SHANGHAI, Apr. 1 (SMM) – Tianneng Power reported RMB 9.89 billion in operating income in its 2012 annual report, up a significant 81.8% from 2011. Profit also climbed 15.1% to RMB 709 million. 

The sharp increase in Tianneng Power’s revenues was mainly driven by its capacity expansion in 2012. The company acquired Hercules Energy, 70% of Anhui Zhongneng Power, and 51% of Wanyang Green Energy last year. These acquisitions, combined with an expansion of outsourced processing, caused Tianneng’s capacity to rise 23% from 2011’s 65 million units to 80 million units last year.

The surge in operating income was not directly mirrored by a surge in profits due to the following two factors.

First, Tianneng’s expansion resulted in higher costs. Operating costs doubled to RMB 8.03 billion in 2012. Marketing and financing expenditures also jumped 51.5% and 52%, respectively.

Second, the price war ensuing from the growth in capacity across all the larger producers cut into margins. Tianneng saw the average price of its batteries fall 11% last year as its average margin for the year slipped to 18.76% from 2011’s 26.39%, even falling to a low of 16.1% in the second half of the year as it became necessary to expand distributor rebates.

Despite these higher operational costs, Tianneng’s M&A activity, outsourced processing, and increased distributor rebates did enable the company to capture a larger market share. As a result, sales into the primary market rose 60.9% to 2.956 billion, while replacement battery sales surged 100% to 6.276 billion, this is against a backdrop where total demand growth for electric vehicle batteries was only 8% for the year.