Lithium battery cathode materials are sold at a loss, Jiangsu Lopal Tech.'s cross-border profits are suddenly lost, the debt ratio is at a new high, and they plan to go to Hong Kong to "get a blood transfusion"

This article is translated from "Securities Star" by the author Lu Wenyun. Since 2021, Jiangsu Lopal Tech. (603906.SH) has achieved a breakthrough in performance by focusing on the layout of lithium iron phosphate cathode materials. But after a sudden wealth increase, Jiangsu Lopal Tech.'s profit in 2023 ended with a huge loss of 1.2 billion yuan, not only experiencing its first loss since going public, but also wiping out the profits earned in the past two years, continuing to be deeply in the red in the first quarter of this year. With the decline in prices of main raw materials such as lithium carbonate, the price of lithium iron phosphate cathode materials also plummeted, coupled with a high dependence on Contemporary Amperex Technology (300750.SZ) which lacks price negotiation ability, the core product gross profit margin of Jiangsu Lopal Tech. incurred losses. At the same time, the significant drop in revenue from Contemporary Amperex Technology in 2023 is also testing the stability of Jiangsu Lopal Tech.'s performance. Securities Star noted that after entering the lithium battery field, Jiangsu Lopal Tech.'s asset-liability ratio has continuously increased due to successive expansions, increasing pressure on debt. In the face of debt pressure, Jiangsu Lopal Tech. filed for listing on the Hong Kong Stock Exchange to seek new financing channels to ease debt pressure, while continuing to seek funding to support expansion plans. First loss after listing, inventory markdowns surged Jiangsu Lopal Tech. landed on the A-share market in April 2017, initially focused on the research, development, production, and sale of environmentally friendly fine chemicals for automotive use, including lubricants and engine coolant, diesel engine exhaust treatment fluids, automotive maintenance products, among others. In June 2021, Jiangsu Lopal Tech. acquired 100% equity of Tianjin Betel Nano and Jiangsu Betel Nano for 845 million yuan, entering the lithium battery cathode material business. With the support of the lithium battery business, Jiangsu Lopal Tech.'s performance accelerated dramatically. In 2021 and 2022, Jiangsu Lopal Tech. achieved revenues of 4.054 billion yuan and 14.072 billion yuan respectively, with growth rates of 111.72% and 247.15% respectively. Corresponding net profits attributable to shareholders were 351 million yuan and 753 million yuan, with growth rates of 72.98% and 114.61% respectively. However, after two years of high growth, Jiangsu Lopal Tech.'s performance encountered a "Waterloo" in 2023. According to the 2023 annual report, Jiangsu Lopal Tech. achieved total operating income of 8.729 billion yuan, a year-on-year decrease of 37.96%, with a net loss of 1.233 billion yuan, a year-on-year decrease of 263.8%. This is also the first time Jiangsu Lopal Tech. has incurred a loss since going public, and it has wiped out all the profits made since diversifying. Jiangsu Lopal Tech. stated that in 2023, the new energy vehicle subsidy policy was scaled back, raw material prices fluctuated significantly, the industry faced a slowdown in downstream demand and inventory destocking pressure, the price of the company's main raw material lithium carbonate dropped significantly, resulting in substantial inventory markdown losses, leading to a loss of net profit. According to data from Frost & Sullivan, the average prices of lithium carbonate in 2021, 2022, and 2023 were approximately 119,800 yuan per ton, 482,400 yuan per ton, and 272,300 yuan per ton respectively. The price in 2023 was halved compared to the previous year. It is reported that the price increase from 2021 to 2022 was mainly due to the increase in demand for lithium battery products leading to a shortage of lithium carbonate supply, while the price decline in 2023 was mainly due to the balance of supply and demand dynamics. At the 2023 performance briefing, Jiangsu Lopal Tech.'s Chairman and General Manager Shi Junfeng stated that it appears that the price of lithium carbonate is now at a low level, and the probability of large price fluctuations in the future is small. The company's profits in the lithium iron phosphate sector are also expected to gradually return to normal levels. Securities Star noted that while the lithium iron phosphate cathode material boosted performance, Jiangsu Lopal Tech. also stockpiled a large amount of inventory. The inventory size in 2021 and 2022 reached 1.101 billion yuan and 3.007 billion yuan respectively, significantly higher than the 321 million yuan in 2020. In terms of structure, raw materials were the main inventory content. However, as lithium carbonate prices continued to fall, the high inventory of raw materials became a "hot potato." In 2023, Jiangsu Lopal Tech.'s inventory size decreased by 46.46% to 1.61 billion yuan, but the provision for inventory markdowns was significantly higher than in previous years, reaching 555 million yuan, further exacerbating the loss. In the first quarter of this year, Jiangsu Lopal Tech. remained deeply in the red, achieving revenues of 1.474 billion yuan, a year-on-year decline of 29.24%, with a net loss of 78.045 million yuan, a year-on-year growth of 64.96%, mainly due to the reduction in profits of the lithium iron phosphate cathode material business. Revenue influenced by Contemporary Amperex Technology, lithium battery products sold at a loss From a product perspective, Jiangsu Lopal Tech.'s lubricants, coolant, and automotive maintenance products all achieved positive growth, with corresponding revenues of 707 million yuan, 485 million yuan, and 70.239 million yuan, with growth rates of 13.32%, 26.67%, and 20.42% respectively. However, two business revenues saw year-on-year declines, with revenue from diesel engine exhaust treatment fluids down 9.16% to 626 million yuan, and revenue from lithium iron phosphate