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1、EQUITYRESEARCH|August 06,2024|5:44PM HKTGoldman Sachs does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this repor

2、t as only a single factor in making their investment decision.For Reg AC certification and other important disclosures,see the Disclosure Appendix,or go to employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.The Gol dman Sachs Group,Inc.A year ago ou

3、r China team deconstructed Chinas supply chain amidst unprecedented changes to the outlook,to build a picture of resilience,opportunity and vulnerability.A year on and a year worse,we sample seven significant global manufacturing industries representing 22%of Chinas GDP growth.In five sectors,these

4、industries have built more capacity than the entire global demand pool imbalances that have left more than 50%of capacity running at zero or negative cash margins.As Chinas transition continues,we ask how cyclical are these imbalances,how much further can they go and how might we gauge inflection po

5、ints ahead.We conclude that Chinese manufacturers are responding to poor profitability and uncertainties around limitations to market access to the US and EU,pre-emptively adjusting the pace of future additions of capacity,in contrast to consensus narratives.We expect a rebalancing in supply versus

6、demand,a restoration in profit,and sharp deceleration of Chinese supply to the world through 2028.Our Rule of Three and tipping point frameworks suggest that:(1)solar and lithium batteries are the closest to reaching an inflection point in their supply/demand imbalances,with negative cash margins an

7、d reductions in Capex plans set against still solid demand growth;(2)electric vehicles and power semis are furthest from an inflection point,driven by both their balance sheets and profitability positioning;and(3)tipping points may be altered by supply side reforms,competitive industry structures,ca

8、pacity expansion ex-China as well as demand destruction,if faced with a global economic slowdown.China in Transition Chinas capacity-the imbalance,the inflections,and beyond cyclesFull list of authors insideJacqueline Du+86(21)2401-8948 Goldman Sachs(China)Securities Company LimitedTrina Chen+852-29

9、78-2678 Goldman Sachs(Asia)L.L.C.Allen Chang+852-2978-2930 Goldman Sachs(Asia)L.L.C.Eric Shen+852-2978-7954 Goldman Sachs(Asia)L.L.C.Tina Hou+86(21)2401-8694 Goldman Sachs(China)Securities Company Limited2131d4eaf4cb4d50b1d51c8af07b64b4Jacqueline Du+86(21)2401-8948 Goldman Sachs(China)Securities Com

10、pany LimitedTrina Chen+852-2978-2678 Goldman Sachs(Asia)L.L.C.Allen Chang+852-2978-2930 Goldman Sachs(Asia)L.L.C.Nick Zheng,CFA+852 2978-1405 Goldman Sachs(Asia)L.L.C.Tina Hou+86 21 2401-8694 Goldman Sachs(China)Securities Company LimitedVerena Jeng+852 2978-1681 Goldman Sachs(Asia)L.L.C.Olivia Xu+8

11、6 21 2411-8018 Goldman Sachs(China)Securities Company LimitedEric Shen+852 2978-7954 Goldman Sachs(Asia)L.L.C.Nicolas Yi+86 21 2401-8922 Goldman Sachs(China)Securities Company LimitedMengwen Wang+86 21 2401-8932 Goldman Sachs(China)Securities Company LimitedFiona Ye+852 2978-0680 Goldman Sachs(Asia)

12、L.L.C.Jolin Liu+852 3966-4087 Goldman Sachs(Asia)L.L.C.Qiying Wei+852 2978-6426 Goldman Sachs(Asia)L.L.C.Cecilia Tang+86 21 2401-8738 Goldman Sachs(China)Securities Company LimitedTing Song+852 2978-6466 Goldman Sachs(Asia)L.L.C.Sylvia Hu+86 21 2401-8792 Goldman Sachs(China)Securities Company Limite

13、dSelina Yan+852 2978-0178 Goldman Sachs(Asia)L.L.C.Xiyang Zhao+86 21 2411-8045 Goldman Sachs(China)Securities Company LimitedContributing AuthorsFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4 Exhibit 1:Sectors in one chart-global supply chain positions,supply/deman

14、d balances,cyclical inflections,and supply consolidation 5722100%200%400%600%27%30%USEUSEAOthersPath to rebalanceRebalance01 year to capex tipping point23 years to capex tipping pointCyclical or structural oversupplyOverview-Chinas global supply position,changes in domestic demand and exports China

15、supplies75%of global supply 86%of global supply 81%of global supply 66%of global supply 29%of global supply 54%of global supply 33%of global supply Mkt share 2023A55%ex-China 72%ex-China 65%ex-China 26%ex-China 6%ex-China 16%ex-China 21%ex-China China exports 2023A42%of its output42%of its output37%

16、of its output19%of its output15%of its output16%of its output53%of its outputChanges 20-23A23-28E20-23A23-28E20-23A23-28E20-23A23-28E20-23A23-28E20-23A23-28E20-23A23-28EDomestic demand+0.2x+0.0 x+3.4x+1.1x+5.7x+2.0 x+6.0 x+1.1x+0.7x+0.5x-0.1x-0.1x-0.7x+0.9xExports/ex-China capacity+0.2x+0.1x+1.9x+0.

17、8x+7.2x+2.0 x+6.7x+2.6x+2.7x+1.6x+0.2x+0.1x+2.0 x+0.4xEx-China mkt share -0.4%+3%+5%-4%+40%-19%+15%+4%+3%+4%+2%-1%+10%+4%Global demand 2028ELevels of excess capacity,capacity utilization ratesLevel of excess capacityCN capacity as%ofglobal demandCapacity utilization rates2026-28E based onextrapolate

18、d capex revision trendexports to US/EU vs.capacity8%8%10%6%12%9%4%5%7%4%2%2%3%4%Cyclical inflections-Rule of Three and tipping point frameworksConclusionsRule 1-cash margin%of industry at negative OCF/sales(1Q24A)Rule 2-Capex revisionRule 3-positive demandPotential for consolidation and normalized r

19、eturnsConclusionsSupply structureNumbers of producers(outer ring)and market shares(inner ring)Steepness of cost curve(1-OCF/Sales)Entry barriersROIC/Risk adj ratio27%4.3x6%0.9x12%1.3x6%0.5x18%5.4x4%1.2x16%1.1xGovernment support and shareholdings SOE shares(left)Subsidy/OCF(23A)(right)Low potentialLo

20、w potentialMid potentialHigh potentialMid potentialMid potentialNot bottomingNot bottomingStableFlatSteepSteepSteepSteepSteepHigh potential(HHI=1250)Not bottomingBottomingNot bottomingBottomingMidHighLow(HHI=330)LowMidHighMidFlat(HHI=2200)(HHI=2900)(HHI=2000)(HHI=1500)(HHI=300)50%50%06%21%73%049%51%

21、074%26%019%81%078%22%0100%0lithiumbatteriessolarmodulesair conditionersconstructionmachinerypowersemis(IGBT)YesNotYesNotNotYesYesNotYesNotNotNotNotYesYesYesYesNotYesNot-16%-5%-15%35%-28%-41%153%130%-12%6%-7%-7%0%19%33%13%54%4 4 32 15%7%SOE SHsubsidy/OCF28%7%SOE SHsubsidy/OCF10%10%SOE SHsubsidy/OCF30

22、%9%SOE SHsubsidy/OCF44%7%SOE SHsubsidy/OCF49%5%SOE SHsubsidy/OCF43%2%SOE SHsubsidy/OCF88%98%100%72%95%102%77%92%96%78%90%97%81%92%99%72%88%90%93%98%99%44%69%2023A26-28E50%28%22%3 6 18 73%21%6%2 6 35 50%39%11%2 6 17 25%39%36%1 5 49 61%20%19%2 2 5 22%22%56%3 7 555 49%41%27%30%30%50%5%16%12%20%5%54%65%

23、2023A26-28E61%79%2023A26-28E87%41%2023A26-28E30%46%2023A26-28E62%62%2023A26-28E81%74%2023A26-28EUSEUSEAOtherselectricvehiclesYesGroup 1Group 2Group 3cash losscash profit7%10%18%25%21%18%19%16%17%21%6%6%6%9%119%119%2023A26-28E197%138%2023A26-28E153%91%2023A26-28E116%94%2023A26-28E35%83%2023A26-28E66%

24、63%2023A26-28E109%86%2023A26-28E2023A1Q24AsteelPositiveZeroNegativecapex revision over past 12monthsrevision on 2024Erevision on 2025E Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 2Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM213

25、1d4eaf4cb4d50b1d51c8af07b64b4Executi ve summary Surplus capacity in various sectors in China has been at the center of many debates in the context of intensifying tensions in global trade and other geopolitical issues,as well as the deep level of imbalances that have been breached.For example,in 1Q2

26、4A,Chinese capacity in solar modules and lithium batteries reached 150-200%of the global demand pool,while more than 50%of industry supply in solar,electric vehicles,steel,and construction machinery generated zero or negative cash margins.I n this report,we focus on forward-looking factors that will

27、 lead to potential cyclical turns ahead.We believe the turn of the cycle,or changes in imbalances,rather than absolute excess supply,will predominantly drive both the path of industry pricing and margins,and the direction of travel of Chinese exports.We conclude that Chinese manufacturers are respon

28、ding to poor profitability and uncertainties around limitations to market access to the US and EU,pre-emptively adjusting the pace of future additions of capacity,in contrast to consensus narratives.We expect a rebalancing in supply versus demand,and a restoration in profit through 2028-for early in

29、flecting sectors we expect higher capacity utilization(from 54-55%to 69-79%)and expanding unit cash profit(from-Rmb0.04 to Rmb0.11/w for solar,and Rmb122 to Rmb137/kWh for batteries)over the period.As a result,the expanding share of Chinese supply to the world(i.e.,the ex-China market),will decelera

30、te sharply or decline in most sectors,including notable inflections taking place in new energy sectors.Specifically,we expect the market shares of Chinese supply,in terms of both Chinese exports and potential output from more ex-China capacity developed by Chinese producers,will become stagnant on a

31、verage across our sample sectors,versus a 10%increase in 2020A-23A.Despite a much decelerated growth outlook,the trade-of f between lower volumes and potentially higher pricing may still be enough to support a reasonably better outcome in terms of the contributions of these sectors to Chinas GDP/eco

32、nomy.On a sector level,we expect positive cyclical risks(of improving S/D balance)for solar modules and lithium batteries,but persistent/rising negative cyclical risks(of excess capacity)in electric vehicles and power semis(I GBT).We expect steel and construction machinery to remain in structural ex

33、cess supply,and air conditioners to remain in balance.Despite non-market driven factors,we expect capital investments will no longer be supported imminently for solar modules and lithium batteries,but think it may take 2-3 years for power semis and electric vehicles to change course.What makes our w

