Enchi: "Global market share should reach 50% by 2025" (1H22 conference call)

The following content is about Enjie's telephone meeting information on the 2022 first-half financial report regarding, and for Dolphin Analyst's interpretation of the financial report, please visit 《Electric Vehicle Battery's Alternative Aesthetic, Enjie's Belief》.

There isn't a lot of information in Enjie's financial report, however, there is quite a bit in the telephone meeting provided, so Dolphin Analyst will summarize some key information for everyone:

1. In order to achieve the global market share goal of 50% by 2025, the company plans to reach a shipment volume of 18 billion by 2025, with wet method at 12-13 billion, dry method at 5-6 billion, and overseas customers accounting for 40%, overseas market share reaching 35%-40%, and domestic market share reaching 65%-70%.

2. The company's coated film product ratios have increased quickly, with coated film accounting for 40% this year, aiming to reach above 50% in the next few years. There are 34 online coating lines this year, and at least 54+ next year, with new lines added every year focusing on online coated film.

3. It is expected that wet method separators will remain mainstream in the future and that production capacity will continue to be expanded, while cooperating with partners (subsidiaries, downstream major customers) to build a dry method base, which is expected to be put into operation in the second half of 2022. This will further improve the company's separator product structure to meet diverse application scenarios.

4. Energy storage started late and has a small base. However, new energy vehicle batteries will still be the mainstream in the next 10 years and far higher than the number of energy storage batteries. Additionally, energy storage does not necessarily have to use dry method separators. Given the focus on costs in the initial stage, dry method separators are used, but in the next few years, in the mid to high-end energy storage fields, there should be a gradual shift towards using wet method separators.

1. Key information discussed by management:

Downstream demand is strong, supply cannot meet demand. The company's main concentration is on increasing production capacity.

【1】Review of January-June 2022

Although affected by the chip shortage, rising prices of battery raw materials, and the impact of the epidemic in Shanghai and other places, sales of new energy vehicles reached 2.6 million, YoY+120%. Sales of new energy vehicles drove rapid growth in demand for power batteries, with domestic power battery shipments surpassing 200GWh, YoY+140%. Benefiting from this, the separator industry is in short supply, with demand remaining strong during the epidemic and steady prices. The shipment volume of China's lithium battery separators reached 5.4 billion square meters, YoY+55%, with increasing proportions of wet methods.

【2】Outlook for 2022

As the epidemic gradually recovers, it is expected that the sales volume of new energy vehicles will exceed 6 million for the whole year, which will drive up demand for separators. The company is at full capacity and demands continue sustain. Therefore, the company will mainly focus on increasing production capacity.

【2.1】Domestic and foreign production capacity construction is progressing steadily:

With 5 large production bases currently built, there will be an addition of 110+ production lines over the next 4 years, scattered in China, Europe, and the United States.

【a】Domestic base construction is progressing smoothly

New domestic bases: Chongqing Enjie, Suzhou Jeli (Phase II), Jiangsu Enjie, Yuxi Enjie, Hubei Enjie, and Xiamen Enjie.

• Chongqing Enjie has completed the construction of the first phase of four production lines and is currently undergoing the second phase of construction.
• Suzhou Jielike (Phase II) 200 million square meters of head production capacity project has completed the basic steel frame construction and is expected to be put into production before the end of the year.
• Jiangsu Enjie has obtained the corresponding approval and land and is currently under construction.
• Yuxi Enjie has obtained land and is actively preparing for subsequent work.
• Hubei Enjie is in the infrastructure stage and will complete part of the workshop and warehouse construction by the end of the year.
• Xiamen Enjie has been established and is actively preparing for subsequent construction.

[B] Overseas new energy expansion wave is coming, the company firmly lays out overseas markets

1. Hungary:

Progress: The foundation part of the workshop has been completed, and it is expected to be completed and put into production in 1Q23.

Contribution to the company's business development: (I) To comply with the trend of localization of overseas new energy industry chains, consolidate cooperation with European battery manufacturers and new energy vehicle customers; (II) Enter the European market with the geographical and tax advantages of Hungary.

