TIP840: CATL: Powering EVs, Power Grids, and AI w/ Stig Brodersen, Manish Karira & Ralph Summerford

30:15And this is similar to Amazon's playbook. They get paid on e-commerce sales today and pay the suppliers much later and let that float fund the flywheel. But this is where the risk also resides. There is a limit to how much you can stretch your payables. And the Chinese authorities are asking large firms to start paying the SME suppliers sooner. So for CATL, that likely means that part of their interest free float might unwind and a period of readjustment in how it funds its growth. I don't think it will break the model because much of CATL's payables are to large suppliers, which are outside the SME rules that the authorities are pushing for.

30:59But I would say it's still a real headwind to watch out for. Yeah, Manish, and there's a big debate around China's state involvement in domestic champions and how subsidies have helped companies like CATL and BYD. Does CATL have any government golden share or would it succeed without state support? Yeah, so let me just talk about golden share a bit. So golden share in China is basically like a special management share, typically given to the state or a government fund. And the main purpose is for the state to have some kind of regulatory oversight on the company. It does not impact the day-to-day operations of the company, but the state gets some veto powers and is mostly used for companies in the social media space where you want to have some control on what content gets distributed to the general population.

31:56So talking about CATL, CATL is a founder-controlled company with no publicly disclosed golden share. And yet, like virtually every strategic Chinese manufacturer, it did benefit from state support early on. The biggest support that CATL received was the restriction that functionally locked out foreign competition from the China support program and gave CATL a captive domestic market to scale up. It wasn't until Elon Musk negotiated Tesla's entry in China in 2019 that the state scrapped the restriction and allowed foreign competition to come back in. And I believe the second support that CATL received was it came in the form of these consumer purchase subsidies that helped create the EV demand in China.

32:47So these subsidies are also now fully phased out at the end of 2022. But what is worth mentioning here is that the mindset which is at the top of the company. So at the peak of the subsidy boom in 2017, Robin Zheng sent his staff a now famous letter in Chinese which roughly translates to If you stand where the wind blows, even a pig can fly. His point being that a strong subsidy tailwind in the captive home market can make even a mediocre company look great. And his message was a warning to his team against the dependency on a subsidy and to build a cost and technology advantage that could help them win globally without the state support.

33:34And that warning got tested for real. So China removed the restrictions of foreign competition and the competition came running back in. LG, Panasonic, they all came back in. So basically the wind stopped and CATL still holds a leading global share in the EV battery market and they earn margins which are above the best of the industry. So the point here is that Robin Zhang didn't confuse a policy support with a durable advantage. He instead used the government support as a temporary support to internally build a system that now gives them a long-term competitive advantage. Now for the other side of the story, because no thesis survives without the bear case.

34:24But on the risk that we talked about, though, are there any more worth putting on the table before I get up there? Yeah, absolutely. So I think the first one, which I think is the biggest for CATL, is the geopolitical risk. So CATL is effectively walled out of the US market, which is the second largest market for EV batteries. The company is on the Pentagon's list of companies that work for the Chinese military. This is something that the company has contested hard. Robin Zeng has sent executives to Washington to make the case, but so far without success. So CATL's counter to this restriction is the licensing model that I talked about.

35:08And as an example, that the Ford partnership in Michigan, where CATL licenses its technology rather than owning a manufacturing facility and in return collects a fees on that license. I think it's a clever way to circumvent the restriction, and it's a template that CATL could repeat with other partners. But having said that, as I mentioned, it's still in the early stage and it's not a done deal yet. So the risk is still very real and something investors need to watch out for. Let's go deeper, Manoush, on the licensed royalty and service. I think you called it the LRS model. LRS is often spun as an asset-like growth.

35:51In reality, it may be better spun as a defensive capitulation. By surrendering direct ownership and customer relations to Ford and GM, CATL is admitting that direct Chinese ownership is politically toxic under the U.S. Inflation Reduction Act. Accepting a mere 3 % to 4 % royalty fee turns that invisible king you mentioned into a low-rent IP landlord. This model makes CATL, what I would call a ghost in the machine, vulnerable to a stroke of the pen, where the U.S. regulators can sever the IP link at any time and leave CATL with zero physical assets to reclaim. Not only a stroke of the pin loss by handing over the blueprint for high-density packs to Ford and GM, not only are you handing over the blueprint, CATL is training the very competitors who seek to exclude it.