34、ork dif f erent:We believe basic economics,including cash margins and the Capex cycle,are dominant forces driving industry cycles in China.We utilize industry Capex revision trends,rather than absolute capital spending,to reflect incremental supply responses to market conditions,and gauge capacity e

35、xpansion trends beyond 2024-25E.Our proprietary analysis utilizing(1)The“Rule of Three”;and(2)tipping points define the bottom of a cycle,and quantify the limitation of non-market driven supporting factors on capacity expansion in a downcycle.6 August 2024 3Goldman SachsChi na i n Transi ti onWhy we

36、 are writing this reportCash margins drive the Capex cycle,and a potential rebalance of supply vs.demandEx-China market share of Chinese supply will decline or decelerateWhich sectors are likely to rebalance firstWhat makes our work dif f erentFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4e

37、af4cb4d50b1d51c8af07b64b4We selected seven sample sectors for our analysis as they represent a wide range of Chinese manufacturing sectors,all with excess capacity in the past or at present,and they reflect the growing presence of Chinese supply in the global market.On an aggregate basis,in 2023A th

38、ese seven sectors contributed 6.6%of Chinas GDP and 21.9%of GDP growth,and they held an average 37%market share in the ex-China market for their respective products(versus 27%in 2020A).The current imbalance-in a global context I s there overcapacity in these sectors?Yes,in our view,based on numbers

39、of indicators.As of 2023A,we estimate that Chinese capacity in five of these seven sectors is higher than the entire global demand pool for their respective products.I n particular,Chinese solar modules capacity is equivalent to 200%of global demand,while lithium batteries equates to 150%.Capacity u

40、tilization rates of the seven sectors ranged from 30-87%as of 2023A,versus 41-95%in 2020-21A.Prices of respective products have declined by 10-55%(for most sectors)vs.early 2023,as a result of worsening supply and demand imbalances.Potential inflections-cash margins and the Capex cycle I n 1Q24,more

41、 than 50%of industry supply generated zero or negative cash margins(in most of our sample sectors).There were notable revisions in producers 2024-25E Capex plans-for example,an average cut of 28-41%for lithium batteries,but an upward revision of over 100%for power semis(I GBT),and mixed for electric

42、 vehicles.Changing fundamentals are reshaping potential inflection points,both positively and negatively,taking industry capacity utilization rates to very dif f erent places versus where Exhibit 2:Cyclical and structural risks of supply/demand imbalances-the outlook for seven select sectors in Chin

43、a Growingdemand ContractingdemandPositive capex revisions,accelerating capacity additionPositive cyclical risk of restoring S/D balanceNegative-structual excess supplyUnlikely scenarioPower semis(IGBT)air conditionersConstruction machineryLithium batteriesSolar modulesElectric vehiclesNegative capex

44、 revision,decelerating capacity additionNegative cyclical risk of building excess capacitySteel Source:Goldman Sachs Global Invest ment Research6 August 2024 4Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4they are today.Extrapola

45、ting from Capex revision trends over the past 12 months to a potential capacity outlook in 2026-28E(a simplified scenario versus GSe base cases),we see capacity utilization rates potentially improving for solar modules and lithium batteries(from 54-55%to 69-79%).On the other hand,accelerating Capex

46、in power semis(I GBT)and the mixed trend in electric vehicles suggest a deteriorating capacity utilization rate(from 78%to 41%),and poor visibility on any improvement,respectively.We estimate the time to the tipping point(i.e.,when Capex revisions become inevitable)as when both profitability and bal

47、ance sheets fail to support access to capital and expansion.This looks imminent for solar modules and lithium batteries,but it could take 2-3 years before the course changes for electric vehicles and power semis.Reasons behind the imbalances-large scale demand growth The common factor in sectors tha

48、t have experienced excess capacity has been the unique path of Chinese demand growth over the past f ew decades.Rather than cyclical swings,Chinese demand typically moves from a low base,then increases at an astonishing scale and pace-making it extremely challenging to estimate a potential market si

49、ze,especially at the beginning of a cycle.Combined with a rapid supply response,the risk of imbalances in capacity and demand,on a large scale,is therefore elevated by nature.Government support for both supply and demand can be meaningful and can exacerbate the mismatch between capacity and demand.H

50、owever,we do not consider this to be a defining element that alters the basics of economics on a sustainable basis.As of 2023A,we estimate the average government subsidy/rebate accounted for only 2-10%of EBI TDA(or operating cash flow).Beyond cycles-it is about the strength of top players and entry

51、barriers Beyond the cycle,our assessment of industry structures and cost curves yield opportunities to invest in sectors with strong returns.We like sectors with:(1)a strong market position of top tier producers(in both market share and cost advantage);and(2)higher entry barriers that protect the st

52、ate of consolidation.Stock picks We highlight 11 stocks that provide exposure to both cyclical inflections and/or structural stability.Please see our summary at the back of this report and ref er to the below links for a detailed analysis.China solar sector-closer to inflection China electric vehicl

53、e sector-no turn yet China lithium battery sector-inflection on the horizon China power semis sector-heating up China air conditioner sector-staying cool China construction machinery sector-structural supply surplus here to stay6 August 2024 5Goldman SachsChi na i n Transi ti onFor the exclusive use

54、 of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Defini ng excess capaci ty I n this report,we assess the degree of excess capacity by analyzing seven sectors:1)solar modules,2)electric vehicles,3)lithium batteries,4)power semis(I GBT chip sets1),5)construction machinery,6)air conditioner

55、s,and 7)steel.For a mor e complet e pict ur e of Chinas self-sufficiency by indust r y,please r efer t o our August 2023 r epor t China in Tr ansit ion:At t he cr ossr oads of t he supply chain.1I GBT-insulated gate bipolar transistors,power semiconductor devices serving as electronic switches in po

56、wer electronics applications.Our seven sample sectors Exhibit 3:The contribution of our seven sample sectors to China GDP and exports-more than 20%for both GDP growth and change in exports Exhibit 4:Capacity utilization rates in prior downcycles and at present(%)-not at the worst points,but still of

57、 deep concern 6.6%21.9%7.8%20.5%0%10%20%30%40%50%2023AGDP2023AGDP growth2023Aexports2020-23Achg in exportContribution to China GDP and export by sector(%)Electric vehiclesSolar modulesLithium batteriesPower semis(IGBT)Air conditionersConstructionmachinerySteelOthers87%71%58%44%41%25%17%0%20%40%60%80

58、%100%012345670%20%40%60%80%100%Power semis(IGBT)(2023A)Steel(2012-15A)Air conditioners(2015-16A)Solar modules(2023A)Lithium batteries(2020A)Electric vehicles(2020A)Construction machinery (2014-16A)Past downcycles2024ECapacity utilization rate in past downcycles and at present(%)Source:NBS,Chi na Cus

59、t oms,Wi nd,Goldman Sachs Global Invest ment Research*IGBT dat a only st art ed i n 2019A wi t h ut i li zat i on rangi ng from 87%-98%Source:Company dat a,Goldman Sachs Global Invest ment Research Exhibit 5:Domestic pricing for key products declined 10-55%vs.early 2023 Exhibit 6:Quarterly EBITDA ma

60、rgin(%,weighted industry average)-softened EBITDA margin in general,implies more profit contraction if combined with price decline 40%60%80%100%120%140%Jan-19Apr-19Jul-19Oct-19Jan-20Apr-20Jul-20Oct-20Jan-21Apr-21Jul-21Oct-21Jan-22Apr-22Jul-22Oct-22Jan-23Apr-23Jul-23Oct-23Jan-24Apr-24Jul-24Normalized

61、 pricing(Jan 23=100%)SolarmodulesElectricvehiclesLithiumbatteriesPower semis(IGBT)ConstructionmachineryAirconditionersSteel-10%0%10%20%30%40%1Q192Q193Q194Q191Q202Q203Q204Q201Q212Q213Q214Q211Q222Q223Q224Q221Q232Q233Q234Q231Q24Quarterly EBITDA margin(%)SolarmodulesElectricvehiclesLithiumbatteriesPower

62、 semis(IGBT)ConstructionmachineryAirconditionersSteel Source:Wi nd,CEIC,Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 6Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4

63、cb4d50b1d51c8af07b64b4Is there overcapacity?Yes,in a global context The textbook definition of excess capacity in an industry ref ers to non-utilized capacity that exceeds demand.Debates around the degree of overcapacity in China usually dif f er with respect to domestic demand,global demand,increme

64、ntal exports,and/or the future demand outlook.I s there overcapacity?Yes,on several indicators.We estimate that five out of our seven sample sectors have capacity that exceeds global demand by 10-100%.I n particular,Chinese capacity of solar modules and lithium batteries is equivalent to 200%and 150

65、%of the global demand pool,respectively-a higher level of excess capacity than other sectors.The best reflection on the balance of capacity versus demand is industry capacity utilization rate,defined as output as%of capacity.Five out of our seven sectors had capacity utilization of 30-60%in 2023A,we

66、ll below 80%typically needed for a balanced market in capital intensive sectors.Rise of exports,thus trade tension From 2020-2023A,Chinese exports for five of the seven sectors increased by 190-720%(based on volume).Through direct exports,or indirectly in the form of finished goods,the market share

67、of Chinese lithium battery exports increased by 40%in the ex-China market,15%for electric vehicles,5%for solar modules,and 3%for power semis(I GBT,combined with domestic substitution that is equivalent to 11%of the ex-China market),Exhibit 7:Excess Chinese capacity in the context of global and China

68、 domestic demand(2023A and 2026-28E)-solar modules and lithium batteries are in high level of excess capacity at present Lithium batteries-23AConstruction machinery-23APower semis(IGBT)-23ASteel-23AElectric vehicles-23AAir conditioners-23ASolar modules-23ALithium batteries-28EConstruction machinery-

69、28EPower semis(IGBT)-28ESteel-28EElectric vehicles-28EAir conditioners-28ESolar modules-28E0%50%100%150%200%250%0%50%100%150%200%250%300%350%400%450%500%China capacity as%global demand(%)China capacity as%domestic demand(%)High level of excess capacity Excess versus global demand Excess versus China

70、 demand *2026-28E capaci t y i s ext rapolat ed based on Capex revi si ons over t he past 12 mont hs Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 7Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4and 2

71、-10%for construction machinery and steel.The rise in Chinese exports is not necessarily the result of excess capacity.However,expanding excess capacity and worsening capacity utilization can still spill over its impact through higher exports and pricing pressure.Changes in market share,rather than t