cathode material products reaching 6.754 billion yuan, a year-on-year decrease of 44.83%. It can be said that the significant proportion of revenue from lithium iron phosphate cathode materials drastically lowered the overall revenue level. Securities Star noted that the price of lithium iron phosphate atomic materials, which usually are the costliest components in a battery, dropped sharply.The positive electrode material is also the only product sold at a loss, with its gross profit margin decreasing by 24.31 percentage points from 16.49% in 2022 to -7.82%. As a result, Jiangsu Lopal Tech.'s net profit margin also fell into the negative, decreasing by 337.02% to -17.35%.In the first quarter of this year, lithium iron phosphate cathode materials are still not as good as in previous years, with the product achieving revenue of 869 million RMB, and the average selling price dropping by 75.35% compared to the same period in 2023. Therefore, the net profit margin in the first quarter is still hovering at a negative level of -6.61%. As lithium iron phosphate cathode materials became the main business, Jiangsu Lopal Tech.'s customers expanded to mainstream battery manufacturers such as Contemporary Amperex Technology, Sunwoda Electronic, and Eve Energy Co., Ltd. At the same time, Jiangsu Lopal Tech. also suffered from a dependence on large customers. From 2021 to 2023, the revenue from the top five customers accounted for 42.9%, 80%, and 64.5% respectively. Among them, Contemporary Amperex Technology contributed a significant portion of the revenue. The revenue from Contemporary Amperex Technology in 2021 and 2022 was 1.16 billion RMB and 7.487 billion RMB respectively, accounting for 28.6% and 53.2% of the total revenue for each period. Jiangsu Lopal Tech. admitted that despite the concentration of customers, the company is not the exclusive supplier of lithium iron phosphate cathode materials to the main customers. This also means that the buyer and seller may not have equal bargaining power. However, high percentage of revenue from large customers also hides risks. Once sales revenue from large customers decreases, performance is often impacted. In 2023, the revenue contributed by Contemporary Amperex Technology dropped to 2.648 billion RMB, a decrease of nearly 65%, and its revenue share also dropped to 30.33%. In addition to procurement, Contemporary Amperex Technology has a close relationship with Jiangsu Lopal Tech., acting as an indirect shareholder of two subsidiaries of Jiangsu Lopal Tech., controlling 6.26% and 30% of the shares of Changzhou Lithium Source and Longpan Era. Debt pressure, raising funds for Hong Kong IPO Data shows that as of 2023, Jiangsu Lopal Tech.'s designed production capacity for lithium iron phosphate cathode materials has reached 200,700 tons, which is eight times the capacity of 23,600 tons it acquired from the relevant assets of Bertrand in 2021. As early as a year before entering the lithium battery industry, Jiangsu Lopal Tech. began to layout a project with an annual production capacity of 40,000 tons of battery-grade energy storage materials. Since entering the lithium battery field, there have been frequent expansion actions. In June 2022, Jiangsu Lopal Tech. raised 2.2 billion RMB through private placement, with 1.29 billion RMB used for the large-scale production of new energy vehicle power and energy storage battery cathode materials, and 500 million RMB for working capital. Just two months later, Jiangsu Lopal Tech. announced again that it planned to raise 2.1 billion RMB through convertible bonds, for projects including the large-scale production of new energy vehicle power and energy storage materials, phosphate iron projects, and working capital, as well as repayment of bank loans. However, after months of preparation, the plan was eventually abandoned. At the same time, Jiangsu Lopal Tech. extended its reach to upstream of the industrial chain, jointly establishing a 40,000-ton lithium carbonate processing plant with Contemporary Amperex Technology in Yichun, Jiangxi. The project is expected to be in operation by the end of June this year. After a period of large-scale expansion, Jiangsu Lopal Tech.'s financial pressure has significantly increased, with its debt-to-asset ratio repeatedly hitting new highs. This indicator has increased from 58.8% in 2021 to 75.73% in 2023, and further climbed to 76.5% in the first quarter of this year, setting a new record high. The debt-to-asset ratio in 2020 was only 28.45%. As of the end of the first quarter of this year, Jiangsu Lopal Tech. had 2.449 billion RMB in cash and cash equivalents, 932 million RMB in marketable securities, totaling 3.381 billion RMB. Correspondingly, the debt included short-term borrowings of 4.755 billion RMB, non-current liabilities due within one year of 1.625 billion RMB, and long-term borrowings of 2.556 billion RMB. It is evident that Jiangsu Lopal Tech.'s debt is more than twice as much as its cash and marketable securities, indicating significant pressure to repay debts. It has been noted that since 2021, Jiangsu Lopal Tech. has raised nearly 9.7 billion RMB through financing activities. Recent financing schemes have included needs for refinancing and debt repayment. Now, Jiangsu Lopal Tech. is planning to list in Hong Kong to seek more financing channels. According to the fundraising purposes, the funds raised by Jiangsu Lopal Tech. will be used for the partial expenses of the second phase of the Indonesia factory, the partial expenses of the new manganese lithium production line in Xiangyang, Hubei, repayment of bank loans, as well as for working capital and other general corporate purposes. It is reported that the total cost of the Indonesia factory (including phase I and phase II) is estimated to be around 2.072 billion RMB. The phase I 30,000-ton lithium iron phosphate project is basically completed and is expected to officially start production at the end of the second quarter of this year. (This article is from "Securities Star", author: Lu Wenyan)