36:57Let's call it LRS leakage. You're right. It's a threat that is very real. Yeah, I totally agree. As the LRS framework evolves, this will be an important aspect to watch out for. I mean, after all, CATL itself learned the manufacturing skills from other players such as BMW. So it's definitely possible for US manufacturers to learn from CATL. Although with the high R &D focus that CATL has, they are constantly moving up the technology curve, but then training competition can still be a threat to watch out for. I would say the second risk that I want to put on the table is the price war at home. So China's battery and EV sector has seen a brutal, brutal price war.

37:43So much so that Robin Zhang himself has publicly asked the industry to stop computing purely on price. The counter here is that the growth in the energy storage segment, especially the AI data center demand that we discussed. It is a new higher margin, faster growing segment where CATL is number one. And the company is moving into a full stack power storage solution where the competition is less intense. Again, storage is not immune to price pressure and its per unit prices are falling too. But it's a higher margin than the EV batteries business and it's still in the early stage of the growth curve.

38:24And the third risk that I would talk about is the technology disruption risk. Now, battery technology is improving at a very high rate. As a rough rule, every two years, the energy density in the battery packs climbs by about 20%. And to add to that, there is faster charging, longer battery life, better cold weather performance, and the innovation spans battery chemistry, materials, cell designs, etc. So the danger here is that the new chemistry, such as the solid state or the sodium ion batteries or something else, leapfrogs the existing LFP and the NMC batteries that CATL is dominant today. And the counter here is that CATL spends more on R &D than anyone in the industry.

39:13The company isn't relying on any single chemistry. It is already developing and scaling sodium ion batteries in parallel. So the bet here is that whatever the next innovation is, CATL is likely working on it too. So the risk is real, but my view is that the disruptor and the incumbent may just turn out to be the same company here. Manush, and I agree. Before we talk about valuation, let me jump in and amplify some of those risks and present a little bit more on the bear case for CATL. The Volcker celebrates volume growth as a sign of dominance, but a forensic look at the numbers reveals a treadmill effect.

39:58Recall, I'm a forensic accountant and that pun I intended to make. In a recent fiscal period, CATL reported a 21.8 % growth in shipped gigawatt-hour volume, yet the top-line revenue contracted by 9.7%. This price deflation acted as a massive 130 % drag on growth. This happened because CATL's long-term agreements utilize raw material indexation. The company is contractually obligated to pass manufacturing efficiency gains and commodity savings directly to their OEMs. CATL is running exponentially faster to stay in the same place financially, so it's surrendering its pricing power to maintain utilization.

40:55Also, the recent 15.5 % profit margin expansion achieved while the revenue was shrinking is a mathematically temporary windfall. It's not a new baseline, it doesn't indicate technological superiority. Rather, call it a cross-wedge profitability fluke. What an investor will likely see is that 15.5 % net profit will regress to a tighter 11 % to 12 % historical bands. Last year, CATL reported almost two times as much cash flow as profit. This two times delta exists because CATO uses its dominant position to squeeze suppliers by a higher days payable. Outstanding. Essentially, it's an interest-free loan from its supply chain, like you said, at Amazon.

41:51However, the Chinese authorities have already now demanding and mandating that large firms pay SMEs faster. As this interest-free loan is called in, and CATL's funding model face a painful readjustment, stripping away the cash used for buybacks and dividends. The interest reflots, like that enjoyed by Buffett and other insurance companies, will go away. Although yours truly believes that the energy storage system is a cyclical buffer to slowing EV sales, The ESS, the energy storage systems, is sensitive to utility capital budgets, to global interest rates, and to AI spend. This ESS buffer can be viewed as a high beta on the global microenvironment.

42:43CATL's uncontested expansion may slow, being the largest, though the biggest target for all the competitors. They may be the slowest mover towards solid state disruption, and they have the most to lose from the next generation chemistry, unless, of course, they invent it. With subsidies from the Chinese government gone, recall the pig in the wind, CATO faces a gravitational pull not seen since 2011. Some of those gravitational pulls include, one, a utilization risk. With new plants in Hungary and Germany, CATL has a massive fixed overhead. Any minor slowdown in European EV adoption due to subsidy cliffs will leave this capacity unabsorbed, turning growth assets into margin angsts.

43:37Commodity concentration. Despite the vertical integration, CATO remains a shadow commodity trading house. Its stock price may be viewed by bears as a proxy for lithium and nickel volatility, not a reflection of R &D prowess. The European Protectionist Wall, the EU Carbon Border Adjustment Mechanism, CBAM, acts as a targeted tax on Chinese cells. And a key founder, key man, risks. CATL is inextricably tied to Robert Zing's personal standing. with a 22.5 % ownership, deep ties to Beijing, any shift in his political standing represents an existential, unhedgable risk for shareholders. And I will remind folks about Alibaba.

