CATL Shares Plunge on Earnings Miss Amid Broader AI and EV Sector Volatility

Reports indicating a planned expenditure of $750 billion on additional computing power have set a contextual tone for market discussions. This significant investment in AI infrastructure is being observed against a backdrop of varied market performances, including the notable CATL earnings miss.

CATL, a major battery manufacturer, reported a profit shortfall that pushed its stock to its lowest level in a year. This has compounded worries within the electric vehicle (EV) sector. The concern is that this fear could extend beyond stock markets to influence currency and bond markets as well.

The current market environment, despite some positive earnings from companies like SpaceX, is experiencing 'AI wobbles' with some data center projects facing delays due to community backlash, leading to plummeting stock values in related companies.

The CEO of Elice, a company whose stock saw significant volatility on its first day, stated he is not concerned about such fluctuations in the initial week. Despite the stock's initial erratic movements, the CEO expressed a long-term outlook of 'explosive growth.'

This perspective comes as the company's stock bounced up about 30%, amid a challenging market environment in China where analysts are cutting price targets for several stocks, expecting continued pressure.

The electric vehicle (EV) sector is facing significant pressure on profitability due to fierce competition and substantial research and development (R&D) spending. This is evident in soft net income numbers, as companies like CATL expand into new areas such as trucks and fuel cells.

Domestic competition in China is relentless, and international trade headwinds are also mounting. EVs constitute about 20% of the HS Tech index, and the current situation, characterized by 'no margins and no profitability,' is drawing parallels to the early phases of the AI industry.

Investors are reminded of the challenge of translating amazing technology into actual profits amidst numerous Chinese players. This macro message regarding profitability concerns is impacting market sentiment, leading to discussions about whether the selloff has been excessive or if earnings truly reflect a poorer performance than a year ago.

China has established a state-owned National Data Group to advance its artificial intelligence (AI) ambitions. The launch of this entity is considered significant due to its high-profile optics, including the Vice Premier inaugurating the opening of the center, an event widely broadcast across state media.

This initiative signals a top-down strategy, suggesting that companies are expected to align and work with this new entity. The government's reported goal is to dedicate a network of data centers and prevent 'data silos' by creating a unified data network to promote cross-industry data sharing. Additionally, Deepseek is releasing inference software to help cloud computing companies achieve cost-cutting, which is crucial for China given bottlenecks in AI accelerators.

The buildout of AI infrastructure is encountering growing constraints, primarily from grid bottlenecks and public backlash. While significant funding is flowing into AI investments, the public is increasingly raising concerns about the sustainability and impact of continued expansion.

This issue is not confined to one region, with similar situations featured in Australia, where data center projects have faced community opposition, and also in the US as midterms approach. The need for a re-evaluation of data center placement is becoming apparent, given the increasing scrutiny over environmental and local impacts.

CATL's shares in Hong Kong plunged by approximately 8% intraday, nearing a 10% threshold, following disappointing earnings. This decline approaches levels seen on the worst day for H shares on record, pushing the stock into unprecedented territory for its Hong Kong listing history, which only dates back to last year.

The broader market context includes a slowdown in the China EV market, a cloudy overseas picture, and the potential revival of a consumption tax in the battery sector. For comparison, the worst day for CATL's A-shares in 2024 saw a 14% decline. The current situation places the company in focus, with analysts observing significant pressure on its stock.

According to an analyst, CATL management does not appear to be overly concerned, citing existing policies the company has been aware of since earlier this year. While demand is expected to remain intact over the next few years, the outlook for the upcoming year is uncertain, particularly concerning overseas markets and the energy-storage sector.

Near-term pressures on profitability are possible, but overall volume is still considered intact, as reflected in projected growth rates. Domestically, uncertainty in energy storage is linked to inventory levels and prices, though a potential decline in battery costs could partially improve returns next year. The analyst also notes the new consumption tax starting in September, with another step-up from 2% to 4% planned for September next year, which will impact profitability. Companies are trying to improve their revenue mix, with non-Chinese markets potentially boosting unit net profit in the long term.

CATL's H shares are currently trading at a significant premium compared to its A shares. This disparity is attributed to different investment sensitivities between onshore and offshore investors.

Onshore investors tend to be more reactive to incremental shifts in market sentiment, while offshore long-term investors are more inclined to trust in high-quality names like CATL. These long-term investors are less concerned about potential challenges, partly because few suppliers can match CATL's market position, leading them to hold onto the stock despite short-term fluctuations.

A planned initial public offering (IPO) for a data center company, initially aiming to raise approximately $5 billion and valued at about $20 billion, has been delayed due to market volatility. Investors are closely scrutinizing data center companies, focusing on volatility, earnings, and future prospects.

Issuers are now considering several options: accepting a lower valuation, conducting a smaller IPO around $3 billion, or delaying the timeline until market conditions improve. This situation reflects a cautious approach in the current market environment, where companies are reluctant to risk a sideways performance for their public debut.

The Indonesian market is experiencing significant pressure due to an MSCI downgrade and a weakening rupiah, which has fallen below 18,000 per dollar. The MSCI downgrade triggered a considerable rout in Indonesian stocks, leading to outflows of approximately $500 million from the stock market.

While some analysts anticipate a 25 basis point hike in interest rates, Bloomberg Economics projects a 'jumbo hike' as the central bank may need to intervene more aggressively to stabilize the rupiah and address investor concerns about market investability. The MSCI decision is not expected until June, and core issues like Indonesia's free float and concentration remain unresolved, contributing to ongoing contagion risk for other asset classes.