2. Ohio, United States

1. Progress:

• As the company's second overseas base, it marks the process of the company's internationalization. With sufficient market research, project preparation work, and experience in building factories in Europe, the construction of the US plant will be more perfect.
• The project was launched in May this year, and is now about to start construction. Products are expected to be supplied by 2024.

1. Contribution to the company's business development:

Assist in responding to North American customer needs quickly and increase overseas market share.

3. The company's advantages in overseas markets

1. Sign long-term supply agreements with European and North American customers, and match localized construction with future customer needs.

2. This year, new customers such as a large overseas automobile company and ACC have been added, and the company's overseas competitiveness has been enhanced. The company strives to achieve a 50% global market share goal by 2025, stacked with overseas factories of LG, Panasonic, Samsung, LG Electronics and General Motors, and domestic battery companies.

[C] The leader is always strong and takes advantage of the opportunity to develop well

1. Company's own advantages The company's production capacity and shipments have ranked first in the world for many years, and its scale costs, market, customers, patents and technology research and development are far ahead. In addition, through forward-looking layout of overseas expansion of business circles, expansion of product matrix, such as tempered membranes, and the launch of the world's first online coating process technology, large-scale production helps reduce costs, and forward-looking development of semi-solid battery separator projects. Although industry competition has intensified, the company's future industry position is stable.

2. Development opportunities for the separator industry: In the past two years, the supply and demand pattern of the separator industry has been tight, and the mainstream wet-process separator has long been in short supply due to slow capacity expansion. It is expected that the price will remain strong, coupled with the entry of the global new energy industry into a period of rapid development, the company will usher in a huge era of opportunity.

Q: Production scheduling; capacity expansion speed; progress in domestic substitution

A: [1] Production scheduling

• The demand for separator products is strong, and prices remain stable.
• Despite the worst outbreak in March and April, the Shanghai plant did not shut down. Shanghai began to gradually ease control from June, and the repair of the industrial chain and logistics accelerated. The demand for diaphragms was strong, and the production and order fulfillment reached a new high in July and August, with sufficient orders but insufficient supply. Production has increased since September, especially for coating films, which have grown rapidly. Orders are strong in 4Q, and production capacity is still insufficient.
• H2 gradually releases new production capacity; currently, production capacity still cannot meet demand, so we will accelerate the release of new production capacity and tap the potential of existing production capacity to ensure customer delivery.
• Demand is expected to remain strong and supply will be in short supply in the next two years.

【2】Production Capacity Planning

This year, 23-25 new production lines will be added, and the production capacity will reach 7-8 billion square meters by the end of the year. Next year, at least 30 more lines will be added, and the production capacity will reach 10 billion square meters by the end of the year. By the end of 2025, more than 100 production lines will be added in total.

【3】Progress in Domestic Substitution

1. Jiesheng Technology

Jiesheng Technology (equipment factory) has made progress smoothly, and it has three subsidiaries: Juxing (100% supply company equipment), Fuqiang Technology (located in Suzhou, automation, responsible for the company's electronic control part), and JOT (located in Finland, automation). The automation of these two companies has differences and overlaps, so the company manages and integrates these three subsidiaries, such as replacing the JOT CEO who understands the business. Currently, all subsidiaries have entered a good state.

1. The subsidiary contributes to the company as follows:

(1) Produce three units of one production line (7 units in one production line)

• Supplementing the insufficient production capacity of some Japanese manufacturers.
• Laying the foundation for the localization of the entire production line. It is expected to achieve 80% localization soon.
• Reduce costs.

(2) Jointly transform process formulas and equipment to tap the company's existing equipment capacity.

(3) Improve the automation and intelligence level of the company's existing equipment

• Improve quality and efficiency.
• Automation is crucial as labor costs are high overseas.

In addition, in addition to the original Apple, Dell, and Microsoft businesses, the equipment factory has also entered the new energy field, such as JOT conducting new energy lithium battery testing (recycling automation, solar inverter automation).