44:35Thanks, Ralph. These are valid risks. I'll get off my soapbox now. Go ahead. Yeah, I agree. I think these are valid risks, especially the geopolitical risk linked to European protection. And anybody investing in China has to be comfortable with taking on the geopolitical risk. That's something which is always there. For the other ones, let me try to kind of address them one by one. So the first one is the utilization risk linked to the fixed overheads at these overseas plants in Hungary and Germany. So it is true that a slowdown in the European EV industry will have some impact on CATL. But I would also say that being the lowest cost producer, CATL might be better placed in managing the downturn compared to the competition.

45:29I mean, we have seen subsidies getting removed in China, resulting in overall EV slowdown. But the dominance of CATL in China has continued. Now, with regards to your point about commodity price volatility linked to the lithium prices, basically. So the company is actively developing new battery chemistries such as the sodium ion batteries as a response to this very risk. So sodium as opposed to lithium is widely available. The issue currently with sodium ion batteries today is that the energy density is lower compared to the lithium-based batteries. But again, as that technology improves, this could be a good hedge for CATL against the commodity price volatility.

46:15And finally, on your point about key man risk, well, that again is a very real risk. Robin Zhang has been the key driver behind the company and is the largest shareholder. I am less worried about a shift in the political standing because, first of all, CATL operates in a sector that China wants to grow. So they have a strong mutual alignment on that. And secondly, Robin Zhang maintains a low profile and rarely speaks in public. So the chances of him rubbing the regulators or the state authorities the wrong way is quite low. But again, it's a valid risk and something I would categorize as low probability, but with potentially high impact and very difficult to hedge.

47:05Let's take a quick break and hear from today's sponsors. Curious about online trading, but haven't taken the first step yet? You're not alone. And Plus 500 Futures is a great place to start. The futures markets are moving fast. And with Plus 500, you can explore popular assets like oil, gold, S &P 500, Bitcoin, and more. From crypto to commodities, there's always something happening. The platform is super easy to use, so you can trade on the go right from your phone. You can get started with just$100 and jump into the action. See something interesting? Once your account is open, you can trade it in just a couple of clicks.

47:40And if you're not quite ready yet, you can practice with a free demo account. No risk, no pressure. With 20 years of experience, Plus 500 makes trading more accessible than ever. Check it out at plus500.com. Trading and futures involves risks of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus. Most leaders are automating work they've never actually watched happen. They know how the process is supposed to go. Someone walked them through it once. It sounded clean, but the version that runs day-to-day looks completely different and nobody's doing anything wrong.

48:16That gap is bigger than most of us realize. And it means the decisions about what to fix, automate, or hand to AI are running on gut, not data. That's exactly the problem that today's sponsor Scribe was built to fix. Scribe is a workflow AI platform trusted by 94 % of the Fortune 500 and Scribe Optimize is your AI roadmap. It passively captures how your team actually works across your approved business apps, no interviews, no manual process mapping, and follows workflows wherever they go, even when they start in one tool and finish in another. The dashboard shows you what's happening and where the time is going live right now, not a report someone built last quarter.

48:56And its top issues view doesn't just flag your biggest inefficiencies. It tells you why they're happening and gives AI-powered recommendations with estimated time savings built in. Importantly, it's a leadership visibility tool, not employee monitoring. It only runs on apps your admin approves, user-level data is anonymized by default, and sensitive information is automatically redacted and never leaves your firewall. To see Optimize in action, head to scribe.how slash WSB and mention The Investor's Podcast for a 30-day risk-free trial. That's S-C-R-I-B-E dot how slash WSB. They say every day your business is late to AI, you fall two days behind, and the competition, they're only moving faster.

49:40Fortunately, there's NetSuite next. You probably already know NetSuite, the AI-powered business suite that securely connects all your data, financials, inventory, commerce, HR, and CRM all in one source of truth, trusted by over 43 ,000 customers. NetSuite Next is the next huge leap because now AI is built into everything you do. It surfaces custom insights throughout your day. AI agents work alongside you on the routine stuff. And anytime you've got a question about anything, you just ask, like you're talking to a colleague. And I use it. And really, I think you should too. For the first time ever, you can try NetSuite Next for free.

50:19If your revenue is at least in the seven figures, go to netsuite.ai slash tip. Built for every industry, ready for every boardroom, netsuite.ai slash tip. All right, back to the show. Now let's get to the fun stuff. I think you already said, man is that we're getting to the fun stuff, but I wanted to talk about the valuation. So with all of this kept in mind, how do you think about the current valuation and is it a buy right now? Okay. So as of today, the current stock price for shares trading in Tianjin, CATL's market cap is around$280 billion. And with a cash sitting on the balance sheet, the enterprise value, which is what you actually pay for the operating business, is close to$250 billion.

