Enjie: Shipping guidelines for 2023 remain unchanged, efforts will be made to reduce costs and increase efficiency in coating (minutes)

The following is a summary of Enjie's 2022 annual and Q4 financial report conference call minutes. For financial report interpretation, please refer to "Enjie: The battery chain's fresh style is becoming more and more mediocre" (https://longportapp.com/topics/4341775?app_id=longbridge).

I. Management Summary

In 2022, the company actively developed market capacity layout, financing, and personnel construction around the succession policy. There are mainly the following aspects.

The downstream business is booming, and the demand for high-quality and high-end lithium battery separators from customers continues to be strong. The progress in expanding high-quality customer base is significant. To ensure the safety of customer supply chains and deepen cooperation with strategic customers, the company has set up separator factories in cooperation with Yiwei Lithium and Ningde Times respectively. The company continues to deepen cooperation with high-quality customer groups and has signed supply agreements for 2023 with many leading power battery companies, including Ningde, Zhongchuang, Guoxuan, Yiwei, and Fencen.

First, to match the future demand of high-end customers for high-quality separator capacity, the company will vigorously promote global capacity layout and construction. As of the end of 2022, the company's capacity is about 7 billion square meters. This year, the company's newly added production lines mainly come from Chongqing Enjie's remaining production lines, Jiangsu Enjie, Hubei Enjie, and the Hungarian base.

The Jiangsu Enjie project has been completed, and the equipment is being installed in stages. It is expected to start production in the third quarter of this year.

Hubei Enjie is undergoing construction and is expected to start production at the end of the third quarter of this year.

The main equipment of the Hungarian base has arrived one after another and is being installed and debugged.

It is expected that by the end of the year, the company's global layout capacity will be nearly 10 billion square meters, better meeting the downstream customers' demand for the company's lithium battery separators.

In addition, the company is also actively promoting the construction of other projects. In March 2022, it was expected to establish a lithium battery separator project with a capacity of 1.6 billion square meters, with a total investment of approximately 4.5 billion yuan. The company's strategic goal is to have a wet process separator capacity of about 16 billion square meters by 2025.

Second, the company's capacity construction provides financial support for the company's capacity construction, enhances the company's financial strength, and optimizes the financial structure. After the board of directors studied and decided not to distribute profits in 2022, the company will consider a profit distribution plan for 2022 after completing the private placement.

Third, in conjunction with the company's development strategy needs, the company has established a global talent development platform to build a good career development channel and employee incentive mechanism to ensure the company's steady development in the future. As of the end of 2022, the company has approximately 7,500 global employees. The company attaches great importance to research and development and has a research and development team of more than 500 people from China, the United States, Japan, Korea, and other countries, including more than 100 master's and PhDs. The company will continue to increase research and development investment, and research and development expenses exceeded 700 million yuan in 2022, with a proportion of 5.8%.

II. Enjie's business & development strategy

As a leading global separator for lithium-ion batteries, Enjie has taken active and effective measures to respond to the complex and changing domestic and foreign environments. Even in the second quarter of 2022, which was greatly affected by the epidemic, the company demonstrated resilience, maintained normal production and operation, and ensured the supply of separators for downstream customers to accelerate their recovery. Despite the impact of the pandemic optimization policy on sales, the sales growth of Enjie Company remained strong in 2022, leading the market share and continuing to increase profits.

In 2022, the company completed the construction of four bases in Jiangxi, Wuxi, Suzhou Jielai, and Chongqing, and put nearly 20 production lines into operation. By the end of the year, the production capacity of wet-process diaphragms reached 7 billion square meters, leading the industry. According to the medium and long-term strategic planning, we will maintain the rapid expansion of production capacity from 2023 to 2025.

This year, we will focus on the construction of the second phase of Chongqing Enjie, Jiangsu Enjie, Hubei Enjie, and the Hungary base. By the end of 2023, the production capacity will reach 10 billion square meters. We will continue to promote projects such as Yuxi Enjie, Xiamen Enjie, and other projects to fully ensure the rapid growth of downstream customers' demand for high-end lithium battery diaphragms.

The company has the world's highest-quality customer base. By cooperating for win-win situations, locking supply, and promoting internationalization, we will deepen and stabilize long-term cooperation relationships with domestic and foreign customers, optimize product and customer structure, and further increase market share.

