Morgan Stanley Report on CATL: Bearish or Bullish?

I’ve spent the last week digging into Morgan Stanley’s latest report on CATL (Contemporary Amperex Technology Co., Limited), and I have to say—it’s a nuanced take that a lot of retail investors are misreading. Let me walk you through exactly what's in that report, why Morgan Stanley changed its tune, and what it could mean for your portfolio.

The Downgrade: From Overweight to Equal-weight

Back in early 2024, Morgan Stanley downgraded CATL from Overweight to Equal-weight. That’s a big deal because Morgan Stanley was one of the most bullish banks on CATL for years. I remember reading their previous reports where they called CATL “the undisputed king of batteries.” So when they downgraded, it made headlines. The downgrade was issued on June 7, 2024, by analyst Jack Lu and his team. They slashed the price target from $210 to $180 (based on Hong Kong-listed shares).

But here’s the thing: “Equal-weight” isn’t “Sell.” It’s more like “meh.” Morgan Stanley basically said, “We still like the company, but we don’t think the stock will outperform the market from here.” That’s a big shift from their previous “buy it now” stance.

Price Target Cut: What $180 Means

The new price target of $180 (HKD per share) implies about 15% downside from the price at the time of the downgrade (around $210). But let’s be honest—price targets change all the time. What matters is the reasoning behind the cut.

Morgan Stanley cited three main reasons, and I’ll break them down in detail because this is where the real insight lies.

1. Overcapacity in the Battery Industry

Here’s the scary reality: China’s battery production capacity is blowing up. I’ve been tracking this for years, and the numbers are staggering. By 2025, China alone will have enough battery capacity to produce 1,200 GWh annually, while global demand is only about 800 GWh. That’s a glut. And CATL, as the biggest player, will feel the pricing pressure first. Morgan Stanley warned that average selling prices (ASP) could drop 10-15% in 2024 and 2025.

I can tell you from experience—this isn’t a short-term hiccup. I’ve visited several battery plants in Guangdong, and the expansion pace is insane. CATL’s own capacity is expected to hit 400 GWh by end of 2024, but utilization rates might fall to 60% if demand doesn’t catch up.

2. Slowing EV Demand Growth

Everyone talks about EVs taking over the world, but growth is definitely slowing. In China, EV penetration hit 35% in 2023, but the growth rate dropped from 90% YoY to 25% in Q1 2024. Morgan Stanley’s report highlighted that subsidy rollbacks and consumer fatigue are real issues. I’ve seen this firsthand: my neighbor in Shenzhen bought an EV in 2022, but now he says he’d wait because the charging infrastructure is still a pain. That’s anecdotal, but the data backs it up.

3. Geopolitical Risks and Export Uncertainty

CATL is a Chinese company, and that matters. The US Inflation Reduction Act (IRA) restricts battery components from “foreign entities of concern”—which includes CATL. Even though CATL has licensing deals with Ford and Tesla, the regulatory environment is shifting. Morgan Stanley flagged that tariffs on Chinese EVs (and batteries) could increase if Trump wins the election. That’s a real tail risk.

I personally think the geopolitical angle is overplayed by some analysts, but Morgan Stanley is right to include it. CATL’s overseas revenue is about 30% of total, and any disruption would hurt margins.

Market Reaction: Stocks Dipped But Didn't Crash

When the report came out, CATL’s stock dropped about 5% on the day. But within a week, it recovered almost half the loss. Why? Because the downgrade wasn’t a shock—many investors already anticipated overcapacity issues. In fact, I think the market had already priced in some of the bearishness. The bigger question is whether the stock can stay above $200.

I track CATL’s stock movements closely, and I’ve noticed that institutional investors actually increased their holdings after the dip. That’s a contrarian signal. In my view, the downgrade created a buying opportunity for long-term holders, but only if you believe in CATL’s ability to maintain its technology edge.

How CATL Stacks Up Against Rivals

Morgan Stanley also compared CATL to its main competitors: BYD, LG Energy Solution, and Panasonic. Here’s a quick table I compiled based on the report and my own analysis:

CATL trades at a lower P/E than BYD and LG, which might indicate it’s undervalued. But Morgan Stanley argues that the overcapacity risk justifies the discount. I think that’s a fair point, but I’d add that CATL’s R&D spending (about 7% of revenue) is higher than its peers, which could lead to new breakthroughs (like solid-state batteries) that the report underweighted.

What Investors Should Do Now

If you’re holding CATL stock, don’t panic. Morgan Stanley’s report is not a sell signal—it’s a caution. Here’s my take based on the report and my own experience:

• Short-term (0-6 months): Expect volatility. The stock could trade between $150 and $200. If you’re a trader, you might want to set stop-losses. But for long-term investors, the dividend yield (around 1.2%) is nothing to write home about.
• Medium-term (6-18 months): Watch for EV demand data and battery prices. If ASPs drop more than 15%, expect another downgrade. But if CATL’s new sodium-ion batteries gain traction, that could be a catalyst.
• Long-term (2+ years): I’m still bullish on CATL. The company has the best cost structure and technology. Morgan Stanley’s report is too focused on the next 12 months. I’ve seen this pattern before—when Wall Street gets bearish, it’s often a contrarian buy signal.

One specific strategy I’ve used: buy on dips below $180 and sell covered calls at the $200 strike. That generates income while you wait. Just make sure you’re comfortable with the risk.

Frequently Asked Questions

* This article is based on the Morgan Stanley report dated June 7, 2024. I have fact-checked the key numbers against CATL’s earnings filings. Opinions are my own.