51:10Now, against a$14 billion of operating profit over the last four quarters, that's about 18 times multiple EBIT to EBIT. And if you look at the P multiple, that's roughly trading at about 21 times, which I think for a global leader like CATL is neither demanding nor cheap. The company has a high return on invested capital of around 17 % and a return on equity of about 25%. So there is a good enough chance that the operating business roughly doubles in value over the next five years. And if the multiples remain where they are, you can expect about 15 % annual return before you add a dividend yield of another point or two.

51:57So to summarize, it's a dominant cash generative founder led business with high returns on capital that can potentially double the value of the business in five years. There are obviously both upside and downside cases. We discuss about the growth engines around AI data centers and the licensing model. If they surprise on the upside, then the returns can be even more meaningful. And the downside case is that the domestic price war intensifies and the LRS model doesn't scale in the US due to geopolitical tension. Most of the listeners are probably based outside of China. So how can a non-Chinese investor buy the stock, Manish?

52:44Isn't it listed in two places? Yeah, yeah, that's correct, Rav. So CATL is dual listed. the A shares are traded in China with the ticker 300750. And the H shares are traded in Hong Kong with the ticker 3750. So same company, same one share, one vote, same dividend per share. But if you look at the stock price, and after adjusting for the FX rate, you will notice that the Hong Kong shares trade at a big premium of roughly 30 to 35 % to the mainline China shares. and that's actually opposite to the norm. Normally for a dual listed Chinese company is the mainland A shares that trade at a premium because Chinese domestic investors face capital controls and they cannot really buy in Hong Kong.

53:37So their demand gets concentrated into the local listing. But for CATL, it's the opposite case. And the reason is pure supply and demand. So the Hong Kong float is relatively small and the demand from global investors is quite high. The Hong Kong and Chinese shares are not fungible, meaning that you can't buy in one market and freely convert and sell it in the other market. It's a bit like TSMC, whose US-listed shares have long traded at a premium to the domestic Taiwan shares. So if an international investor, if you have access to the Chinese shares, then that is a cheaper way to get access to this business.

54:19Some brokers provide access to domestic Chinese listings using something called the Northbound Stock Connect. But this is usually limited to the institutional investors. For smaller retail investors, Hong Kong shares are the only option. These are freely accessible to everyone, but you will have to pay a premium to own them. Now, CATL has been widening the Hong Kong float. So after the Hong Kong IPO in 2025, they did a follow-on placement in 2026. And yet the global demand was so high that the premium hasn't compressed much. My personal view is that in the long run, Hong Kong shares should trade at a premium of about 10 to 20 % range using TSMC as the reference.

55:07So TSMC has averaged at around 15 % premium, but how and when that gap will compress is hard to say. Yeah, we've covered a lot about CATL here. If you had to boil it down and distill it to a single bottom line for an investor looking at a stock right now in mid-2026, what's the takeaway? Our listeners to takeaway is that CATL is not just an EV battle play. It has the potential to become the backbone of the future energy infrastructure and increasingly for the AI data centers. It is not without risks. You have to be comfortable with the geopolitical friction. And if the AI storage growth continues and the LRS licensing model proves scalable, then there is a very real compelling story for this business.

55:59Trey Lockerbie So without taking any sides, I don't want to get here too much metal up between a bull and a bear. I have to say still, reading up on CXL, I was more excited about batteries that were not for vehicles, but really for stabilizing power grids and AI data centers. And in my past, actually in my very first job at college, I was working with power grids, which I never thought would come in handy ever. But here we are 12 years into running the Investor Podcast. And apparently now it makes sense that that was my first job. And I'm amazed by how many technological changes you've seen within PowerGrid.

56:40And I know for most people, they're probably, I don't know, turning the light on and off or whatever, but someone who was looking at it from the nerdy inside of PowerGrid. It's almost like the laws of physics have changed over the past 15 years. And even before everyone talked about AI. You have these sophisticated tools that could pretty well predict demand supply, and you need that to stabilize the grid. So one reason why coal and nuclear have been used or are still being used for electricity generation is because they had such a low marginal cost, but also because they refer to what is baseload.

57:18So we use electricity all the time. And so it's very predictable, which is very useful. And you always have so and so much that you need. Of course, you have different times during the day where you need more electricity, for example, generally more during the day than during the night. But then you also, even during the day, you have whenever you wake up before you go to work, then there's a peak period, then you come back from work and you fire up the TV and you cook dinner, whatever. And so you can predict that pretty comfortably what's going to happen. So you can more or less see that demand of electricity on the curve.