1. Design Institute and Research Institute

• Establish a research institute and design institute to launch more new products in new fields, such as automated gymnastics, automated slurry systems, and automated MAX systems.
• Research and development are carried out in their respective original workshops. The new workshop was sealed last month, and large equipment will be installed in September. The research and development and automation production workshops will be settled by the end of the year, and the dormitory will be completed in November and is expected to be occupied before the Spring Festival in 2023. The large boiler will be settled in 1Q23.

Q: Opinion on the competition pattern of the diaphragm industry

A: The industry has exploded since 2021; it will maintain a high explosive speed in 2022. In the current extremely prosperous market where supply is in short supply, it is normal for participants to obtain business and profit growth. As a leader, the company has the following advantages:

1. New entrants are still in the stage of going from 0 to 1, while participants in other industries have yet to follow suit, and the company has gone from a follower to a leader.
2. Due to device and technology limitations, long verification cycles (more than 20 months), and insufficient production capacity, there is high demand and supply shortages both domestically and globally. Over the next 5-10 years, especially with international battery factories expanding their production capacity, demand will remain strong and the company will expand production to increase supply and maximize demand.

• LG will add power battery factories and cylindrical battery factories in Canada and the United States, with a goal of achieving nearly 200GWh production capacity in 2022 and over 500GWh in 2025.
• SK will expand production in European regions such as Hungary, with a goal of nearly 100GWh and increasing it to over 200GWh in 2025 and to over 500GWh in 2030.

1. Competition in the membrane industry is not simply limited to cost, but comprehensive strength in technology, process modification, new product development, and stable customer relationships.

• The energy storage battery industry has a small base but is growing rapidly, and is not expected to become a major market player until 3-5 years later. The main source of growth in the next 2-3 years will come from power batteries. The company has established strong relationships with all top downstream power battery manufacturers. For example, we have established close supply relationships with major customers through strategic alliances and joint ventures, and have the technical strength to develop jointly with our clients, ensuring stable cooperation.
• We have made sufficient arrangements in terms of patents, which is particularly conducive to overseas market development. Patent layout is a long-term process. As of H1 2022, the company has 560+ patents (100+ international patents) and exclusive patented technology licensed by the predecessors of foreign companies, leading the industry.
• The membrane industry has high barries in heavy assets and high technology, with high requirements for industry participants. The company has sufficient funds, technology, and talent reserves.

In fact, the production capacity expansion in 2021 will not be released until 2024 or 2025, and not all of it is effective capacity (i.e., it can meet downstream demand). Therefore, the company will not face price pressures from its products in the next 2-3 years. Prices are expected to remain stable, and prices for certain products with special requirements may increase slightly. As a firm believer in expanding production, the company is confident that it will achieve its goal of achieving a 50% global market share by 2025. Overall, the company has significant advantages in terms of comprehensive strengths, and its future development is not threatened, and it will maintain and expand its advantages.

Q: China's and foreign market share to achieve the goal of global 50% market share; expectations for overseas market share in the next two years; measures to achieve the goal.

A: [1] Domestic and foreign breakdown of the 50% global market share goal

The overseas market is crucial to achieving the goal of a 50% global market share after 2025.

The company expects that by 2026-2028, the market will enter a stable stage and China will account for 45% of the global lithium-ion battery market, Europe 30%, and North America 15%. The total demand for dry and wet membranes worldwide is expected to be 33-36 billion square meters. Based on this, the company plans to ship 18 billion in 2025, including 12-13 billion for wet-method and 5-6 billion for dry-method. Overseas customers will account for 40% of shipments, overseas market share will be 35%-40%, and domestic market share will reach 65%-70%. 【2】Plan:

1. Accelerate production capacity construction, especially overseas production capacity. It is expected to increase 30 production lines every year in the next three years. This year, 23-25 lines are expected to be added, striving to achieve a shipment volume of 11 billion square meters by 2025.

2. The company has a stable cooperative foundation with overseas customers such as LG, Panasonic, and ACC, and will continue to consolidate orders, optimize customer structure, and increase profits (domestic pays attention to cost, overseas customers pay attention to quality, so overseas orders are more profitable).