First, the company accelerates the construction of joint ventures with strategic customers such as Ningde Times to ensure the supply chain security of strategic-level customers.

Second, the company signed supply lock-up capacity with multiple top lithium battery companies such as Ningde Times, Uni Energy, Gotion High-tech, Farasis Energy, and others to improve the company's capacity utilization rate, optimize product structure, and increase domestic market share.

Third, we are actively laying out overseas manufacturing bases to enhance local manufacturing capabilities to meet the needs of European and North American customers, such as large overseas automakers, and expand the company's influence in overseas markets. We believe that the commissioning of the Hungary project has a milestone significance for both the company and the industry.

To achieve the company's strategic goal of occupying 50% of the global diaphragm market share by 2025, we will focus on two aspects of work.

We will focus on the diaphragm industry and improve the layout of production capacity. In 2022, the diaphragm industry was prosperous. According to Gao Gong's statistics, the domestic diaphragm shipment volume reached 12.4 billion square meters, a year-on-year increase of 59%. Wet-process diaphragms are still mainstream and account for 75%. According to securities firms' estimates, the global lithium battery industry will have about 84 billion Gwh of new production capacity in 2023, and the demand for diaphragms is expected to be 12.6 billion square meters. Due to the long production cycle of diaphragms and industry characteristics, entering domestic high-end customers requires severe long-term validation, especially in recent years, where the requirements for battery energy density improvement and safety performance have continued to increase. High-end diaphragm products with high consistency and customization that can provide downstream customers with long-term stability and sufficient high-quality capacity to match downstream customer expansion needs cannot yet meet downstream demand.

From the customer and order situation of Enjie Company in recent years, top customers have locked up high-quality capacity to improve supply chain certainty for their own rapid development. Therefore, according to the medium and long-term strategic goals, we will promote the construction of multiple bases in various places, such as Changzhou Jintan, Hubei Jingmen, Yuxi Jie, Xiamen Enjie, and strive to add about 3 billion square meters of production capacity each year. 2) We will accelerate the construction of dry-process projects and seize the opportunity of energy storage development. As the global energy structure is rapidly transitioning to a low-carbon situation, the installation structure of renewable energy is accelerating. Intermittent renewable energy such as wind and photovoltaic power has gradually become the main force of global new installed capacity in recent years. The global energy storage market maintains a high-speed growth trend. According to the research statistics released by Gotion High-Tech, the domestic shipment volume of energy storage lithium batteries reached 130GWh in 2022, an increase of 171% compared to the previous year. The development potential of China's energy storage industry is enormous, which has also driven a significant increase in demand for energy storage batteries and membranes.

Enjie has cooperated with the global dry-process leader Celgard to establish Jiangxi Enbo Company, which focuses on the production of high-quality dry-process membranes. We already have one production line in commissioning, and we will accelerate customer validation and equipment installation and commissioning in the next step. We plan to complete the first phase of 1 billion square meters of production capacity construction before the end of this year, to achieve full coverage of the three major application areas of power, consumption, and energy storage, strengthen the company's competitiveness, and consolidate our industry position. The company and strategic customers such as CATL jointly build a dry-process factory, planning to have a capacity of 2 billion square meters, to meet the customer's demand for dry-process membranes.

In the future, the company will focus on the power and energy storage fields, relying on product and technological advantages, market advantages, cost advantages, and capacity release, to help the company's business scale and performance reach new heights. We will seize the historical opportunity of the booming development of new energy vehicles and energy storage market, and return investors with excellent results.

II. Analyst Q&A

Q1: Regarding the actual production capacity/shipment proportion/cost reduction of online coating?

A1: By the end of last year, our total online coating production capacity had reached nearly 1.5 billion square meters. In the past two months, as the epidemic situation has improved, we have also accelerated the installation progress of online coating. By March (now), the output scale of our online coating production line has reached more than 2 billion square meters.

This year, especially in the second half of this year, the speed of construction of our online coating production lines will be greatly accelerated. It is expected that by the end of this year, we will have about 55 online coating production lines in total. This year, the newly added online coating production capacity is mainly concentrated in Jiangsu Jintan Base and Hubei Jingmen Base.