57:58And then you have supply. And as the world has started to rely more on renewables, that energy has become somewhat more intermittent because you're looking at something like solar, you don't always know clouds in the sky, how much, or the wind blowing for that matter. And then to the latter, if you're thinking about something as simple as wind, and you're thinking, well, you just need to blow. And the more blows, the more electricity you generate. That is directional, correct? But you also have something called cutout speed. It's roughly 90 kilometers an hour and above that. The turbine pitches with the blade, it just stops.

58:35I think that's probably the easiest way to think about it. So it's not like a linear curve, I guess that's what I'm trying to say. But of course, from a purely physics perspective, you have bigger issues than just predicting demand to supply. And for the longest time with renewables, the issue has been that you can't store the energy. Because from the moment the wind hits the turbine's blade, electricity has to be used the moment that it's being made. You can think about it as it's a pipe and not a bucket. And then there's another dimension, and sorry for geeking so much out here, but the longer it has to travel, the more transmissions it has to go through, then it also uses some of that power.

59:13Anyways, I get too carried away here. But of course, with today's battery technology, much of that is changing, and it will continue to change in favor of better storage. So you're looking at a company like C2L, that would benefit from the underlying tailwind, no pun intended, even if you look beyond the AI data centers. But of course, the data centers, accelerate the need for batteries. And if you're looking at electricity, you also have several issues. The most important, the one that we're probably most aware of as consumers is grid stability. And so you need the right frequency. Perhaps you heard that the frequency we use in Europe is 50 hertz.

59:56It's 60 hertz in the US. And it's for purely historical reasons that you have different frequencies. The story is that in the 1890s, the German company AG, they picked 50 hertz because it fits the metric system better. Then in American Westinghouse, they went with 60 hertz, part because they literally observed that lights flickered less at 60 hertz. So that became the standard. And for someone who traveled around Japan a bit, I can't help myself but mention that In Japan, they ordered German equipment in Tokyo, but then in Osaka, in the southern part, they ordered American. So actually, to this very day, Japan runs in two different frequencies.

1:00:38In the northern part, it's one and it's another. And it's purely by accident. It started 130 years ago and it's still going on today. So you can't share that power unless it runs through really, really expensive converters, and it's actually quite complicated. And of course, you don't have the same issue between Europe and the US because they have their own power grids. And even within those regions, you actually have a ton of smaller power grids and it all patched together. It's actually kind of freakish whenever you really get to study how the power grids work. But I'm telling this story because I find it to be like a microcosm of how much randomness we're facing, but it's something we still have to act on today.

1:01:18And it's important because every power plant and every appliance needs to be in sync. If supply and demand fall out of balance, even for seconds, the frequency drifts. And if it drifts too far, the way that the grid protects itself is through what we call blackouts. So it's very severe whenever something like that happens. And this is actually my long-winded way of talking about AI data centers in particular, because I think the complexity of that from a power grid perspective is that, if I can use the analogy of a stadium. So picture a stadium with 70 ,000 people, and then a person here is a GPU.

1:01:55So everyone is talking, eating, walking around at random. And all of that randomness, you can think about this, it all blends into a steady hum. That's a normal data center. But then you have an AI data center. So that's not just 70 ,000 people doing their own thing, independent of each other. It's 70 ,000 people who watch the same game. So everyone cheers at the same time whenever there's a goal. And it's not a steady hum. It's cheering and then back to a steady hum. And the grid isn't built for that. Remember what we talked about before about you're predicting, yes, we're coming back from work and then we go to sleep.

1:02:36It's a very, very gradual decline. That is not the way that PowerGrid has to work today, but that's the way that they're being built. And you can't just build a new PowerGrid. That's not really how it works. In theory, yes, in practicality, it's very, very complicated, very expensive, and all kinds of issues. We probably shouldn't go into it today here. But what is amazing about the CO2L batteries is that they sit between the data center and the grid, and it absorbs those dots. And an AI data center is, you could say, it's even worse than a football stadium because you might get a few goals throughout those 90 minutes.

1:03:09But then whenever you train a model, it will take you weeks to train a model. And then you have this cheering, and then steady hum. And it happens every second or two. So it's incredible tiresome for the grid to work with. And so, of course, everything I just said, I guess, just proves that someone is going to sell a lot of batteries. It doesn't prove that it's going to be CATL necessarily, it's going to be the winner. The storage market is growing faster than CATL's storage shipment. So competitors are taking their share right now. But why, and sort of like very much putting the spotlight on you here, why does CATL win the market and not just participate in it?

