary - Envicool's 4Q24 and 1Q25 results missed expectations due to delayed revenue recognition and increased operating expenses, leading to a 31% downward revision in EPS estimates [11][15]. - The data center room cooling segment saw sales growth of 49% in 2024, with a record high order backlog by 1Q25, indicating strong demand [13][14]. - Envicool's total revenue is expected to rise from Rmb 3.529 billion in 2024 to Rmb 4.589 billion in 2025, with net profit projected to increase from Rmb 344 million to Rmb 453 million [16].

Group 1 - The competition between Chinese and South Korean companies in the battery sector is expanding from electric vehicles to energy storage systems (ESS) due to the rising demand for renewable energy and data centers [1] - ESS helps stabilize the power grid by providing backup power, especially as the demand for clean technologies and AI-related hardware increases [1] - The share of energy storage batteries in the global battery market has increased from 5% in 2020 to 20%, with predictions of more than doubling by 2030 [1] Group 2 - Chinese energy storage batteries account for nearly 90% of the global ESS installed capacity, with over 80% market share in the US and over 75% in Europe [2] - Following the imposition of tariffs in the US, South Korean battery companies see an opportunity to regain market share, with LG Energy focusing on cost-effective lithium iron phosphate batteries for the US market [2] - The different trajectories of Chinese and South Korean energy storage companies illustrate a "tale of two battery markets" [2] Group 3 - In 2022, China exported lithium-ion batteries worth $15.3 billion to the US, widening the market share gap with competitors like South Korea [3] - Chinese lithium iron phosphate batteries are favored in the US for their competitive pricing and cost-effectiveness, particularly for data centers [3] - Despite high tariffs, Chinese exporters may withstand costs due to existing advantages, while South Korean manufacturers have yet to prove their ability to competitively produce lithium iron phosphate batteries at scale [3]