72、he absolute market share,can be more sensitive in some regions if those exports impact sectors that are strategically important to local manufacturers and employment-we see higher tension in global trade,as evidenced by the recent changes in tarif f and duties,and trade investigations and probes aga

73、inst Chinese exports for selected products.One example to the contrary is Chinese air conditioners-while maintaining a prevailing ex-China market share of 55%(70%if based on unit sales),exports have not been subject to the same degree of push back in global trade,which we believe is due to the absen

74、ce of large changes in its global market share.We estimate 40-60%of Chinese exports were designated for the US and EU in 2023A for solar modules,lithium batteries and electric vehicles sectors,where there is relatively higher uncertainty in continued market access.Exhibit 8:Relative change in ex-Chi

75、na market share(for Chinese exports)-most key products hold a more dominant market share versus three years ago Exhibit 9:Chinese export breakdown by region-nearly half of Chinese exports of new energy sectors go to the US and EU 1Me0%20%40%60%80%100%SolarmodulesLithiumbatteriesAirconditionersElectr

76、icvehiclesConstructionmachinerySteelPower semis(IGBT)Market share of Chinese exports in ex-China(%)mkt shr-2020AChgs in mkt shr-2020A23ADomestic substitution 2020A23A0%1%27%30%5%12%1%49%41%30%50%16%20%5%0%20%40%60%80%100%SolarmodulesElectricvehiclesLithiumbatteriesPower semis(IGBT)Constructionmachin

77、eryAirconditionersSteelChinese export breakdown by regions-2023A(%)USEUSEAOthers Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research Exhibit 10:Changes in Chinas domestic demand and exports(2020-2023A;volumes)-strong exports a

78、nd strong domestic demand Exhibit 11:Current tariffs on selected Chinese products and recent changes imply more intensified trade tensions 338%597%573%68%-69%24%-11%194%669%717%265%202%16%22%-200%0%200%400%600%800%SolarmodulesElectricvehiclesLithiumbatteriesPower semis(IGBT)ConstructionmachineryAirc

79、onditionersSteelChanges in Chinas domestic demand and exports 2020-2023A(%)Domestic demandChinese exportsSectorYearExport limitations/tariffs on Chinese importsSolar modules2024Section 301:10%tariff imposed by the US on a suite of PV products in 2018,revised up to 25%in 2019 and 50%in 2024.Electric

80、vehicles2024In May 24,the US announced an increase tariffs on EVs imported from China to 100%(from 25%),effective Aug24.2024In Jun 24,the EU announced an increase tariffs on battery EVs imported from China(to 27.4%-48.1%from 10%)provisionally in Jul24;a final decision will be made in Nov24).Lithium

81、batteries2024In May 24 the US announced an increase in tariffs on imports of batteries and battery-related products from China(to 25%from 0-7.5%)in 2024-26.Power semis(IGBT)2024In 2024,the US announced an increase in tariffs on semiconductors to 50%from 25%by 2025.Construction machinery2018-19The US

82、 raised tariffs on construction machinery(excavators,concrete pumps,loaders and road machinery)to 25%from 10%.Air conditioners2018In 2018,the US increased tariffs on split air conditioners imported from China to 25%from 2%.Steel2024In 2024 the US increased tariffs on steel products imported from Chi

83、na to 25%from 0-7.5%.Vietnam is also discussing tariff hikes.Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 8Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d

84、50b1d51c8af07b64b4Cycli cal i nflecti ons and structural traps Most cases of excess supply are cyclical,in our view.We focus our work,including the“Rule of Three”and tipping point analysis,on industry trends of capacity additions,using profitability,Capex revisions,demand trends,as well as cash flow

85、 generation and balance sheet strength depletion,to gauge the inflection of capital investment for capacity additions,which provides a forward-looking picture on potential changes to imbalances and capacity utilization rates.Exhibit 12:Using our Rule of Three and tipping point analysis to define the

86、 cyclical bottom and timing-solar modules and lithium batteries would be the first two sectors to inflect Cyclical inflections-Rule of Three and tipping point frameworksConclusionsRule 1-cash margin%of industry at negative OCF/sales(1Q24A)Rule 2-Capex revisionRule 3-positive demand(demand trend)Time

87、 to reach tipping pointno capex expansion0-1 year1 year3 years1-2 yearsno capex expansionno capex expansionNot bottomingNot bottomingStableNot bottomingBottomingNot bottomingBottoming50%50%06%21%73%049%51%074%26%019%81%078%22%0100%0lithiumbatteriessolarmodulesair conditionersconstructionmachinerypow

88、ersemis(IGBT)YesNotYesNotNotYesYesNotYesNotNotNotNotYesYesYesYesNotYesNot-16%-5%-15%35%-28%-41%153%130%-12%6%-7%-7%0%19%29%22%36%33%32%34%43%49%35%10%10%9%5%21%-8%11%1%17%-4%-3%-4%electricvehiclesYesPositiveZeroNegativecapex revision over past 12monthsrevision on 2024Erevision on 2025E1Q242Q24YTDste

89、el Source:Company dat a,Goldman Sachs Global Invest ment Research“Rule of Three”-to define the industry bottom The below is quot ed fr om Taking a pur e cyclical appr oach by Jim Covello(Goldman Sachs global head of equit y r esear ch and for mer long-t ime semiconduct or equipment analyst)and Avi N

90、ash(for mer Goldman Sachs chemicals analyst).1.Are the majority of companies in the industry at or near breakeven EBI TDA?Rule One asks whether or not the cash flows of the majority of companies in an industry have deteriorated to the point at which companies are no longer able to add any new capaci

91、ty and/or have begun to take capacity of f-line.2.Has the industry reached“hara-kiri”stage?The point of Rule 2 is that industry executives must“throw in”the proverbial towel and give up anticipating when an industry is going to hit a cyclical upturn.Only af ter industry managements capitulate are su

92、pply/demand dynamics likely to come back into balance.3.I s there a glimmer of hope for an upturn?An industry can stay at a cyclical bottom for some time.Rule Three helps us identify whether business conditions have started to improve and thus whether or not a cyclical upturn is imminent.6 August 20

93、24 9Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Definition of groups We categorize industry supply into three groups 1,2 and 3,representing producers with the lowest,average,and highest cash cost positions,with the total summin

94、g to 100%of the industry.Group 1 includes a limited numbers of top industry players,typically with lower cash costs and more meaningful market share.Groups 2 and 3 are divided based on cash costs,each with representative market shares.The total number of producers in each sector ranges from 9 to ove

95、r 500.We analyze a selected sample of companies in each group to represent the overall performance of similar suppliers.Using the“Rule of Three”to search for a cyclical inflection The“Rule of Three”framework,a legacy of the Goldman Sachs US research team,helps the search for a cyclical bottom(but is

96、 also useful to assess the risk of a cyclical correction).The analysis centers on industry profitability,management expectations and Capex plans,and demand inflection.Rule Number 1:Are the majority of companies in the industry at or near breakeven EBI TDA?We use the most recent OCF/sales as an indic

97、ator.As of 1Q24A,five out of our seven sample sectors saw 50-100%of their supply generate either zero or negative operating cash flow,a significant deterioration from 2023A(when only two out of the seven were in the same position).Solar and steel were the most negative sectors in 1Q24A,while air con

98、ditioners had the highest profitability.Rule Number 2:Has the industry reached the“hara-kiri”stage?We use the trend of Capex revisions as a better indicator of incremental changes in supply responses to market conditions.The second derivative of the Capex trend captures producers plan in terms of ad

99、ding or canceling expansion projects,versus changes in capital spending yoy.Lithium batteries had the most negative Capex revisions in the past year,with current 2024 and 2025E Capex plans 41%and 28%lower than what was planned a year ago,mostly driven by Group 2-3 producers(i.e.,non-top producers)as

100、 margins deteriorated.On the other hand,power semis(I GBT)saw the most robust upward revisions over the past year with current 2024E and 2025E Capex more than 100%higher than a year ago,reflecting accelerating plans for building new capacity.Exhibit 13:Snapshot of industry cash profits(OCF/sales);in

101、 1Q24A most sectors had more than 50%of supply generate negative cash margins Exhibit 14:Snapshot of industry cash profits(OCF/sales);in 2023A most producers were in positive cash margins a year ago 0%20%40%60%80%100%SolarmodulesSteelElectricvehiclesPower semis(IGBT)LithiumbatteriesConstructionmachi

102、neryAirconditionersOCF/sales(1Q24A)-%supply in negative/zero/positiveNegativeZeroPositive20%20%40%60%80%100%SolarmodulesSteelElectricvehiclesPower semis(IGBT)LithiumbatteriesConstructionmachineryAirconditionersOCF/sales(2023A)-%supply in negative/zero/positiveNegativeZeroPositive Source:Company dat

103、a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 10Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4 Rule Number 3:I s there a glimmer of hope in the industry(fo

104、r a demand upturn)?We use the most recent demand trends on the ground to make this assessment.YTD growth in demand for lithium batteries,EVs,solar installation and power semis(I GBT)ranged from 10-43%,however,steel and construction machinery continued to see negative/stagnant yoy trends in demand.Ti

105、pping points-when Capex expansions are not supported We recognize that potential non-market driven factors could extend the cycle beyond expectations,including SOE shareholdings,large MNC or industry shareholders,government subsidies(e.g.,government rebates as%of Capex),or sometimes simply cash burn

106、.While SOE ownership tends to be higher in traditional sectors,among growth sectors SOE ownership within electric vehicles is also relatively high.Government subsidies ef f ectively accounted for 2-10%of cash profits in 2023A,based on the disclosures of listed companies.These factors could provide s

107、upport,especially in downcycles,and add hurdles for weak producers to exit in theory.However,there are more limitations to support that can be provided to capital Exhibit 15:Capex revision trend over the past 12 months -Capex in power semis revised up,but solar and lithium batteries cut Exhibit 16:I

108、ndustry Capex revisions,Capex yoy changes,and Capex/sales-negative Capex revisions despite high Capex/sales are a better reflection of supply additions turning cautious -50%0%50%100%150%Power semis(IGBT)SteelConstructionmachineryAirconditionersElectricvehiclesSolarmodulesLithiumbatteriesCapex revisi

109、on over the past 12 months(%)2024E2025EIndustry Capex trendCapex/sales2024E2025E2024E2025E2024E*Power semis(IGBT)130%153%51%9%68%Steel19%0%0%0%5%Construction machinery6%-12%-7%-7%4%Air conditioners-7%-7%4%5%3%Electric vehicles35%-15%-39%-32%13%Solar modules-5%-16%-20%-40%7%Lithium batteries-41%-28%-