1:03:46First of all, Stake, that's a very interesting way to explain the badly used case for an AI data center, especially with the World Cup just concluding. Well, with regards to your point about storage market growing faster than CATL's storage shipment, that is true. Even though CATL is the number one player in energy storage space and the segment grew installations by roughly 30 % last year, but that was below the overall industry growth rate of close to about 80%, if I'm not wrong. I believe one key reason why this segment did not grow at a faster rate for CATL last year was because of capacity constraints.

1:04:28So CATL's utilization rate last year was around 97%, meaning that they sold pretty much what they could produce. Now this year, some of those constraints should ease up as new manufacturing capacity comes online. So it will be important to see if CATL can start regaining market share in this segment. In fact, if you look at the latest quarterly result, CATL's energy storage sales for the first half of 2026 grew by about 88 % year on year, and the storage volume nearly doubled year on year. So this gives some data point around the CATL's potential market share position in the energy storage space.

1:05:14Trey Lockerbie, Ph.D.: Thank you for painting some color around that, Manish. The other thing I want to talk about is battery leasing. And I'll admit that whenever I first read about this, it sounded a bit strange to me. At least in Europe and North America, this is somewhat novel idea. In China, it's already happening at scale. And so the concept is simple, actually very, very smart, I should say. You buy the car, but not the battery, and you subscribe to the battery. And like I mentioned, the first time I was like, what? You don't buy a battery? But anyways, I started to think about it in a different way.

1:05:52And I was thinking, okay, so this is sort of like whenever you have a phone plan, and you don't pay the$2 ,000 upfront for the phone, you pay monthly. And then whenever the phone gets old, you swap it for a new one. And whenever I thought about it like that, I was like, oh, okay, that makes sense. And so it's the same idea, except the battery is roughly a third of the price of an electric car. Historically, it's even more. So removing lowers the sticker price significantly and allows for more people into the market. And then there's swapping. So instead of, I'm going to say charge for an hour, I think you already mentioned, man, it's actually today, you do it much, much faster.

1:06:30But anyways, you drive to a station and then very short period of time, you have a machine that changes the battery. Now, I should say, to be clear, most Chinese EV drivers are still charging at home. But for someone driving to the grocery store, swapping is nice to have, I guess, but certainly not a need to have. But I've learned that there are already several thousand swap stations across the country. And of course, then you have taxis and trucks where the vehicle earns money every hour it moves. So swapping becomes perhaps more than the fault, I don't know. But for those drivers, time is money.

1:07:09And so time at a charter is therefore also lost income. And I guess what I found interesting as an investor is how this could potentially change CATL's business model. They stop being a company that sells your battery once, and instead the battery stays in the pool at CATL and its partners own and operate. And they never lose the battery. It comes back, it gets checked, it gets used, and eventually recycled. And so CATL owns the whole lifetime of the asset. And so you as a user, which is very, very nice, you don't have to worry about the battery getting old. And I think going back to this example here with someone with an iPhone, for example, we all know the feeling like we bought this expensive gadget, but also a gadget can't be without.

1:07:58Then after a few years, you're like, oh my God, the battery is just terrible. And so Apple needs new money. We need to buy a new one, whatnot. And with an EV, the same problem knocks thousands of dollars off the car's value. But then under this model, that's not their problem. It's not the consumer's problem anymore. And of course, capitalism is brutal. We always talk about that here on the show, but the batteries are heavy, stations are expensive, the automakers have to agree on standards. So I'm not saying by any means that battery releasing is just a free lunch, but Manish, you're the ball.

1:08:35So how big could this become? Yeah. So battery swapping is popular in China and CATL has close to 2000 stations and growing. The company builds modular battery packs that are co-developed with major Chinese automakers. So it basically locks in the customers. And the cost of setting up the network is shared with various partners. So it is not CATL alone taking the entire cost up front. The advantages of battery swapping, as you mentioned, are cost and time. So the average swap time is less than 100 seconds. So taxis and heavy commercial vehicles can be on the road for longer with low downtime. The risk here is that with the battery charging time coming down, the time advantage might not be that significant, especially for smaller vehicles.

1:09:32But what C88 is also doing is that they are adding superchargers to these swapping stations. So the same station can cater to both battery swapping as well as fixed battery vehicles. And I think this is where the scale of CATL, both in battery packs and charging network, can help them to provide a faster payoff for these stations. Thank you, Manish, for that caller. One thing I realized as I was diving deeper into CATL was that they're not just making different types of batteries. To your point before in this episode. It takes stakes in other companies, and so far, more than 150. Now, one of them is DeepSeek.

