(Bloomberg) -- Shares of Contemporary Amperex Technology Co. slumped as Morgan Stanley slashed its recommendation to underweight, expecting geopolitical tensions to hinder the Chinese battery giant’s expansion into US markets.
Restrictions under the Biden administration’s Inflation Reduction Act — which requires certain materials to be sourced and assembled within the US to receive tax benefits — mean electric vehicle battery exports from China to North America are now unlikely, analysts including Jack Lu wrote in a Wednesday note.
“Potential geopolitical, national security risks may lead to delays in Chinese battery makers’ global expansion plans versus Korean battery makers’ accelerating expansion,” they wrote.
Shares of the Tesla supplier fell for the third day on Wednesday, losing as much as 6.8% in its biggest intra-day drop in a year. CATL is among the day’s worst performers on the CSI 300 Index, which is down less than 0.5%. Turnover during morning trading was more than double the average over the past 20 days.
Morgan Stanley’s underweight call is the only sell-equivalent recommendation among more than 40 ratings tracked by Bloomberg. The brokerage earlier this year raised the rating to equal-weight, only to cut again now. Its price target of 180 yuan — reduced from 213.89 yuan — is also the lowest and compares with analysts’ average of 325.51 yuan.
Lu ranks first among peers for producing the highest relative returns based on the companies he has covered over the past year, according to data compiled by Bloomberg. Investors following his CATL calls would have made 2.9% in the period compared to a drop of 19% in the stock.
CATL also faces significant margin pressure as second-tier manufacturers adopt more aggressive pricing strategies to gain market share, the analysts wrote. The fact that some other domestic manufacturers have adopted new battery suppliers also shows risk to CATL’s dominance, they said.
Concerns over exports rose this week as Tesla’s website showed its Model 3 vehicles are eligible for a tax credit of $7,500, suggesting that sourcing and manufacturing requirements may limit CATL’s expansion stateside.
The global battery supply chain is less secure than the fossil fuel ecosystem as China holds a 50%-75% share in shipments for the former, according to Morgan Stanley. “The West will need to become more self-sufficient in the provision of EV batteries” amid potential decoupling from the Chinese supply chain, the analysts wrote.
(Updates prices, adds details throughout)
©2023 Bloomberg L.P.