110、22%-4%13%*post revision,weighted avg of samplesRevisions over the past 12 months Capex YoY Source:Bloomberg,Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research Exhibit 17:Potential non-market factors(including suppliers with SOE or l

111、arge MNC ownership and government subsidies)may add hurdles for weak producers to exit 15%28%10%30%44%43%49%5%14%8%25%0%20%0%7%7%10%9%7%2%5%0%10%20%30%40%50%Solar modulesElectric vehiclesLithium batteriesPower semis IGBTConstructionmachineryAir conditionersSteelSolar modulesElectric vehiclesLithium

112、batteriesPower semis IGBTConstructionmachineryAir conditionersSteelSolar modulesElectric vehiclesLithium batteriesPower semis IGBTConstructionmachineryAir conditionersSteelPotential supporting factors for the industries%of supply in SOE%of supply with large MNC shareholdersReported government subsid

113、y versus OCF-2023A Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 11Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4investment-regardless of the shareholders or rebates.I n our view,the tipping point(fo

114、r Capex revisions)becomes inevitable,when neither profitability nor the balance sheet can support capital for expansion.Assuming EBI TDA margin for mid-level(Group 2)producers is zero,a scenario very close to 2024YTD for most of our seven sample sectors,our stress test analysis signals Capex tipping

115、 points-defined as when more than 50%of the industry comes to net debt(i.e.,no more cash to burn),with EBI TDA interest coverage less than 5x(i.e.,an inability to service existing debt).On this basis we see imminent tipping points for solar modules and lithium batteries.On the other hand,it may take

116、 another 2-3 years before the industry Capex cycle for EVs and power semis(I GBT)will be forced to turn as balance sheets strength depletes.A deeper deterioration in cash profits could accelerate this process.Exhibit 18:Tipping points for Capex-when balance sheets and profitability both fail to supp

117、ort Capex expansions Sectors2023A2024E2025E2026E2027E2028ESolar modulesTipping point(current)Group 1=34%-60%,net cash-62%,net cash-71%,net cash-75%,net cash-42%,net cash-48%,net cashGroup 2=14%67%,12x97%,0 x680%,0 x1847%,0 xn.a.n.a.Group 3=52%*57%,2x57%,2x57%,2x57%,2x57%,2x57%,2xElectric vehiclesTip

118、ping point(3+years)Group 1=50%-51%,net cash-42%,net cash-45%,net cash-42%,net cash-38%,net cash-36%,net cashGroup 2=28%-16%,net cash-5%,net cash5%,9x13%,10 x21%,10 x27%,10 xGroup 3=22%-51%,net cash19%,-EBITDA-290%,-EBITDA-equity,-EBITDA-equity,-EBITDA-equity,-EBITDALithium batteriesTipping point(1 y

119、ear)Group 1=73%-67%,net cash-70%,net cash-67%,net cash-72%,net cash-69%,net cash-70%,net cashGroup 2=21%59%,5x117%,0 x211%,0 x299%,0 x431%,-EBITDA680%,-EBITDAGroup 3=6%-81%,net cash-47%,net cash24%,-EBITDA45%,-EBITDA133%,-EBITDA586%,-EBITDAPower semis(IGBT)Tipping point(12 years)Group 1=51%-92%,net

120、cash-54%,net cash7%,52x55%,71x155%,-EBITDA255%,-EBITDAGroup 2=39%-13%,net cash-3%,net cash43%,-EBITDA63%,-EBITDA163%,-EBITDA263%,-EBITDAGroup 3=11%1%,5.2x7%,-EBITDA37%,-EBITDA63%,-EBITDAn.a.n.a.Construction machineryno Capex expansionGroup 1=26%17%,16x19%,5x25%,5x29%,6x28%,27xn.a.Group 2=34%*35%,9x3

121、5%,0 x35%,0 x35%,-EBITDA35%,0 x35%,0 xGroup 3=40%-27%,net cash-22%,net cash-24%,net cash-17%,net cashn.a.n.a.Air conditionersno Capex expansionGroup 1=60%-32%,net cash-31%,net cash-32%,net cash-33%,net cashn.a.n.a.Group 2=21%-25%,net cash-28%,net cash-33%,net cash-37%,net cashn.a.n.a.Group 3=19%-12%

122、,net cash-25%,net cash-35%,net cash-44%,net cashn.a.n.a.Steelno Capex expansionGroup 1=22%11%,35x8%,41x3%,60 x-1%,net cash-4%,net cash-6%,net cashGroup 2=22%7%,-EBITDA15%,-EBITDA19%,-EBITDA24%,-EBITDA28%,0 x34%,0 xGroup 3=56%66%,3x74%,5x76%,5x78%,2x79%,5x81%,11xHow to read this chartScenario analysi

123、s-assuming average producers(group 2)at zero cash margins.*not covered,based on 2023A financial data.blue color represents net cash in balance sheetlight grey color represents net debt position,with ability to service debt(EBITDA interest coverage 5x)dark grey color represents net debt position,with

124、 risk in servicing debt(EBITDA interest coverage 50%of supply is in net debt,EBITDA interest coverage is 10 x)in a matter of 3-10 years.Behind this pattern,new demand segments have been built from zero to mature,such as housing and infrastructure,or those that are still evolving such as electric veh

125、icles and renewables.Supply responses,when a new market is being defined,can move at an even more astonishing speed in China,for many reasons.We estimate it only takes 6 months to build a new solar module plant,1.5-2.5 years for electric vehicles and lithium battery capacity,and 2.5 years for a stee

126、l plant(less than one year before 2010).The uncertainty of market size and pace of demand growth,combined with an aggressive supply response,probably implies a high margin of error for producers and industries to match capacity additions to future demand,especially at the beginning of the cycle.On t

127、he other hand,once demand growth decelerates,the adjustment in capacity investment soon follows.For example,Capex/sales for air conditioners has fallen to nearly zero in recent years due to stable demand,despite still attractive margins and returns.6 August 2024 15Goldman SachsChi na i n Transi ti o

128、nFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4 What has previously worked-supply side reforms I n addition to cyclical forces that drive the consolidation of supply through cycles,there have been Chinese government policies in the past to ef f ectively facilitate

129、the rebalance of oversupplied sectors,given policymakers are in a unique position to regulate industry development policy and have the ability to manage aggregate capacity growth through project approval processes.I n 2015-2017,the Chinese central government implemented a successful supply-side refo

130、rm of key overcapacity sectors including steel and coal,followed by aluminum.I n 2012-2015,the slowdown in domestic demand exacerbated the level of excess capacity,taking utilization rates to 70%.With a fragmented supply structure,these industries had Exhibit 25:Capex expansion in China is driven by

131、 demand growth -a close correlation between industry Capex trend and changes in demand can be seen from historical data-10%0%10%20%30%40%50%-40%0%40%80%120%160%200%240%2001200320052007200920112013201520172019202120232025EDemand/capex growth(%)Capex/sales(%)Lithium batteriesdomestic demand up 10 xove

132、r 2019-23A-10%0%10%20%30%40%50%-40%0%40%80%120%160%200%2001200320052007200920112013201520172019202120232025EDemand/capex growth(%)Capex/sales(%)Construction machinerydomestic demand up 6xover 2015-20A-10%0%10%20%30%40%50%-40%0%40%80%120%160%200%2001200320052007200920112013201520172019202120232025EDe

133、mand/capex growth(%)Capex/sales(%)Steeldomestic demand up 5xover 2001-21A-10%0%10%20%30%40%50%-40%0%40%80%120%160%200%2001200320052007200920112013201520172019202120232025EDemand/capex growth(%)Capex/sales(%)Electric vehiclesdomestic demand up 7x over 2019-23A-10%0%10%20%30%40%50%-40%0%40%80%120%160%

134、200%2001200320052007200920112013201520172019202120232025EDemand/capex growth(%)Capex/sales(%)Air conditionersdomestic demand up 3x over 2008-18A-10%0%10%20%30%40%50%-40%0%40%80%120%160%200%2001200320052007200920112013201520172019202120232025EDemand/capex growth(%)Capex/sales(%)Solarmodulesdomesticde

135、mand up 7x over 2019-23A-10%0%10%20%30%40%50%-40%0%40%80%120%160%200%2001200320052007200920112013201520172019202120232025EDemand/capex growth(%)Capex/sales(%)Power semis(IGBT)domestic demand up 6xover 2019-23A Source:Company dat a,Goldman Sachs Global Invest ment Research Exhibit 26:Construction tim

136、e for new capacity in China by sector-0.5-2.5 years implies short Capex cycle and rapid supply responses Exhibit 27:Path of demand growth by key sectors-China,the scale of demand changes in China are much larger than the typical cyclical changes in mature demand 0.51.01.51.52.02.52.50.00.51.01.52.02

137、.53.0Solar modulesConstruction machineryElectric vehiclesAir conditionersPower semis(IGBT)Lithium batteriesSteelConstruction period for new capacity in China(years)0%100%200%300%400%500%600%700%800%900%1000%200120022003200420052006200720082009201020112012201320142015201620172018201920202021202220232

138、024E2025ENormalized domestic demand-China(%)Solar modulesElectric vehiclesLithium batteriesPower semis(IGBT)Construction machineryAir conditionersSteel Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 16Goldman

139、 SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4completely lost their pricing power and more than 50%of supply f ell into negative cash margins and many producers were unable to service their debt.Starting in 2015,the central government i

140、mplemented a capacity reduction plan for these industries,including Rmb100bn in central government funding to facilitate the severance of 1.8mn coal and steel workers.More than 10%of industry capacity was closed and new expansions have been strictly controlled since that time,leading to structurally

141、 better margins and pricing in coal,aluminum,and steel in subsequent years.Exhibit 28:Supply side reforms in 2015-2017-effective closures of capacity for Chinese steel,aluminum and coal led to improving capacity utilization in subsequent years 60%70%80%90%100%110%120%0%200%400%600%800%1000%1200%2001

142、20022003200420052006200720082009201020112012201320142015201620172018201920202021202220232024ECapacity-aluminumSteelCoalUtilization-aluminum(RHS)SteelCoalSteel capacity closures(168mnt or 16%,excluding MFF and others)2015-100mnt LT maintainance2016-93mnt2017-50mnt BF,150mnt MFF2018-25mntCapacity util

143、ization(%)Coal capacity closures:2016-2017-nearly 800mntor 17%capacityAluminum capacity closures:2017-4.4mnt,or 11%capacityCapacity(normalized by 2001A)-China(%)Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 17Goldman SachsChi na i n Transi ti onFor the exclusive use of

