The Darkest Moment for the Leading Energy Storage Company: Rapid Industry Growth But Significant Decline for Pylon Technologies

March 14, 2024 – Despite the energy storage (battery cell) shipments maintaining a remarkable year-on-year growth rate of 60% in 2024, Pylon Technologies (688063.SH), the leading company in this sector, has experienced a substantial drop in its performance over the past two years. Recent reports indicate that after a 45.13% decrease in revenue in 2023, the company faced another decline of 39.19% in 2024. Net profit attributable to shareholders plummeted by 92.04%, pushing the company to the brink of losses.

Pylon Technologies has positioned itself as a leader in the overseas energy storage market, with international revenue consistently accounting for over 90% of its total earnings. The company attributes its 2024 performance decline to the complex and changing global economic landscape coupled with intensified industry competition, which has put significant pressure on the sales prices of its energy storage products. However, the drop in market value has been even more pronounced than the decline in performance. Pylon’s share price peaked at over 500 yuan per share in 2022, rivaling that of CATL, but has now fallen below 50 yuan. Its market capitalization has dramatically decreased from over 700 billion yuan to just over 100 billion yuan, representing a reduction of more than 85%.

This significant drop in market value appears to be linked to changes in investor perceptions and the company’s positioning in the energy storage market. Research from the Times Business Institute indicates that while the drop in Pylon’s market value seems connected to its slipping performance, it may also reflect a fundamental shift in market expectations regarding the company.

Key Insights

• Market Shift and Competition from Battery Giants: After establishing home energy storage as its primary focus, Pylon experienced rapid growth between 2018 and 2022, with revenues increasing by over tenfold. In 2022, the company saw a massive revenue spike, largely driven by the energy crisis in Europe due to the Russia-Ukraine conflict, resulting in a doubling of revenue to 6 billion yuan and making it the top supplier of home energy storage systems globally. The recent revenue decline, however, seems more like a return to the mean rather than the sole reason for the sharp decrease in market value. The underlying issue may stem from two main factors: the European market’s shift towards large-scale storage and the competitive advantage that giants like CATL and BYD possess in the energy storage sector.
• Financial Analysis: Increased Depreciation Pressure: In mid-2022, at its market peak, Pylon announced a substantial fundraising plan of 5 billion yuan for capacity expansion and working capital, which has left the company in a precarious position today. Due to slowing demand in the energy storage market, the major expansion project has been postponed, causing excess cash to remain on Pylon’s balance sheet. Meanwhile, the fixed assets have doubled, leading to increased depreciation costs amid declining revenues.

Transitioning Away from Easy Profits

Pylon Technologies was established in 2009, focusing on lithium iron phosphate energy storage battery systems. After years of development and establishing its supply chain, the company shifted its focus to overseas home energy storage markets, particularly in Europe, around 2017. This move led to a period of rapid growth from 2018 to 2022, where revenues nearly doubled each year, except for 2020.

2022 marked the peak of Pylon’s success, not only with a revenue surge of nearly double but also achieving the top position in global home energy storage system shipments (according to S&P Global Commodity Insights). The net profit reached a historic high of 1.273 billion yuan, driven by the spike in demand for home energy storage due to the European energy crisis, a temporary situation that could not be sustained. The attractive profits drew numerous competitors into the market, setting the stage for a price war.

Starting in 2023, as the European energy crisis began to ease, the market saw a noticeable decline in demand, resulting in significant inventory accumulation in home storage. Some manufacturers entered the market with lower-priced battery cells, leading to a notable drop in prices for home energy storage systems, which significantly impacted Pylon’s performance. By 2024, the company’s revenue dropped to just 33.4% of its 2022 figures, and its net profit turned negative for the first time since data tracking began.

Core Reasons for Market Shift and Increased Competition

The decline in Pylon’s performance can largely be seen as a mean reversion, and the significant drop in its market value is tied to a shift in market expectations. The demand in the European market has been transitioning. Until 2024, the market was dominated by home energy storage systems, but there has been a clear trend towards large-scale storage (industrial energy storage) in recent years. The unit cost of large-scale storage is lower, and it offers better economic viability over its lifecycle (with a cycle life surpassing 8,000 cycles compared to 4,000 for home storage).

According to SPE (the European Photovoltaic Industry Association), large-scale storage installations in Europe are projected to reach 11 GWh by 2024, marking a 205% year-on-year increase and surpassing the share of home storage for the first time. The EU has provided explicit support for large-scale storage projects, indicating a significant policy shift.

Pylon Technologies acknowledges this market trend and has adapted its strategy accordingly, focusing on expanding into commercial and industrial energy storage markets domestically and internationally. In its 2024 semi-annual report, Pylon noted significant results from expanding its commercial and industrial energy storage products overseas, although it did not disclose specific revenue figures for these segments.

Financial Analysis: Increased Depreciation Pressure

In mid-2022, at the peak of its market value (over 700 billion yuan), Pylon announced an ambitious fundraising plan to generate 5 billion yuan for expanding lithium battery capacity. This plan has since left the company in a challenging position. The demand for energy storage has slowed down, causing the expansion project to be postponed until 2026, despite a portion already being operational.

As of mid-2024, Pylon had 6.35 billion yuan in cash on hand, with its expansion project progressing slowly. The company now faces increased depreciation pressure due to a substantial increase in fixed assets, which grew from 1.068 billion yuan at the end of 2022 to 2.009 billion yuan by the end of the third quarter of 2024. The depreciation expense for fixed assets in the first half of 2024 reached 87.58 million yuan, a 46.7% year-on-year increase.

Despite the current slowdown in expansion projects, Pylon’s gross margin remains relatively stable, reported at 36.61% for the first three quarters of 2024, consistent with the previous year, primarily due to improved cost control and declining raw material prices. However, net profit saw a drastic decline, down 92.04% year-on-year.

The significant drop in net profit can be attributed to two primary factors: the sharp decline in revenue while expenses remained high, and a substantial decrease in foreign exchange gains compared to the previous year.

In an increasingly competitive environment, Pylon is still aiming to reverse its fortunes through high research and development investments, alongside enhancing its sales channels.