Tesla Battery Supplier CATL Rides EV Boom to $200 Billion-Plus Valuation

The rally has outpaced rises for rival battery makers

Panasonic Corp.

PCRFY 0.25%

of Japan, whose share have gained 10.5%, and

LG Chem Ltd.

051910 -3.08%

in South Korea, which logged a slight drop in the same period. CATL has also outperformed EV makers such as

Tesla Inc.

TSLA -2.27%

,

NIO Inc.

NIO -4.25%

and

XPeng Inc.

XPEV -3.62%

, whose shares have struggled after surging last year.

The stock has been boosted by recent deals signed with Tesla and others, plus record sales growth at China’s NIO, XPeng and

Li Auto Inc.

LI -6.73%

, said Kelvin Lau, an analyst at Daiwa Capital Markets. The three Chinese companies all buy lithium-ion batteries from CATL, which is based in the southeastern province of Fujian.

In June, CATL extended a deal to supply Tesla’s Shanghai factory with battery packs until 2025. It has also recently secured new customers including Mercedes-Benz, a unit of Germany’s Daimler AG.

Some 25% to 30% of global passenger car sales will be electric by 2030, up from less than 4% in 2020, as governments seek to phase out cars that use internal-combustion engines, said Neil Beveridge, senior energy analyst at Sanford C. Bernstein. “The 2020s will be the golden age of the battery industry in terms of growth,” he said.

Mr. Beveridge said CATL had 30% of the global EV battery market, and more than half of the market in China, giving it significant cost advantages over competitors. In turn, he said that helped make it more profitable than rivals, with a gross profit margin of 28% last year. Gross profit measures revenue minus the costs, such as labor and materials, directly incurred in making those goods.

Some investors say the company is a better bet than some of the EV makers it serves. Many fledgling companies in the sector remain unprofitable, and competition is intensifying as traditional auto manufacturers expand their new-energy vehicle lineups.

“It’s too risky to bet on a brand as the electric-car race has just started,” said Dennis Chien, a senior analyst at Hong Kong-based investment company HSZ Group. “However, leading component makers like CATL will remain key beneficiaries in the long run, no matter which EV brand emerges as the winner in China’s electric-car race,” he said.

Since early 2019, CATL has been one of the top 10 holdings in the firm’s HSZ

China Fund,

Mr. Chien added.

Money managers Allianz Global Investors Asia Pacific Ltd. and Pacific Asset Management Co. are among the foreign institutions with holdings in CATL, according to FactSet. In total, 8% of the company’s free float, or freely traded shares not held by major long-term shareholders, are owned by offshore investors through the Stock Connect trading link between Shenzhen and Hong Kong, according to Wind.

To be sure, the run-up has given CATL an exceptionally high valuation. The stock now trades at about 103 times forecast earnings for the next 12 months, according to FactSet. The equivalent price-earnings ratios for LG Chem and Panasonic are 19.3 times and 13.2 times, respectively. CATL’s first-quarter net profit was 1.95 billion yuan—the equivalent of $301 million, and more than double what it earned in the same quarter a year earlier.

Other potential headwinds include geopolitical tensions between the U.S. and China, something that Mr. Beveridge at Bernstein said could make it harder for the group to grow internationally. A potential industry glut could also cut into margins: Bernstein estimates 180 gigafactories, or giant battery plants, are planned world-wide, including 140 in China.

Still, analysts say CATL will be hard to dislodge from its position. “CATL should be able to maintain its dominant position in the lithium-ion battery market in the next five years,” said Mr. Lau at Daiwa, citing its ability to innovate and its ties with local and international car makers.

Write to Joanne Chiu at joanne.chiu@wsj.com