3. Technological innovation drives the high-quality development of the diaphragm industry, especially where overseas customers have very strict quality requirements. The company continues to input research and development, develop cutting-edge technology, and has sufficient technical reserves. In fact, the company's rich patents have played an important role in the layout of Hungary and the United States. (Japan is limited by cost and has no overseas layout, and domestic companies except Enjie are also limited by patents and have no overseas layout).

4. Diaphragms are customized products, and overseas customization requirements are more evident than in China. The company has begun to jointly develop battery diaphragms for 2024 and 2026 with overseas customers, and customer stickiness is increasing.

5. Reduce costs:

• Automation: The construction of domestic and overseas factories applies automation, and European and American factories reduce 30-50% of labor, and domestic factories are also undergoing transformation in this respect.
• Fine management: Cost reduction from thrift. Since the second half of last year, significant effects have been achieved.

Q: What is the planned proportion of the core customer's coated film?

A: The company has been laying out in 5 aspects: supply chain security, cost, quality, new products, and intellectual property.

1. Supply chain security:

Currently, the company has the largest production capacity of coated film in the world and maintains high productivity expansion rate, guaranteeing supply.

1. New products:

• Introducing new products of online coated films with features of efficiency improvement, reduction of waste, and high quality. Cooperation has been reached with many customers, and customers expect to increase production rapidly.
• Customers have strong stickiness, and the company has started to jointly develop battery diaphragms for 2024 and 2026 with overseas customers, many of which are coated products.
• The company is the diaphragm company with the largest global research and development investment, especially in the field of coated film. Among them, products related to technical indicators such as heat-resistant ceramic diaphragms and PVDF coated films have reached the world's leading level and have been recognized by customers such as Panasonic and LG.
• Focus on developing cutting-edge technology. For example, establishing a joint venture company with Walon, Jiangsu Saneagle, which specializes in providing coated diaphragms for customized half-solid-state battery for Walon and other customers. Sansheng's construction is progressing smoothly, and it is expected to be put into operation by the end of this year.

1. Intellectual property:

Coated film broke out rapidly in 2021, and overseas companies master core patents. The company's patent layout is perfect, with more than 560 patents and technology patent authorization from LG and others.

• Not only does the company export diaphragms, but some domestic customers also export batteries. Such customers attach great importance to intellectual property, so they will choose to use coated film products like those of the company, which have a system of intellectual property protection.

Overall, the proportion of the company's coated film products has increased rapidly, accounting for 40% this year, and hope to reach over 50% in the coming years. After years of development efforts, supplying Korean customers with coated film products has been entirely converted from basic films, Japan will begin this year (related to patents, etc.), and most of China is looking forward to online coated film. This text contains technical jargon and industry-specific terminology. Please provide more context or clarification if necessary.

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今年在线涂布有 34 条产线，明年至少 54+ 条，以后每年投建的新产线都是在线涂布膜。

Q: View on dry-process diaphragm; layout of dry-process diaphragm in the company

A: [1] View on dry-process diaphragm

1. Energy storage started relatively late and has a small base; power batteries will enter the GWh era in 2024-2025. In the next 10 years, new energy vehicle batteries will still be mainstream and far outnumber energy storage batteries. Wet-process diaphragm has advantages such as energy density and is the mainstream for new energy vehicle batteries.

2. Energy storage does not necessarily have to use dry-process diaphragm. In the early stages, dry-process was used due to cost considerations. With the development in recent years, safety and service life are increasingly valued, especially in the middle to high-end energy storage field. Therefore, wet-process diaphragm is more preferred.

In summary, the demand for dry-process will grow rapidly with the development of energy storage, but wet-process is still the mainstream and dry-process is only complementary.

[2] Layout of dry-process diaphragm in the company

In the future, the company will do the following layout:

1. Vigorously expand wet-process production.

2. Cooperate with partners (subsidiaries, downstream major customers) to invest in dry-process bases. The bases under construction are expected to be put into production in H2 2022, further improving the company's diaphragm product structure to meet diversified application scenarios.

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