An analyst has expressed skepticism that Indonesia can implement sufficient market reforms to resolve its core problems before MSCI's decision in June. While Indonesia has taken some steps, these measures have not addressed fundamental issues such as stock market manipulation, high concentration, and low free float.

The analyst noted that a comparable reform process in India took two to three years, suggesting the current timeline is insufficient to effectively tackle these deep-seated problems. Despite attempts to involve various stakeholders, the analyst believes more time is needed to move public opinion and implement lasting changes, especially given the market has already lost almost $500 billion in market capitalization.

Chinese tech giants Tencent, Alibaba, and ByteDance have reportedly placed orders for millions of Nvidia graphics cards, with a sticker price estimated around $35 billion, according to a Reuters report. Minmin Low, a China correspondent, clarified that these are standard graphics cards intended for retail end-consumers, not the high-end data center GPUs subject to restrictions.

Unlike data center GPUs, these graphics cards lack the hardware bridge necessary to link tens of thousands of units together for large-scale data center operations. Companies are reportedly looking to acquire more than 3 million of these cards. However, Nvidia has indicated that it may only be able to fulfill 5% to 10% of the total order, raising questions about its capacity ramp-up.

Jio Platforms is seeking to raise $4.2 billion in an initial public offering (IPO), which would make it the largest ever in India, surpassing Hyundai's 2024 offer. However, the IPO, valuing the company at approximately $70 billion, is about 10% lower than its direct rival, Airtel.

Analysts note that investors are increasingly prioritizing companies that generate higher revenue per subscriber, rather than simply having a large subscriber base. Nomura, for example, has identified Airtel as a top pick, citing its premium subscriber segment as more resilient during economic downturns.

A growing number of neo-cloud and data center initial public offerings (IPOs) are being pulled or postponed, signaling a shift in market sentiment. This trend began about two weeks ago when an Australian data center operator withdrew its $5 billion IPO, an event initially perceived as an isolated incident.

Attention then shifted to Ellis, a Korean data infrastructure company, which experienced a 32% plunge on its debut, making it a central topic and re-focusing interest on data center buildouts. Many companies aiming for rapid scale are looking to sell shares, but delays are becoming common as issuers test the market and observe how rivals perform before launching their own offerings. The tanking of Coreweave shares in the US further exacerbates this cautious environment, leading many operators to consider downsizing their share sales or postponing their IPOs indefinitely, including a delayed IPO in Singapore.

CATL shares fell approximately 10% in Hong Kong following a weak earnings report, with cost pressures and squeezed margins identified as key takeaways. The stock is also facing additional headwinds from the European Union and an anticipated consumption tax on batteries, contributing to near-term pressure.

Analysts have responded by cutting street price targets for CATL. This decline is significantly impacting the overall Chinese benchmark index, which is feeling the drag from CATL's performance while other sectors are doing relatively better. Despite some positive earnings from companies like SpaceX and Super Micro, which offered a buffer against recent market risks, broader questions persist about the trajectory of the AI trade, particularly concerning neo-clouds and data center infrastructure buildouts.

The window for data center listings is not closing, but investors are increasingly demanding a differentiated approach to asset evaluation. They are scrutinizing factors such as existing contracts, company credibility, track record, and development potential.

This shift suggests that valuations for data center companies may reset over the next two weeks to a different level than what was observed three months ago. Capital raising activities, whether through strategic deals or IPOs, are expected to continue, but the central question revolves around where valuations will ultimately settle. This cautious sentiment, while not a market closure, indicates a period of adjustment for the sector.

Despite a robust year for initial public offerings (IPOs) in Greater China, market sentiment remains notably weak, creating a disconnect between the volume of fundraising and how investors perceive public markets. The underlying health of the market, as measured by companies' ability to raise capital, appears strong with large follow-on offerings being well-received.

However, valuations in China and the U.S. are not at all-time highs, which paradoxically offers confidence that the current rally could continue. This robust IPO pipeline, particularly in Hong Kong, may be contributing to a liquidity squeeze in other parts of the market, leading to concerns about the overall benchmark performance and the need to space out large listings.

Australia's data center development is grappling with significant challenges, including widespread concerns over power sources, similar to global trends, but also uniquely compounded by community backlash and an infrastructure gap. Many of the country's transmission lines are in need of upgrades, but efforts to build new networks frequently encounter strong community opposition.

An illustrative example is a planned data center in west Melbourne, where residents found the proposed large, concrete, super high-voltage transmission lines to be unsightly. This sentiment contributed to a similar situation earlier in the month, where a data center project in Sydney was canceled due to community backlash over its proximity to residential areas and a school, highlighting the persistent problem of grid bottlenecks and public resistance to infrastructure expansion.

SpaceX reported a strong third quarter, with net income reaching $4.4 billion, surpassing profit estimates due to robust growth in its satellite and internet businesses. The company also forecast next-quarter revenue of up to $37 billion, which exceeded expectations. Meanwhile, Super Micro also reported preliminary first-quarter sales of $8.5 million to $9.5 million, attributed to surging demand in AI infrastructure powered by Nvidia chips, expecting gross margins of 12% to 12.5%.

Elon Musk, CEO of SpaceX, expressed support for a potential merger with Tesla, stating that special committees at both companies are currently considering the idea. Musk highlighted potential synergies in areas such as artificial intelligence, chip design, robotics, and satellite connectivity as strong merits for combining the companies, emphasizing their role in advancing 'super intelligence singularity.'