Raise 2023-2024 earnings forecasts on more upbeat estimates of gross margin; maintain "Buy" with TP unchanged at HK$38.00. We raise our 2023-2024 earnings forecasts by 18.5% and 17.6% to RMB2,129 mn and RMB4,086 mn, respectively, as we turn more positive on CALB's gross margin outlook; we introduce our 2025 earnings forecast of RMB6,554 mn.
　　The projected earnings growth in our forecast period primarily reflects our projected strong sales volume growth, enabled by the Company's capacity expansion agenda in the run-up to 2025. We maintain our TP unchanged at HK$38.00 （based on 29x 2023 PER）。
　　We turn more upbeat on CALB's gross margin outlook: While uncertainty prevails regarding CALB's gross margin amid pressure for EV makers to cut down costs, we believe the situation is alleviated by 1） the expected margin uplift thanks to a better economy of scale as CALB's management expects sales volume to reach 80GWh in 2023, enabled by CABL's capacity expansion, 2） the need for high-end EV makers to diversify their supply mix, offering CALB a chance to expand its high-end market share, 3） the upgrade in CALB's product mix and the expected increase in battery packs （as opposed to battery cells and modules） in the sales mix going forward, and 4） CALB's ongoing effort in cost optimisation, e.g. the use of "One-stop Bettery" technology to improve production efficiency. In light of the above mentioned rationale, we expect CALB's gross margin to further expand to 11.3%/ 11.9%/ 12.5% in 2023/ 2024/ 2025, respectively, and we believe CALB has a fair chance to improve its gross margin to above 15% in the mid-term.
　　1H23 results preview: According to China Automotive Battery Innovation Alliance （CABIA）， CALB installed 12.56GWh of power battery capacity in vehicles in China in 1H23, up 39.6% yoy and representing a market share of 8.26%. We believe CALB's sales volume has started to pick up following the slack season of 1Q23 - according to CABIA, the installed power battery capacity in vehicles by CALB in June 2023 was 2.9GWh, marking CALB's largest installed volume in a single month. CALB's management remains confident about their 2023 sales target of 80GWh, with EV and ESS batteries accounting for 50GWh and 20GWh, respectively.
　　Major risks: Delay in production capacity expansion, unexpected surges in raw material costs, weaker-than-expected EV sales, and risks related to high customer concentration.
　　Transfer of coverage: With this note, we transfer coverage of CALB （03931 HK） from Jun Zhu to Peter Shao.