The advantages of online coating in terms of cost are very significant, and the actual cost savings from operation can be seen at a level of about 15% to 20%. Starting this year, with the gradual abundance of our online coating production capacity, we will also accelerate the introduction of new customers at home and abroad.

All the new production lines we have in Hungary are matched with online coating production lines, and they have also been recognized by customers. The preliminary verification has been completed at our new base in China, and we are waiting to immediately provide supply with Hungary. The gradual release of online coating production capacity has also accelerated the speed of our coated film replacing basic film shipments. It is estimated that this year, the proportion of our overall coated film shipments will exceed 50%, which will help the company further optimize our product structure and further enhance our profitability. Q2: About the progress and expected pace of the current research equipment? How do you view domestic equipment manufacturers?

A2: The progress of self-developed equipment has been very smooth, and it is progressing according to the established plans and goals. Some projects have exceeded our goals and have achieved good results.

Last year, we mainly carried out renovation and upgrading of the existing production lines and equipment, designed key technologies ourselves, and constructed new factories.

As for other domestic equipment, we have spent a lot of effort and time over the past ten years to train or cooperate, but overall, they have been failures. In the end, we acquired a Japanese company, and also added FQ Tech. We think this is a very good combination, as it has both experience and elements of Japanese capital manufacturing, and also has room for automation and intelligent upgrading.

As for our experience with domestic equipment manufacturers-

Firstly, domestic equipment manufacturers do not understand the process and invest very little in research and development. Basically, they just copy machines.

Secondly, their technical foundation is still weak, and precision is not up to the standard.

Thirdly, the reliability is not up to the standard (high failure rate).

Fourthly, the life expectancy of domestic equipment is short, and wear and tear is too fast.

Therefore, this equipment is not that simple. We are also gradually promoting self-developed equipment. We have innate advantages, which can be used to achieve localization under these circumstances.

Q3: About the price of membranes, has the company's selling price for membranes changed? Looking at each link, how do you view the price trends of basic films and coating this year?

A3: From the company's overall strategic direction, we have always maintained a unified and stable pricing policy and logic. In the past many years, four or five years ago, when the market was in a state of overall relaxation and partial tension, we did not enter, but we moderately adjusted the price downwards. When the entire market was extremely tight in the past two years, we were also very cautious in adjusting the prices of membranes. This arrangement has always maintained our reasonable and appropriate gross profit margin level.

To summarize briefly, we can say,

Basic films are still in a relatively tight supply state, and their prices have not been adjusted.

As for coating materials, we have made some price adjustments for specific customers and specific products, and the proportion of adjustment is around a single digit.

Q4: About shipment, how was the production and shipment situation for Q1 2023?

A4: There were some cases of policy subsidies in the first quarter, as well as the impact of the Spring Festival on downstream demand in January. The entire first quarter was indeed a slow season, and we also saw a brief weakening of downstream demand.

After the Spring Festival, we adjusted the maintenance and overhaul time for our equipment for the year. In February, we started the maintenance and overhaul of all production lines.

You can also see that the overall market in January and February was relatively weak, which had a certain impact on shipments. The market in March was still in a recovery state, and it is expected that the Q1 shipment will be the same as the same period last year. Overall, our expectation for the whole year is to ensure the delivery capacity of 6.5-7 billion square meters.

Q5: What is the current pace of production capacity and customer verification for aluminum-plastic film? When is it expected to bring profits to the company?

A5: We have two factories for aluminum-plastic film, one in Jiangxi and one in Jiangsu, which are currently under construction.

The planned production capacity of the Jiangxi factory is 100 million square meters. We already have one production line and are advancing the verification work for power customers. More customers are currently in the stage of sample testing and trial production, and there will be a significant progressive development this year. The planned production capacity for the Jiangsu factory is 280 million square meters, and we are currently installing two production lines.

As to when we can make a profit, both our factories are currently in the process of construction while customer verification is also ongoing. We believe that with the smooth importation of customers in the future and the gradual release of our production capacity, our aluminum-plastic film business, including production and sales, will have a significant increase in growth. The overall penetration rate of the soft-pack battery will also be improved, and the company will gain better business opportunities with the development of this industry.

Q6: How is the progress of the joint venture established by the company for semi-solid-state batteries? What are the specific cooperation forms with the other two companies?

