Microvast Reduces Dependence On China; Gross Margin Soars For 2024

The EV battery maker reported a huge increase in its gross profit margin last year, a significant achievement that can help it stand out in a crowded field

Key Takeaways:

• Microvast's gross profit margin jumped to 31.5% in 2024 from 18.7% the prior year, already exceeding the company's target for this year
• The U.S.-based EV battery maker is reducing its reliance on China by boosting its sales to other markets, which is also helping to beef up its margins

Turbocharged margins are driving electric-vehicle (EV) battery maker Microvast Holdings Inc. (MVST.US) ahead at full speed on its journey to profitability.

The company's revenue increased about 8% year-on-year in the fourth quarter to $113.4 million, according to its latest earnings disclosure last week. That kind of top-line growth isn't going to awe anyone, even though its revenue for the quarter was a record. For all 2024, Microvast's revenue grew by a more respectable 24% to $379.8 million, also a record.

What's more remarkable is a drastic improvement in Microvast's gross profit margin, which jumped to 36.6% in last year's fourth quarter from 22% a year earlier. That paralleled its performance for the entire year, when the figure jumped to 31.5% from 18.7%, surpassing its goal of hitting 30% this year. The big margin improvements led to an 80% year-on-year surge in Microvast's gross profit for the fourth quarter and a 52% rise for 2024.

Microvast is based in the U.S. state of Texas but has strong ties to China – something it is apparently trying to downplay, which looks prudent as U.S.-China trade tensions continue to rise. Its founder is a Chinese American, and China is the biggest customer for its batteries. The company also manufactures its products in China, though it wants to shift some production to a U.S. facility in the state of Tennessee if and when it raises necessary funding. It has a plant in Germany as well.

Margins can go up and down all the time, but the large improvement Microvast is reporting isn't something you see everyday. The company only provided a general explanation for the increase, with CFO Feriel Khambabi crediting improved operational efficiency, increased utilization and cost control on the company's earnings call.

Although the company didn't specially mention it, diversification away from China probably also played a role in the big margin improvement, as other markets overtook China to account for a majority of the company's revenue last year. Prices in Western markets for comparable products are typically higher than in China, helping a company to boost margins.

Improving margins is critical for Microvast because it operates in an extremely crowded industry where the top 10 global manufacturers, led by China's CATL (300750.SZ) and BYD (1211.HK; 002594.SZ), control nearly 90% of the market. Microvast is among the many smaller companies fighting for the remaining 10%. The company has been around for nearly two decades, showing that longevity doesn't necessarily spell big success in the fast-moving EV battery market. 

To stand out, Microvast positions itself as an innovator focused on a niche of the market providing batteries for large vehicles. In its latest annual report for 2024, the company says its mission is to "innovate lithium-ion battery designs without relying on past technologies."

"We call this true innovation," Microvast declares in the report. "We started without preconceived notions of lithium-ion battery creation, unlike many companies that repurposed legacy technologies for new markets like electric vehicles – a process we consider product development rather than true innovation. To understand this difference is to understand what we have set out to achieve."

Geographic diversification

Microvast specializes in high-performance batteries for large vehicles like trucks, buses and trains. It says a key strength of its products is that they charge quickly and have longevity that eliminates the need for battery replacements during the lifecycle of a vehicle.

The company is American but also has close China connections, including its founding by Chinese American entrepreneur Wu Yang in Stafford, Texas in 2006. China is also the company's single biggest market, which isn't surprising given the country is the world's largest EV market.

But Microvast's sales elsewhere are growing, reducing its reliance on China – a step that looks especially important in the current environment of ever-increasing U.S.-China trade tensions. China accounted for more than 51% of Microvast's revenue as recently as 2023, but the figure dropped sharply to 33% last year as Europe, the Middle East and Africa (EMEA) zoomed to become its largest market accounting for about half of sales. U.S. sales also quadrupled, albeit from a small base, to reach 4%.

Heavy reliance on one country or region for sales is never good, especially if that market is China, where competition among battery makers is fierce and a prolonged economic slowdown is depressing vehicle sales. Increasing sales in the West looks prudent not only for diversification purposes, but also because sales to such markets typically carry higher margins.

Microvast may be a small player in the EV battery market, but at least in terms of margins, it beat some of its larger rivals last year. Its 31.5% gross margin for 2024 easily exceeded 24% for CATL and 19% for BYD, although the latter isn't directly comparable as it also makes cars.

While its margins may be enviable, Microvast still lags the larger companies on its bottom line. The company is losing money, and its net loss widened last year. One key factor was an impairment loss of $93 million following a decision to pause construction of the Tennessee plant due to insufficient funding. The company also recorded a large expense related to a convertible loan from its founder.

But these extraordinary factors aside, Microvast generated positive cash flow from its operations last year, something it hasn't been able to do for years. Investors clearly focused on such positives, sending Microvast shares rallying more than 50% in three days after the latest earnings release.

Microvast shares are still down more than 80% from where they traded in July 2021 when the company went public through a merger with a special purpose acquisition company (SPAC). They trade at a price-to-sales ratio of 1.8, far below 2.7 for industry leader CATL.

As a manufacturer, Microvast can obviously beef up its profit margins only so much. But if it can maintain its current level of operational profitability, it may well be able to become profitable on a net basis – something the lone analyst who follows the company on Yahoo Finance expects to happen this year. There will undoubtedly be headwinds, including Donald Trump's latest tariff bombs, which will make U.S.-China trade more costly. That could pressure Microvast's strong margins, though an ability to defend its profitability in such challenging times could also help to shore up its stock price.