Ganfeng Lithium (1772 HK) 1Q21: Ganfeng Lithium’s net profit climbed 60 times year on year to Rmb476 million in 1Q21, driven by lithium carbonate/lithium hydroxide pricing rises and lithium hydroxide production growth, which helped the company meet its earlier guidance. In 2Q21, the price rally has accelerated. We expect the lithium market to stay high in 2021 due to supply limitations and demand surges. With a target price of HK$140.00 based on a 50x 2022F PE, we keep Ganfeng as our top lithium pick.
• 1Q21 outcomes are on track. Ganfeng Lithium (Ganfeng) reported a Rmb476 million net profit in 1Q21, up 184 percent year on year and in line with the company’s earlier earnings projection (Rmb450m-510m).
• Increased revenue and margins in a robust lithium market. Revenue increased by 49 percent year over year, with gross margin increasing by 11.6 percentage points year over year and 4.2 percentage points quarter over quarter to 31.1 percent, a three-year high. The company’s excellent earnings growth was fueled by rising lithium compound pricing and consistent product sales in a booming electric vehicle (EV) sector.
• Advice for 1H21. The company forecasted a net profit of Rmb800m-1,200m for 1H21, implying that 2Q21 net profit will stay strong at Rmb324m-724m, owing to increased contributions from its lithium-ion battery sector, as well as lithium compound price rises and a production ramp-up.
STOCK IMPACT • The upward trend in lithium compound pricing is expected to continue in 2Q21. According to the most recent data, average domestic lithium carbonate/lithium hydroxide (battery-grade) spot prices increased 46 percent yoy in 1Q21 to Rmb74,595/Rmb72,463 per tonne. The average price of lithium carbonate/lithium hydroxide has risen further 19% / 40% qoq qtd in 2Q21.
• In the medium to long term, we prefer high-end lithium hydroxide to lithium carbonate. By the end of the year, Ganfeng had a lithium hydroxide (battery-grade) capacity of around 80,000 tonnes. Ganfeng’s lithium hydroxide production is expected to be 60,000/80,000 tonnes in 2021/2022, respectively, based on long-term committed orders.
Why Prefer Ganfeng as an EV market boom beneficiary with strong long-term potential. We continue to believe that Ganfeng will benefit from increased demand for high-grade lithium compound products. We believe that its significantly lower-than-industry production costs, as a result of the high-quality raw material supply it has secured, as well as industry-leading technology and know-how, will enable it to sustain reasonable margins in the near future.
REVISION OF EARNINGS/RISK
• For 2021/22/23, we revise up our net profit forecasts by 9%, 37%, and 42%, respectively, to account for: a) higher lithium carbonate/lithium hydroxide/lithium metal price forecasts; b) higher lithium hydroxide production forecasts in 2022/23; and c) a higher revenue contribution from the lithium-ion battery segment.
• Keep BUY, but lift the target price to HK$140.00 (from HK$125.00).
The revised target price of HK$140.00 is based on a 50x 2022F PE, which translates to an 11.5x 2022F P/B with a 36% upside over the present price. As a result, we retain our BUY recommendation.
• Negative risks include: a) EV market penetration that is slower than projected; b) considerable reductions in lithium content in EV batteries as a result of technological advancements; and c) a slower-than-anticipated lithium compound price rebound.
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