1:10:16And this might be my lack of understanding of the Chinese market, but whenever I looked at all their investments, that was the one that stood out to me. And perhaps many of our listeners would know that Naimio, it's China's AI darling, if you wonder. This is the lab that shook everyone in Silicon Valley here in early 2025. They're building this frontier model on the cheap. And in June, they took outside money for the first time. So it was roughly$7 billion at a valuation above$50 billion USD. CHL itself put in$700 million. And I should say for the record that these numbers come from press reports.

1:10:51These are all private deals, similar to whenever you have between, say, Microsoft and OpenAI. There are certain reports, but it's not like an official document. You can just go in and see. These are all the terms. So anyways, the rationale is straightforward. AR centers that we already established, they're power hungry. CHL are investing in a future customer. And this is to the point before, not just a Chinese phenomenon. You have NVIDIA committed more than$40 billion to equity stakes in 2026. And of course, I can't help myself but scrutinize how that carousel works, where they're taking different stakes in each other.

1:11:27That seems to be some kind of voucher thing anyways. I don't want to digress. But it is kind of interesting how this ecosystem is built around the biggest tech companies, not just in the US, but also in China. But they also do it differently. If you look at the biggest tech companies, compare the strategic stakes to the market caps, actually, Chinese companies hold roughly 10 % of their market cap, whereas Americans, it's only 4%. Now, in China, they've been doing it for the better part of 15 years. The stakes are also broader too, like supply chains. You're looking at minds, customers, as we saw there with DeepSeek political alignment.

1:12:07American big tech companies, at least for now, looks a little lighter. It could change. This certainly went heavily in for the past 18 months, and all of it was specifically in AI. And of course, then you have a lot of this on paper prices, meaning whatever the latest funding round would tell it to be. So that gives you some kind of distorted numbers, but still gives you a way to perhaps be directionally correct. Now, Manish, you talked to us about CTL trading at around 18 times operating profit. How do you treat these 150 plus stakes? Did you give them any value? And should investors see CTL as a battery maker with a side portfolio, or is the portfolio even a part of the moat?

1:12:52Yeah, I think the CTL's investment portfolio, I think is more strategic than financial. It helps them to achieve vertical integration. It spans upstream mining companies to downstream automakers and power infrastructure player in the energy storage system. Their investment in DeepSeek, I believe, is a part of their AI data center integration play. Although I think investing in a foundational AI model lab is going to the extreme end of vertical integration, In terms of valuation, it is tricky to value these investments because most of them are private. And depending on their stake, they are treated differently in the financial accounting point of view.

1:13:37I believe the simplest way to look at it is to see the long-term equity investment line item on their balance sheet. So as of last quarter, this number was about$11 billion. So slightly less than one-time operating profit. So when we look at 18 times operating profit, I did not account for the value of these long-term investments. But if you include them at book value, then it drops to about 17 times. But I would categorize these numbers, these investments, more as a competitive advantage play through vertical integration and less as a financial investment play. All right, Manish and Ralph. This was what we had planned here for the bull bear thesis here.

1:14:25I wanted to ask you here before we transition into the final segment, you both presented your case, but do you have any concluding remarks? I don't know, Manish, have you become more bearish after speaking with Ralph or perhaps we even converted Ralph? I don't know. Yeah, it'll be interesting to hear from Ralph. What does he think? I think it's always interesting to hear the other side of the argument you know as charlie munger has said that you have to argue the other side better than the other player so i think understanding the bear thesis is extremely important and seeing whether you are missing anything i'm like it is a capitalism is brutal so it's it's always a learning game and this was a fantastic episode i really enjoyed it and would love to hear what Ralph thinks about this business.

1:15:13It was extremely enlightening to me, Manush. Like I said at the beginning, cattle, C-A-T-L, I didn't know which way to go there, but I do now. I've learned so much about batteries that I didn't know. And it is, I think, as Stig pointed out, the industry has changed and so much has changed. And what we've learned and where we're going, it's the same way that my education started coming about when I got thrust into a data center and learning about data centers. So it's truly amazing. And I believe it's like so many of the people I hear talking about AI. And I heard Sam Altman yesterday in a podcast saying the world has changed.

1:16:06It is totally different. And then I heard a scientist speaking about a week ago and saying that this is the greatest time in the world to be alive, that so many things are happening. And I'm in complete accord with that. And getting into something like CATL and speaking about this and learning about it, just really excites me. I'm like Stig. So many things have changed, and we are right in the middle of that change. And I just want to say to you, Manish, thank you for bringing this to us and giving us such a great education about it. And I really dug deep to try to get a bare case going here to say these things.