144、ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Beyond cycles-potenti al for consoli dati on Beyond cyclical factors,we look for factors that define intrinsic returns and profitability of industries-underlying supply structure,the steepness of the cost curve(i.e.,the dif f erence between low

145、 cost and high end producers),and entry barriers.These factors determine the level of competition and thus a sustainable range of margins,the potential for consolidation through cycles(and its sustainability),and thus valuation multiples that investors are willing to ascribe.We prefer industries wit

146、h steep cost curves and strong top players Sectors with strong leading producers in terms of both market share and cost competitiveness tend to consolidate more readily and deliver more favorable returns over time-air conditioners and lithium batteries are likely in this category.The top two players

147、 in lithium batteries command a 70%domestic market share and enjoy 20%higher margins than weaker competitors.Similarly,nine producers dominate the Chinese air conditioners sector af ter years of consolidation(there were 400 players in 1996-2006).The average historical ROI C of these two sectors is 1

148、2-27%and risk adjusted ratio is 1.3-4.3x,at the higher-end of our seven sample sectors.Power semis has the highest risk adjusted return(5.4x),which we think is partly due to the short history of the sector.While electric vehicles have a steep cost curve,the market share of the leading producers is n

149、ot as concentrated and entry barrier remains a concern.On the contrary,sectors with flat cost curves,accompanied by less prevailing market Exhibit 29:Sector potential for supply consolidation-supply concentration,HHI index,cost curves,and investment returns-steep cost curves and concentrated supply

150、usually yield higher returns 551.522.51.522.5Chart TitleSTDROIC-hist avgPotential for consolidation and normalized returnsConclusionsSupply structureNumbers of producers(outer ring)and market shares(inner ring)Steepness of cost curve(1-OCF/Sales)Entry barriersROIC/Risk adj ratio27%4.3x6%0.9x12%1.3x6

151、%0.5x18%5.4x4%1.2x16%1.1xHow to read these chartsMidHighLow(HHI=330)LowMidHighMidFlat(HHI=2200)(HHI=2900)(HHI=2000)(HHI=1500)(HHI=300)Mid potentialFlatSteepSteepSteepSteepSteepHigh potential(HHI=1250)Low potentialLow potentialMid potentialHigh potentialMid potentiallithiumbatteriessolarmodulesair co

152、nditionersconstructionmachinerypowersemis(IGBT)33%13%54%4 4 32 88%98%100%72%95%102%77%92%96%78%90%97%81%92%99%72%88%90%93%98%99%50%28%22%3 6 18 73%21%6%2 6 35 50%39%11%2 6 17 25%39%36%1 5 49 61%20%19%2 2 5 22%22%56%3 7 555 electricvehiclesGroup 1Group 2Group 3cash losscash profit2023A1Q24Asteel50%Ou

153、ter ring:there are 2producers in group 1 of this industry61%20%19%2 2 5 Inner ring:they(group 1)account for 61%of industry market shares72%88%90%of supply in industrysum to 100%if adding all groupsCash cost of this group of producers equals to 72%of ASP,implying 28%cash marginProducers at this level

154、 of cash cost represent 50%of the industry supply Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 18Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4positions of top producers,suggest dif ficulty in conso

155、lidating-steel and solar are likely in this category-the historical average of the two sectors over the past 1-2 decades suggests less attractive risk-adjusted return ratios.The Herfindahl-Hirschman I ndex(“HHI”)is a statistical measure of concentration level of an industry.According to the U.S.Depa

156、rtment of Justice,an HHI between 1,000 and 1,800 points is generally considered to be moderately concentrated.We estimate lithium batteries and air conditioners have a high level of concentration with HHI s of 2,900 and 2,200 respectively,while HHI s for steel and solar modules is only around 300.En

157、try barriers sustain consolidation Entry barriers determine the sustainability of consolidation.The most powerful barrier to overcome tends to be an ecosystem in the supply chain or distribution channels around producers.The consolidation of the air conditioner sector is testimony to how sustained b

158、arriers to entry(such as a distribution network)can sustain improved profit and returns.Exhibit 30:Average historical ROIC and risk-adjusted return by sector-air conditioners hold the highest,followed by lithium battery Exhibit 31:Industry supply structure-number of producers(2023A)-air conditioners

159、 has 9 producers versus over 500 in steel -2.0 4.0 6.0 8.00%10%20%30%40%Power semis(IGBT)Air conditionersLithium batteriesConstruction machinerySteelSolar modulesElectric vehiclesRisk adjusted ROIC ratio(x)ROIC-hist avgRisk adjusted ratioHistorical avg ROIC(%)89%81%94%64%44%46%78%60%80%100%0 60 80 1

160、00p axis,ers-op-Mid tiersail end5508486108917535493218020406080100Power semis(IGBT)Air conditionersLithium batteriesConstruction machinerySteelSolar modulesElectric vehiclesNumbers of producers by sector(2023A)Top/mid tiersTail end550 Source:Company dat a,Goldman Sachs Global Invest ment Research So

161、urce:Company dat a,Goldman Sachs Global Invest ment Research Exhibit 32:Cost curve steepness and top market share-strong top producers in market shares and cost differentiation are best positioned for consolidation Exhibit 33:Historical average EBITDA margin and ROIC-electric vehicles,solar,steel ar

162、e in the lower range,while air conditioners,lithium batteries,power semis(IGBT)are in the upper range Power semis(IGBT)Air conditionersLithium batteriesConstruction machinerySteelSolar modulesElectric vehicles0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%0%5%10%15%20%25%30%35%40%Steepness of cost curve(EBIT

163、DA margin difference of high/low cost producers)(%)Average market shares of top producers(%)Well consolidatedLess consolidatedSteep cost curvePoorly consolidatedFlatter cost curveSolar modules,6%Electric vehicle,6%Lithium batteries,12%Power semis(IGBT),18%Construction machinery,16%Air conditioners,2

164、7%Steel ,4%0%5%10%15%20%25%30%35%0%5%10%15%20%25%30%35%EBITDA margin-historical avg(%)ROIC-historical avg(%)Source:Company dat a,Goldman Sachs Global Invest ment Research Dat a range:solar 2010-2023,elect ri c vehi cles 2016-2023,li t hi um bat t eri es 2016-2023,power semi s(IGBT)2019-2023,const ru

165、ct i on machi nery 2009-2023,ai r condi t i oners 2008-2023,st eel 2002-2023 Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 19Goldman SachsChi na i n Transi ti onHHI indicates consistently high and low rankings in our analysisFor the exclusive use of ACCOUNTSKARUNADUCABS

166、.COM2131d4eaf4cb4d50b1d51c8af07b64b4 Exhibit 34:Entry barriers ranked by sector-a strong ecosystem on the supply side or customer side usually leads to high entry barriers Policy approvalTechnology hurdlesResource constraintsCustomer Distribution networkSupply chain mgmtqualificationEncouraging poli

167、cy historically but incrementally higher requirement on new capacity by MIITNeed to keep up with new cell tech and assembly know-howNo constraint in raw materialsBankable module,quality after sales servicesNeed distribution channel for DS;USS(typically direct sales)requires customer resourcesNDRC su

168、spended the issuance of BEV production licenses since 2017.MIIT increasingly strict on issuing production licenses.Approval requirements on BEV capacity addition have also been tightenedVehicle assembly requires technological know-how.Car makers tend to in-house R&D of key components,which are diffe

169、rentiatedNo constraints in raw materials.Potential production bottlenecks in certain components such as LiDARs and chipsStrict and detailed national qualification standards for batteries,controller,energy efficiency,post-crash safety requirement,etc.Fragmented dealership market landscape in China an

170、d OEMs could choose a direct-selling model,therefore relatively low barriers for OEMs to expand their dealer networkRequests mainly for local government approvals and approvals related to environmental impact assessmentBattery performance and quality are differentiatedNo constraints in raw materials

171、,proximity and management of supply chain highly criticalTypically required 1-2 years for verification in EV modelsDirect sales bound by long-term contractsGovt supportive of capacity expansion,suppliers need to obtain local environmental reportsHigher tech hurdles for industrial/automotive IGBTSili

172、con based,no limitation on raw materialsAutomotive products need longer time for customer qualificationNeed long-term partnership with industry clients(automotive/energy/industrial)Only environmental impact assessment needed but not a hurdle for capacity expansion Important for product line expansio

173、n and to stand out among peersNo constraints in raw materialsStandardized productsIn DMs,high-quality top-tier dealers have been taken by competitors.Difficult to build a dealer network from scratchNo special policy approval requirement.Local government has taken a neutral attitude and reviews proje

174、cts case by caseTechnology hurdle:vertical integration and automation,which could improve efficiency and product qualityLeading players have in-house key components development and manufacturingn.a.Leading players have lower customer acquisition costs online,and possess more extensive offline channe

175、lsNo policy approval required for greenfield expansions,strong executionCommoditized for most productsNo constraints in raw materialsCommoditized nature for mostDirect sales and trader sales bear no loyalty requirementAssessment on levels of entry barriersLowSolarmodulesMidElectricvehiclesHighLithiu

176、m batteriesMidPower semis(IGBT)MidConstruction machinery HighAir conditioners LowSteellowlowlowlowmidmidmidmidmidhighhighhighlowlowlowlowlowlowlowlowmidlowlowmidmidmidmidlown.a.highhighhighhighhighmid DS:Di st ri but ed solar,USS:Ut i li t y-scale solar,MIIT:Mi ni st ry of Indust ry and Informat i o

177、n Technology Source:Goldman Sachs Global Invest ment ResearchChinese air conditioners-A strong global presence and positive profitability With only a handful of suppliers in the sector,the Chinese air conditioner sector holds a 55%ex-China market share(70%if based on unit sales)but is also a sector

178、where most producers are currently generating positive margins.Since 1998,there have been several rounds of excess capacity,price wars and inventory cycles,and the sector managed to consolidate before demand matured.While the number of companies in the space significantly declined(97%from the peak),

179、the remaining leading players established a sustainable ecosystem and entry barriers by investing in distribution networks and integrating production with core components.At the same time,maturing demand and technology have disincentivized large-scale supply expansion.Click here for full discussion.