A6: As of now, the infrastructure of our joint venture's factory building and office building has been completed. The joint venture has just completed the installation and debugging of two production lines, and has the production and processing capacity of 80 million square meters per year. The expansion work is still ongoing. Our plan is to achieve a production capacity scale of more than 2 billion square meters for the whole of SanHeng by 2025.

As for the cooperation model, it mainly focuses on the advantages of the three shareholders. Enjie is a low-cost and high-quality supplier and guarantee of the base film; Bluestar mainly owns many intellectual property rights for solid-state electrolyte coated membranes and provides a large number of orders for the joint venture; and TianMuxianCaoSteel has expertise in the production and manufacturing of solid-state electrolyte bodies, as well as many intellectual property rights related to coated membranes. This project is actually a combination of the advantages of the three parties.

The company's primary goal is to provide supply and support for Bluestar's membranes. At the same time, the joint venture is not limited to just one customer of Bluestar. While satisfying Bluestar's supply, we will also actively develop other downstream lithium battery customers to provide high-quality semi-solid-state ion-conductive coated membranes for other customers. Currently, the joint venture is also actively expanding new customers, and has already started to provide samples and testing to other downstream customers, and has started cooperation with some other refueling customers for research and development.

Q7: What is the situation of the company's free cash flow?

A7: Our performance in the fourth quarter was not as good as in the third quarter for four main reasons.

The first reason is that the production of power electronic factories was affected by the epidemic in the fourth quarter, which led to a reduction in the number of shipments.

The second reason is that we did not sell off the scrap materials in the fourth quarter, resulting in a decrease in revenue compared to the previous quarter. The third reason for the increase in financial expenses quarter-on-quarter is mainly due to the fact that we have obtained more bank loans. The fourth reason for the increase in energy expenses quarter-on-quarter is mainly due to the winter pricing for natural gas, electricity, and steam in various regions.

The main reason for the large difference between operating cash flow and net profit is the impact of bills. As we settle with customers mostly using bills, according to accounting standards, bills cannot be considered as cash equivalents and cannot be entered into the cash flow statement. Therefore, after receiving bills, some of them are directly used to pay for equipment and infrastructure payments, fixed assets of the company, and prepaid equipment payments of atomic construction projects. These long-term assets have net increases of 8.5 billion in 2022. Only 5.3 billion of this part is paid in cash, and the difference of 3.2 billion is directly paid with bills. If this 3.2 billion is included, the operating cash net flow generated will be 3.7 billion, which is basically matched with net profit.

Q8: What is the trend of future customer structure changes, and how will they contribute to the increase of single-product profitability? How does the company management expect the single-product profitability of the company in the next few years?

A8: We mainly improve our profitability quality from the cost and revenue sides.

Firstly, from the cost side, the company will continue to adopt various measures to promote our cost reduction and efficiency improvement. This mainly includes continuing to reduce our losses and improve efficiency through our refined management.

Secondly, online coating is a very important part of our cost reduction and efficiency improvement. Through the scheduled release of our online coating capacity this year, we can further optimize the structure of our products, from the base film to the coating film transition and to significantly reduce the cost of our coating film to ensure our profit.

Thirdly, we have achieved good results in the domestication of raw materials. We continue to reduce our costs through the domestication of equipment and raw materials. These are some of the work we mainly perform on the cost side.

Fourthly, we play a cost-reducing role by continuously releasing production capacity and rapidly expanding to achieve economies of scale. These are four works on the cost side.

Apart from that, on the revenue side, because the price and gross profit of coating film are relatively higher than that of base film, this year, increasing the proportion of coating film is also a focus of our work.

Another part is the construction of overseas bases. Through the timely delivery of our overseas factories, we can consolidate and enhance our market share in Europe and North America and create greater additional value for the company.

In addition, the company is a very research and development-focused enterprise, and we are also making a large-scale investment in research and development. Thanks to this large investment in research and development, we can continue to launch new products and make technological progress. Many new projects are also progressing smoothly.

In addition, many new products achieved batch shipments last year, as well as some other more cutting-edge new products, including semi-solid and heat-resistant base films with high safety that we started promoting last year, etc. The continuous launch of these new products also ensures our overall competitiveness while providing higher added value to customers and maintaining a relatively high level of company profitability.

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