1:16:54Thank you, Ralph. Thank you so much. Yeah, I have to say, I really enjoy this bull bear format. And I should say that one of the reasons why we decided to go this route is, and perhaps it's our own biases, I don't know, but very often, whenever you're bullish about a company, you end up speaking with other people who are also bullish. And so you sort of like end up in the same echo chamber and you pat each other on the back and everyone agrees that we're all so smart because we are invested in the same company. And so having someone who is the bear, but also has the permission to kind of, I wouldn't say rude, but you're sort of someone like, if people are excited about a stock, you generally don't want to be the guy who's like, well, you're probably all wrong.

1:17:39That guy doesn't get invited back, right? So giving someone, in this case, Ralph, the permission to be the bear and ask the critical questions. I think that's just so incredible and important. So thank you, Ralph, for playing along. And I don't know if you want to play bull next time or if it's more fun to be the bear, but just want to say thank you for providing such a compelling bear case. Well, I appreciate that. And I would say that for the audience listening, you think of a CPA that I am and a career that I've spent as being a CPA and the work that I've done there as being no. I was always saying no, but I look forward to being the bull.

1:18:21Preston Pyshko, Ph.D.: Fantastic. All right. So before we let the listeners go, I just wanted to say that if anyone are interested in hearing more from Ralph, he'll be speaking at the TIP Intrinsic Value Conference in New York City. That's on September 19th. And Ralph, what will you be speaking about? Ralph McLaughlin Well, of course, Stig, I'm going to be speaking about investments. But more importantly, I'll be sharing the story of how investing actually became my third career. My first career, as I mentioned, it was a traditional CPA. I prepared financial statements, audited financial statements, tax returns, consulting.

1:19:00And then that led into my second career as a forensic accountant. And that's where I investigated all these financial shenanigans, partners cooking the books, massive Ponzi schemes like we all heard about Bernie Madoff and multi-billion dollar bank frauds. And so if you name the fraud, I've probably investigated it. But people often ask me if tracking down the frauds uniquely prepared me for a career in investments. And I honestly have to tell them, no, it was a helpful foundation, certainly. But it wasn't until I found a community of lifelong learners like the ones right here in TIP, that I truly learned how to dig into the fundamental analysis of a business.

1:19:50I met people like Manish who really gets in there and digs into the economic moats and figures out what makes a business genuinely investable. And that just really excited me. So, blending my past careers with the new one, it's been an incredible education for me in learning how to invest. And the people I've met along the journey have become forever friends. That evolution and then the frameworks I've picked up along the way, that's exactly what I'm going to be sharing in New York. That's fantastic. Thank you, Ralph. We'll make sure to link to the conference in the show notes. We also have a bunch of other cool stuff.

1:20:33We have a dinner with William Green and a bunch of other activities there. So you can read more about it on the website. But I wanted to give the audience the opportunity to connect with you. How can they do that? Well, I still have a LinkedIn page. I think it's linked to my firm, which I formally retired a year ago, but it's still linked there. So I have a LinkedIn page. And you can also email me. My email address is ralph.sommerford, S-U-M-M-E-R-F-O-R-D at gmail.com. Fantastic. Thank you, Ralph. I also wanted to mention that not only do we have the event in New York City, we also have an event in Q1.

1:21:17We're still finalizing on the exact date, but it will be sometime in Q1 in Singapore, exclusive for our Mastermind members. And Manish is going to be hosting that on behalf of TIP. And again, we'll be talking a ton more about that in the next quarter's episode between the three of us. But Manish, where can the audience engage with you? Thanks, Tej. This was wonderful. And I look forward to the Singapore event with the Mastermind members. And those who want to connect with me, you can find me on LinkedIn. My profile ID is Manish-Karira. And yeah, I look forward to connecting with you. Thank you, Manish.

1:21:53And thank you, Jens. I look forward to inviting you back here for next quarter's episode. And yeah, like we talked about, perhaps we should turn the tables. Perhaps Manish, you're going to be better next time. And Ralph, you're going to find an amazing company and be bullish. Yeah. CPAs are not always negative. Fantastic. Yeah, great. I look forward to taking the other opposite side of the argument. Thanks for listening to TIP. Follow The Investor's Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice.

1:22:36The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice. References to any third-party products, services, or advertisers do not constitute endorsements, and the Investors Podcast Network is not responsible for any claims made by them.

1:23:12Copyright by the Investors Podcast Network. All rights reserved.