180、6 August 2024 20Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Sector Snapshots-Solar modules I n 2023A,China supplied 86%of the global market,with 42%of production exported.Chinese exports nincreased 1.9x over 2020-2023A and mark

181、et share ex-China increased from 67%in 2020A to 72%in 2023A.49%of exports went to the US and EU.2023A capacity in China equated to 4.0 x the domestic demand pool and 2.0 x the global demand pool,nand operated at a 44%capacity utilization rate.I n 1Q24A,pricing was 46%lower yoy,and 100%of the industr

182、y generated zero or negative operating cash flow.2024E and 2025E industry Capex was revised down by 5%-16%over the past 12 months.Manufacturing cost in China is 30-60%lower than ex-China peers on average,and 10%lower than our nestimated cost of Chinese capacity overseas.Our view on the sector:The Ch

183、ina solar industry is heading into the final stage of a downcycle,with a ncyclical bottom likely in 2025E.We expect 1/3rd of industry capacity to shut down in the coming quarters,and sustainable demand to drive a recovery in utilization rate from 2025E onwards.Click here for details.Exhibit 35:Indus

184、try S/D balance(base case)-solar modules Exhibit 36:EBITDA vs capacity utilization-solar modules Chinese solar modules2021A 2022A 2023A 2024E 2025E2026EBase caseOutput-ChinaGW172 275 459 504 591 729 Output-ex ChinaGW38 49 74 109 125 133 Demand-GlobalGW210 324 533 612 716 863 Demand-ChinaGW64 105 260

185、 290 340 408 yoy%7%65%147%12%17%20%Capacity-ChinaGW347 527 1,036 928 1,009 1,091 Capacity utilization%50%52%44%54%59%67%Capacity/China demandx5.4 5.0 4.0 3.2 3.0 2.7 Capacity/Global demand x1.6 1.6 1.9 1.5 1.4 1.3 Direct exportGW89 155 193 202 236 280 Indirect export-estGW-Export as%of output%52%56%

186、42%40%40%38%(0.2)0.00.20.40.60.81.01.20%20%40%60%80%100%120%140%2015201620172018201920202021202220232024E2025E2026E2027E2028E2029E2030ECapacity utilization-China Solar modules(%)Unit EBITDA,Group 1Unit EBITDA,Group 2-3Utilization-Group 1Utilization-Group 2-3Unit EBITDA(Rmb/W)Source:CPIA,IEA,Wi nd,Co

187、mpany dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research Exhibit 37:Industry cash cost curve and profit-solar modules Exhibit 38:Market share by supplier(2023A)-solar modules 40%60%80%100%120%140%0%20%40%60%80%100%Cash op cost,1Q24A(%)-Chin

188、a solar modules1-EBITDA/sales1-OCF/salesGroup 2Group 3Cash lossCash breakevenCash profitGroup 1Jinko10%Longi8%Trina8%JA7%CSIQ4%Tongwei4%Chint3%Risen2%GCL System Integration2%DMEGC1%Others51%Market shares-China solar modules 2023ATrina solar:Huafu capital management 11%Risen:Ninghai Xingtaihe Equity

189、Investment 4%Source:Company dat a,Goldman Sachs Global Invest ment Research Source:PVi nfoli nk6 August 2024 21Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Sector Snapshots-Electri c vehi cles I n 2023A,China supplied 66%of the

190、global market,with 19%of production exported.Chinese exports nincreased 6.7x over 2020-2023A and market share ex-China increased from 10%in 2020A to 26%in 2023A.42%of exports went to the US and EU.2023A capacity in China equated to 2.1x the domestic demand pool and 1.2x the global demand pool,nand o

191、perated at a 54%capacity utilization rate.I n 1Q24A,pricing was 12%lower yoy and 50%of the industry generated zero or negative operating cash flow.I ndustry Capex for 2024-25E was revised by+35%and-15%over the past 12 months.Manufacturing cost in China is 47%lower than top ex-China peers and 17-24%l

192、ower than our nestimated cost of Chinese capacity overseas.Our view on the sector:The inflection point for domestic new energy vehicles has yet to arrive,given nnearly half of the industry to generate positive cash margins,and the industrys positive perception on the margin outlook is still supporti

193、ng continued expansion plans.Click here for details.Exhibit 39:Industry S/D balance(base case)-electric vehicles Exhibit 40:EBITDA vs.capacity utilization-electric vehicles Chinese electric vehicles2021A 2022A 2023A 2024E 2025E2026EBase caseOutput-Chinamn units3 7 9 12 14 16 Output-ex Chinamn units3

194、 4 5 4 6 8 Demand-Globalmn units6 10 14 16 20 24 Demand-Chinamn units3 6 8 10 12 13 yoy%169%90%36%27%17%13%Capacity-Chinamn units8 11 17 20 22 25 Capacity utilization%42%60%54%62%65%66%Capacity/China demandx2.6 2.0 2.1 2.0 1.9 1.9 Capacity/Global demand x1.2 1.1 1.2 1.2 1.1 1.0 Direct exportmn units

195、0.5 1.0 1.7 2.3 2.9 3.4 Indirect export-estmn units-Export as%of output%16%16%19%19%20%20%(150)(100)(50)0501001500%20%40%60%80%100%120%2015201620172018201920202021202220232024E2025E2026E2027E2028E2029E2030EUnit EBITDA(k Rmb/unit)Capacity utilization-China electric vehicles(%)Unit EBITDA,Group 1Unit

196、EBITDA,Group 2-3Utilization-Group 1Utilization-Group 2-3 Source:CPCA,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research Exhibit 41:Industry cash cost curve and profit-electric vehicles Exhibit 42:Market share by supplier(2023A)-electric vehicles

197、40%60%80%100%120%140%160%180%0%20%40%60%80%100%Cash op cost,1Q24A(%)-China electric vehicles1-EBITDA/sales1-OCF/salesCash breakevenGroup 2Group 3Group 1 Cash lossCash profitBYD35%Tesla 8%General Motors7%GAC6%Geely6%ChangAn5%Li Auto5%Great Wall3%Volkswagen3%Nio2%Others20%Market shares-China electric

198、vehicles 2023AGeneral motors:SAIC 50%/50.1%in JV SAIC-GM/SAIC-GM-WulingGAC:Guangzhou Auto Industry Group 53%Geely:Zhejiang Geely Auto 7.9%ChangAn:ChangAn Auto Group 18%,South Industries Group 14%Volkswagen:Porsche Auto 53%NIO:CYVN investment(Abu Dhabi Govt fund)20%Source:Company dat a,Goldman Sachs

199、Global Invest ment Research Source:CPCA,Dat a compi led by Goldman Sachs Global Invest ment Research6 August 2024 22Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Sector Snapshots-Li thi um batteri es I n 2023A,China supplied 81%o

200、f the global market,with 37%of production exported.Chinese exports nincreased 7.2x over 2020-2023A and market share ex-China increased from 26%in 2020A to 65%in 2023A.c.57%of direct exports went to the US and EU,per our estimation.2023A capacity in China equated to 3.3x the domestic demand pool,and

201、1.5x the global demand pool,nand operated at a 61%capacity utilization rate.I n 1Q24A,pricing was 45%lower yoy,and 27%of the industry generated zero or negative operating cash flow.I ndustry Capex for 2024-25E was revised down by 28%-41%over the past 12 months.Manufacturing cost in China is 28-56%lo

202、wer than ex-China peers on average,and 20-30%lower than nour estimated cost of Chinese capacity overseas.Our view on the sector:We are positive on China batteries given Capex cuts and demand growth.n2024E is likely to be the trough of this down cycle followed by a sustained recovery in utilization t

203、o 55%-60%in 2024E-26E.Accordingly,we expect China battery unit GP to recover with CATL s unit GP to rebound to Rmb198/kWh(from Rmb188/kWh)in 2024-2026E.Click here for details.Exhibit 43:Industry S/D balance(base case)-lithium batteries Exhibit 44:EBITDA vs.capacity utilization-lithium batteries Chin

204、ese lithium battery2021A 2022A 2023A 2024E 2025E 2026EBase caseOutput-ChinaGWh283 663 819 985 1,243 1,533 Output-ex ChinaGWh117 85 162 265 397 558 Demand-GlobalGWh400 749 981 1,250 1,640 2,091 Demand-ChinaGWh142 292 411 536 686 879 yoy%133%106%41%30%28%28%Capacity-ChinaGWh488 939 1,342 1,781 2,167 2

205、,556 Capacity utilization%58%71%61%55%57%60%Capacity/China demandx3.4 3.2 3.3 3.3 3.2 2.9 Capacity/Global demand x1.2 1.3 1.4 1.4 1.3 1.2 Direct exportGWh62 187 208 188 248 299 Indirect export-estGWh28 54 95 135 178 230 Export as%of output%32%36%37%33%34%34%-100 200 300 400 5000%20%40%60%80%100%2015

206、201620172018201920202021202220232024E2025E2026E2027E2028E2029E2030ECapacity utilization-China lithium batteries(%)Unit EBITDA,Group 1Unit EBITDA,Group 2-3Utilization-Group 1Utilization-Group 2-3Unit EBITDA(Rmb/kWh)Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Go

207、ldman Sachs Global Invest ment Research Exhibit 45:Industry cash cost curve and profit-lithium batteries Exhibit 46:Market share by supplier(2023A)-lithium batteries 0%20%40%60%80%100%120%140%160%0%20%40%60%80%100%Cash op cost,1Q24A(%)-China lithium batteries1-EBITDA/sales1-OCF/salesCash breakeven G

208、roup 1Group 2Group 3Cash loss Cash profit CATL45%BYD28%CALB8%Gotion4%EVE Energy3%Svolt2%LGES2%Sunwoda2%Farasis2%Zhengli1%Others3%Market shares-China battery 2023ACALB:Jintan Holdings 26%;Jinyuan Inv 14%;AVIC 9%Svolt:Great wall 40%Farasis:Guangzhou Government 14%;China Reform venture capital 13%CATL4

209、8%BYD20%CALB6%Gotion6%EVE Energy7%Farasis1%Others12%Market shares-China lithium batteries 2023ACALB:Jintan Holdings 26%;Jinyuan Inv 14%;AVIC 9%Farasis:Guangzhou Government 14%;China Reform venture capital 13%Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman

210、Sachs Global Invest ment Research6 August 2024 23Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Sector Snapshots-Power semi s(IGBT)I n 2023A,China supplied 29%of the global market,with 15%of production exported.Chinese exports nin

211、creased 2.7x over 2020-2023A and market share ex-China increased from 3%in 2020A to 6%in 2023A.80%of exports went to the US and EU.2023A capacity in China equated to 1.4x of the domestic demand pool and 35%of the global demand npool,and operated at an 87%capacity utilization rate.I n 1Q24,pricing wa

212、s 8%lower yoy,and 49%of the industry generated zero or negative operating cash flow.I ndustry Capex for 2024-25E was revised up by 130%-153%over the past 12 months.Manufacturing cost in China is 3-5%lower than ex-China peers on average(same process nodes),and n5-10%lower than our estimated cost of C

213、hinese capacity overseas.Our view on the sector:We expect continued capacity expansion in the China power semi(I GBT/nMOSFET)space as local suppliers expand to gain market share and to meet client diversification demands and enhanced products.We are cautious on I GBT pricing,and expect declines due

214、to oversupply.Click here for details.Exhibit 47:Industry S/D balance(base)-power semis(IGBT)Exhibit 48:EBITDA vs.capacity utilization-power semis(IGBT)Chinese power semis(IGBT)2021A 2022A 2023A 2024E 2025E 2026EBase caseOutput-Chinamn wafers2.1 2.7 3.2 3.6 4.0 4.5 Output-ex Chinamn wafers4.9 5.9 7.5

215、 8.7 9.1 9.6 Demand-Globalmn wafers7.0 8.6 10.8 12.3 13.2 14.0 Demand-Chinamn wafers1.9 2.3 2.6 2.9 3.1 3.4 yoy%23%21%13%11%8%9%Capacity-Chinamn wafers2.2 2.8 3.7 4.6 5.4 6.0 Capacity utilization%96%98%87%78%75%75%Capacity/China demandx1.2 1.2 1.4 1.6 1.7 1.8 Capacity/Global demand x0.3 0.3 0.3 0.4

216、0.4 0.4 Direct exportmn wafers0.1 0.1 0.1 0.1 0.2 0.2 Indirect export-estmn wafers0.2 0.2 0.4 0.5 0.6 0.7 Export as%of output%11%12%15%17%19%20%0%10%20%30%40%50%60%0%20%40%60%80%100%120%2015201620172018201920202021202220232024E2025E2026E2027E2028E2029E2030ECapacity utilization-China power semis(%)EB

217、ITDA margin,Group 1EBITDA margin,Group 2-3Utilization-Group 1Utilization-Group 2-3EBITDA margin(%)Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research Exhibit 49:Industry cash cost curve and profit-power semis(IGBT)Exhibit 50:M

218、arket share by supplier(2023A)-power semis(IGBT)0%20%40%60%80%100%120%140%0%20%40%60%80%100%Cash op cost,1Q24A(%)-China power semis IGBT players1-EBITDA/sales1-OCF/salesCash breakeven Group 1Group 2Group 3Cash loss Cash profit Starpower15%CRRC Times9%BYD Semi12%Silan1%CR Micro3%Yangjie1%Jiejie1%Othe

219、r CN suppliers5%Foreign suppliers53%Market shares-China power semis(IGBT)2023ACRRC Times:CRRC Zhuzhou Institute 42%BYD Semi:BYD Group Silan:China IC Fund 5%CR Micro:CRH microelectronics 66%;China IC Fund 5%Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sa

220、chs Global Invest ment Research6 August 2024 24Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Sector Snapshots-Constructi on machi nery I n 2023A,China supplied 33%of the global market,with 53%of production exported.Chinese export

221、s nincreased by 2.0 x over 2020-2023A and market share ex-China increased from 11%in 2020A to 21%in 2023A.21%of exports went to the US and EU.2023A China capacity equated to 7.2x of the domestic demand pool and 1.1x the global demand pool,nand operated at a 30%capacity utilization rate.I n 1Q24A,pri

222、cing was flat yoy,and 74%of the industry generated zero or negative operating cash flow.I ndustry Capex for 2024-25E was revised by-12%to+6%over the past 12 months,amid a low Capex/sales ratio.Manufacturing cost in China is 8-46%lower than ex-China production on average.nOur view on the sector:The C

223、hina construction machinery sector entered a multi-year downcycle nbeginning in 2021 due to the property downturn and issues around local government debt.We expect a potential bottoming in domestic demand in 2024-25E,as property new starts stabilize and the replacement cycle kicks-in,but with a lowe

224、r normalized level supported only by replacement demand.Click here for details.Exhibit 51:Industry S/D balance(base case)-const.machinery Exhibit 52:EBITDA vs.capacity utilization-const.machinery Chinese construction machinery2021A 2022A 2023A 2024E 2025E 2026EBase caseOutput-Chinak units369 281 197

225、 175 199 246 Output-ex Chinak units355 387 400 416 417 437 Demand-Globalk units725 668 598 591 615 683 Demand-Chinak units274 152 90 80 99 133 yoy%-6%-45%-41%-11%24%34%Capacity-Chinak units650 650 650 650 650 650 Capacity utilization%57%43%30%27%31%38%Capacity/China demandx2.4 4.3 7.2 8.1 6.6 4.9 Ca

226、pacity/Global demandx0.9 1.0 1.1 1.1 1.1 1.0 Direct exportk units68 109 105 95 100 113 Indirect export-estk units-Export as%of output%19%39%53%54%50%46%-20 40 60 80 100 1200%20%40%60%80%100%120%2015201620172018201920202021202220232024E2025E2026E2027E2028E2029E2030ECapacity utilization-China construc

227、tion machinery(%)Unit EBITDA,Group 1Unit EBITDA,Group 2-3Utilization-Group 1Utilization-Group 2-3Unit EBITDA(k Rmb/unit)Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research Exhibit 53:Industry cash cost curve and profit-const.m

228、achinery Exhibit 54:Market share by supplier(2023A)-const.machinery 0%20%40%60%80%100%120%140%0%20%40%60%80%100%Cash op cost,1Q24A(%)-China construction machinery1-EBITDA/sales1-OCF/salesCash breakeven Group 1Group 2Group 3Cash loss Cash profit Sany26%XCMG19%Liugong10%SDLG10%Caterpillar5%Zoomlion5%L

229、onking1%Others24%Market shares-China construction machinery 2023AXCMG:Xuzhou construction machinery 21%;Jiangsu Guoxin 6%Liugong:Guangxi Liugong Group 26%Zoomlion:Hunan Xingxiang Investment 14%Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global In

230、vest ment Research6 August 2024 25Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Sector Snapshots-Ai r condi ti oners I n 2023A,China supplied 75%of the global market,with 42%of production exported.Chinese exports nincreased 16%ov

231、er 2020-2023A and market share ex-China remained flat at 55%in 2023A vs 2020A.32%of exports went to the US and EU.2023A capacity equated to 2.7x the domestic demand pool and 1.2x the global demand pool,and noperated at a 62%capacity utilization rate.I n 1Q24A,pricing was 3%lower yoy,and 19%of the in

232、dustry generated zero or negative operating cash flow.I ndustry Capex for 2024-25E was revised down by 7%over the past 12 months,amid a low Capex/sales ratio.Manufacturing cost in China is 10%-30%lower than ex-China peers on average,and 8%-20%lower nthan our estimated cost of Chinese capacity overse

233、as.Our view on the sector:We expect healthy supply/demand dynamics and profitability,underpinned by ndiversified demand,disciplined Capex,a higher focus on margins,and consolidated supply structure.Click here for details.Exhibit 55:Industry S/D balance(base case)-air conditioners Exhibit 56:EBITDA v

234、s capacity utilization-air conditioners Chinese air conditioners2021A 2022A 2023A 2024E2025E2026EBase caseOutput-Chinamn units158 152 169 182 173 174 Output-ex Chinamn units50 58 58 45 55 57 Demand-Globalmn units208 210 227 227 228 231 Demand-Chinamn units88 88 100 101 94 97 yoy%10%0%14%1%-7%3%Capac

235、ity-Chinamn units249 251 272 276 280 280 Capacity utilization%64%60%62%66%62%62%Capacity/China demandx2.8 2.9 2.7 2.7 3.0 2.9 Capacity/Global demand x1.2 1.2 1.2 1.2 1.2 1.2 Direct exportmn units68 66 71 81 79 77 Indirect export-estmn units-Export as%of output%43%43%42%45%46%44%-100 200 300 400 500

236、6000%20%40%60%80%100%120%2015201620172018201920202021202220232024E2025E2026E2027E2028ECapacity utilization-China air conditioners(%)Unit EBITDA,Group 1Unit EBITDA,Group 2-3Utilization-Group 1Utilization-Group 2-3Unit EBITDA(Rmb/unit)Source:IOL,Euromoni t or,Goldman Sachs Global Invest ment Research

237、Source:IOL,Company dat a,Goldman Sachs Global Invest ment Research Exhibit 57:Industry cash cost curve and profit-air conditioners Exhibit 58:Market share by suppliers(2023A)-air conditioners 40%60%80%100%120%140%0%20%40%60%80%100%Cash op cost,1Q24E(%)-China air conditioners1-EBITDA/sales1-OCF/sales

238、Cash breakevenGroup 1Group 2Group 3Cash profitCash lossGree31%Midea30%Haier15%Hisense5%TCL5%AUX4%Xiaomi4%Changhong2%Panasonic1%Chigo0%Others3%Market shares-China air conditioners 2023AGree:Zhuhai Gree Group 3%Haier:Haier Group 11%Hisense:Qingdao Hisense Air-Con 37%TCL:Huizhou Investment 4%Changhong:

239、Sichuan Changhong Electric 24%,Hefei Industrial 4%Source:Euromoni t or,Company dat a,Goldman Sachs Global Invest ment Research Source:Euromoni t or,Company dat a6 August 2024 26Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Sector

240、 Snapshots-Steel I n 2023A,China supplied 54%of the global market,with 16%of production exported.Chinese exports nincreased 22%over 2020-2023A and market share ex-China increased from 14%in 2020A to 16%in 2023A.6%of exports went to the US and EU.2023A capacity equated to 1.5x of the domestic demand

241、pool and 66%of the global demand pool,and noperated at an 81%capacity utilization rate.I n 1Q24A,pricing was 6%lower yoy,and almost 100%of the industry generated zero or negative operating cash flow.I ndustry Capex for 2024-25E was revised up by 0-19%over the past 12 months,amid a low Capex/sales ra

242、tio.Manufacturing cost in China is mostly on par with ex-China peers on average,given nearly 70%of steel nproduction cost is raw materials.Our view on the sector:We expect persistent weak margins in Chinese steel for most products,due to nthe structural correction in construction steel,despite much

243、improved excess capacity following 2015-17 supply side reforms.Exhibit 59:Industry S/D balance(base case)-steel Exhibit 60:EBITDA vs.capacity utilization-steel Chinese steel2021A 2022A 2023A 2024E 2025E 2026EBase caseOutput-Chinamnt1,033 1,013 1,019 1,010 979 959 Output-ex Chinamnt933 882 873 890 96

244、8 1,020 Demand-Globalmnt1,965 1,895 1,893 1,900 1,946 1,979 Demand-Chinamnt928 889 865 842 821 812 yoy%-4%-4%-3%-3%-2%-1%Capacity-Chinamnt1,200 1,279 1,260 1,249 1,238 1,235 Capacity utilization%86%79%81%81%79%78%Capacity/China demandx1.3 1.4 1.5 1.5 1.5 1.5 Capacity/Global demandx0.6 0.7 0.7 0.7 0.

245、6 0.6 Direct exportmnt67 67 91 107 98 88 Indirect export-estmnt75 72 70 68 67 66 Export as%of output%14%14%16%17%17%16%-200 400 600 800 1,000 1,2000%20%40%60%80%100%120%201520162017201820192020202120222023E2024E2025E2026E2027E2028E2029E2030ECapacity utilization-China steel(%)Unit EBITDA,Group 1Unit

246、EBITDA,Group 2-3Utilization-Group 1Utilization-Group 2-3Unit EBITDA(Rmb/t)Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research Exhibit 61:Industry cash cost curve and profit-steel Exhibit 62:Market shares by suppliers(2023A)-st

247、eel 0%20%40%60%80%100%120%140%0%20%40%60%80%100%Cash op cost,1Q24A(%)-China steel1-EBITDA/sales1-OCF/salesCash breakeven Cash loss Cash profit Baosteel13%Angang6%Hebei4%Shagang4%Jianlong4%Shougang3%Shandong steel3%Delong steel3%Hunan group2%Fangda steel2%Others56%Market shares-China Steel 2023ABaost

248、eel:SASAC 57%Angang:SASAC 53%Hebei Steel:Hebei SASAC 72%Shagang:Shagang Group 27%Shougang:SASAC 57%Shandong Steel:SASAC 56%Hunan Steel:Hunan SASAC 45%Fangda:Fangda Group 31%Source:Company dat a,Goldman Sachs Global Invest ment Research Source:Company dat a,Goldman Sachs Global Invest ment Research6

249、August 2024 27Goldman SachsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Stock pi cks Exhibit 63:11 stocks that provide exposure to both cyclical inflections and/or structural stability Companies Price as of 2-Aug-2024 CCYCompany profile,TP m

250、ethodology&RisksSolar Daqo ADRTickerDQCompany profile:Daqo is a leading poly producer(14%global mkt share by end-2023)RatingBuywith the strongest balance sheet among our China solar coverage.Target21.8USDTP methodology:Our 12m TP is based on 0.4X 2024E P/B(based on 1 std dev below avg P/B),Price16.1

251、USDas we expect a lower mid-cycle margin for poly in the longer run;cross checked with its historical return profile.Upside35%Key risks:1)Lower-than-expected poly price,2)higher raw material and electricity prices.TongweiTicker600438.SSCompany profile:Tongwei is a leading integrated solar producer w

252、ith 24%/15%/6%share in poly/cell/module(end-23).RatingSellTP methodology:Our 12m TP is based on 1.1X 2024E P/B(derived from a 30%discount to 1X P/B for its solar businessTarget13.4CNYdue to a more pressured balance sheet and shorter FCF cash burn,and 3X P/B for the feeding business based on listedPr

253、ice17.9CNYpeers);cross checked with its historical return profile.Upside-25%Key risks:1)Higher-than-expected market demand;2)favorable chgs in raw material/electricity prices;3)breakthroughin HJT;4)earlier-than-expected ASP stabilization with efficient industry capacity adjustments across the value

254、chain.Electric vehiclesBYD-HTicker1211.HKCompany profile:BYD is a leading NEV maker both in China and globally,with 36%/4%NEV market share in BYD-A002594.SZdomestic/overseas market in 2023.RatingBuy/BuyTP methodology:12m DCF-based(WACC 10.8%,TGR 2.0%)TPs of Rmb309/HK$295 for A/H sharesTarget295.0/30

255、9.0HKD/CNY (applying a 14%discount to the H-shares).Price219.2/234.8HKD/CNY Key risks:1)Intensifying electric vehicle competition;2)Slower-than-expected overseas expansion progress;Upside35%/32%3)Lower-than-expected external battery sales.SAICTicker600104.SSCompany profile:SAIC is the largest Chines

256、e auto OEM with a 14%domestic market share and 73%of sales volumeRatingSell from ICE in 2023.Target9.7CNYTP methodology:12m P/E-based(8x)TP of Rmb9.7.Price14.6CNYKey risks:1)slower EV penetration progress;2)stronger overseas expansion;3)faster JV NEV product transition.Upside-33%Lithium batteriesCAT

257、LTicker300750.SZCompany profile:CATL is the largest and most innovative battery maker globally,with a 40%global market share in 2023.RatingBuyTP methodology:Our 12m TP is derived from an average of a near-term and long-term P/E valuation.We use theTarget307.0CNYcompanys past 3-month average P/E of 1

258、6.3x for 2023E to arrive at a near-term valuation,and employ a 15.0 x Price177.1CNYlong-term P/E for 2030E and discount back to 2023E at 10.8%COE to derive a long-term valuation.Upside73%Key risks:1)product upgrades by peers;2)lower battery demand growth;3)further deterioration in trade barriers.Far

259、asis Ticker688567.SSCompany profile:Farasis is the largest pouch battery maker in China with 1.7%global market share in 2023.RatingSellTP methodology:Our 12m TP is derived from an average of a near-and long-term valuation.We use a 1x P/B applied toTarget7.9CNY2024E BVPS to arrive at a near-term valu

260、ation,while employing an 15.0 x long-term P/E for 2030E and discounting backPrice9.3CNY to 2024E at a 10.8%COE to derive a long-term valuation.Upside-15%Key risks:1)significant long-term contracts from OEMs;2)stronger-than-expected growth from new batteries;3)higher-than-expected government subsidie

261、s.Power semis(IGBT)Hua HongTicker1347.HKCompany profile:Hua Hong is a semiconductor foundry(8 and 12)focusing on specialty technologies.RatingBuyTP methodology:We are Buy rated on Hua Hong.Our 12-month target price of HK$30.0 is based on 24x 2025E P/E.Target30.0CNYOur target multiple is derived from

262、 global semiconductor peers P/E vs.earnings growth correlation.Price19.3CNYKey risks:1)Uncertainties around US-China trade relations;2)Weaker-than-expected end-market demand;Upside55%and 3)Slower-than-expected 12 fab ramp-up.CR MicroTicker688396.SSCompany profile:CR Micro is the leading power-semico

263、nductor integrated device manufacturer(IDM)in China.RatingSellTP methodology:We are Sell rated on CR Micro.Our 12-month target price of Rmb36.37 is based on 28x 2025E P/E.Target36.4CNYOur TP multiple is derived from sector P/E and earnings growth correlation and is within CR Micros historical range.

264、Price39.4CNYKey risks:1)Better-than-expected ASP trend among MOSFET,IGBT,SiC;2)faster-than-expected new design winsUpside-8%and market share gains;3)faster-than-expected new product(IGBT and power IC)development progress;4)fewer entrants within the IGBT/SiC space,which helps to reduce competitive pr

265、essure.Construction machineryDingliTicker603338.SSCompany profile:Zhejiang Dingli is one of Chinas largest suppliers of aerial working platforms(AWP).RatingBuyTP methodology:We base our 12-m TP of Rmb81.0 on a 16.5X 2024E DACF.Our target EV/DACF multiple of 16.5X Target81.0CNYimplies a 45%discount t

266、o its long-term historical average to reflect weak industry demand.Price51.6CNYKey risks:1)Weaker-than-expected construction activity globally;2)intensifying domestic competition;Upside57%3)slower-than-expected ramp-up of its boom lift margin and penetration of electrified boom products in US market

267、;4)escalating US-China trade tensions and unfavorable outcomes from EU anti-dumping and anti-subsidy investigations.SanyTicker600031.SSCompany profile:Sany Heavy is one of Chinas leading manufacturers of construction machinery including excavators RatingSell(ranked No.1 globally),concrete machinery(

268、ranked No.1 globally)and cranes(top 3 in China).Target11.0CNYTP methodology:We use a 2024E target EV/GCI of 1.0 x based on its historical trading level against expected CROCI.Price15.7CNYKey risks:1)Stronger-than-expected construction activity in China and/or globally;2)faster-than-expected marketUp

269、side-30%share gains;3)unexpected decrease in raw material prices;4)unexpected depreciation in Rmb.Air conditionersHisense-HTicker0921.HKCompany profile:Hisense holds a leading position(20%+market share)in the structurally growing China VRF market,asHisense-A000921.SZwell as gaining market share with

270、in the white goods space globally,with 7 sub-brands and product offerings to 130+regions.RatingBuy/BuyTP methodology:Our 12m TP for H/A-shares are based on 17x/12x 2026E P/Es for Hisense-Hitachi JV/legacy white Target35.0/40.0HKD/CNY goods,discounted back to 2025E at a 9.5%COE.Price23.6/28.4HKD/CNY

271、Key risks:1)Weak white goods demand;2)property market slowdown;3)increasing domestic competition;Upside49%/41%4)developer channel contribution;5)Hisense-Hitachi JV integration;6)weak legacy white goods business.Source:Company dat a,Goldman Sachs Global Invest ment Research6 August 2024 28Goldman Sac

272、hsChi na i n Transi ti onFor the exclusive use of ACCOUNTSKARUNADUCABS.COM2131d4eaf4cb4d50b1d51c8af07b64b4Di sclosure Appendi x Reg AC We,Trina Chen,Allen Chang,Jacqueline Du,Tina Hou,Eric Shen,Nick Zheng,CFA,Nicolas Yi,Verena Jeng,Olivia Xu,Mengwen Wang,Jolin Liu,Fiona Ye,Cecilia Tang,Ting Song,Qiy

273、ing Wei,Sylvia Hu,Xiyang Zhao and Selina Yan,hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities.We also certify that no part of our compensation was,is or will be,directly or indirectl

274、y,related to the specific recommendations or views expressed in this report.Unless otherwise stated,the individuals listed on the cover page of this report are analysts in Goldman Sachs Global I nvestment Research division.GS Factor Profile The Goldman Sachs Factor Profile provides investment contex

275、t for a stock by comparing key attributes to the market(i.e.our coverage universe)and its sector peers.The four key attributes depicted are:Growth,Financial Returns,Multiple(e.g.valuation)and I ntegrated(a composite of Growth,Financial Returns and Multiple).Growth,Financial Returns and Multiple are

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278、inancial stocks,only ROE),with a higher percentile indicating a company with higher financial returns.Multi ple is based on a stocks forward-looking P/E,P/B,price/dividend(P/D),EV/EBI TDA,EV/FCF and EV/Debt Adjusted Cash Flow(DACF)(for financial stocks,only P/E,P/B and P/D),with a higher percentile

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