New Stock Outlook| The Blue Ocean Attribute of Lithium Battery Recycling Becomes Prominent, Jinsheng New Energy Is "Trapped" in Costs

In recent years, the rapid development of the electric vehicle industry in mainland China and the accelerated replacement of consumer electronic products have jointly contributed to a significant increase in the supply of retired lithium batteries. According to a Frost & Sullivan report, the total amount of retired lithium batteries in mainland China increased from 91,300 tons in 2019 to 366,100 tons in 2023, with a compound annual growth rate of 41.5%. This growth not only reflects the expansion of the new energy vehicle and electronic product markets but also indicates the huge potential and market demand for the lithium battery recycling industry. Against this backdrop, Guangdong Jinsheng New Energy Co., Ltd. (hereinafter referred to as "Jinshengxin") submitted an application for listing on the main board of the Hong Kong Stock Exchange on December 20, aiming to further expand its business scale in the lithium battery recycling field with the help of the capital market. However, for Jinshengxin, despite the broad market prospects provided by the industry background, the company still faces many risks such as declining revenue, high costs, performance losses, tight cash flow, and intensified industry competition, all of which cast a shadow over its future sustainable development. Global largest third-party lithium battery recycling and reuse enterprise The prospectus shows that Jinshengxin focuses on the recycling and reuse of lithium batteries, providing a range of recycled products, mainly including lithium carbonate, nickel sulfate, cobalt sulfate, and graphite. As of June 30, 2024, the sales of lithium and nickel recycled products accounted for over 70% of the company's total revenue. Its recycling business covers mainstream battery systems such as ternary lithium batteries and lithium iron phosphate batteries, and the products are widely used in downstream applications such as electric vehicles, energy storage systems, and consumer electronic products. According to the Frost & Sullivan report, based on 2023 recycling sales revenue, Jinshengxin is the world's second-largest lithium battery recycling and reuse enterprise, with a market share of 3.8%, and the largest third-party lithium battery recycling and reuse enterprise globally. As one of the earliest companies in mainland China engaged in lithium battery recycling, Jinshengxin has built an integrated, closed-loop ecological system for lithium battery recycling since 2014, with a strong first-mover advantage and comprehensive strength, including "full-element" recovery, "full-component" recovery, and "full-system" layout. In terms of performance, in the fiscal years 2021, 2022, 2023, and the six months ended June 30, 2024, Jinshengxin's revenue was approximately RMB 1.133 billion, RMB 2.905 billion, RMB 2.892 billion, and RMB 995 million respectively; during the same period, annual profits were approximately RMB 69.393 million, RMB 151 million, - RMB 473 million, and - RMB 147 million respectively. Cost fluctuations lead to performance losses It is noted that Jinshengxin has experienced significant fluctuations in raw material costs since 2021. Jinshengxin mentioned in the prospectus that the company achieved strong operational performance in 2021 and 2022, with revenue and net profit increasing by 156.4% and 117.4% respectively, as downstream industries such as electric vehicles and energy storage grew rapidly, resulting in a surge in demand for the company's products. However, the company faced challenges due to product price fluctuations, especially as the market price of lithium carbonate experienced an unprecedented sharp drop in 2023, continuing to fall in the first half of 2024, leading to a short-term mismatch between sales costs and revenue, resulting in gross and net losses in 2023 and the first half of 2024. According to the Frost & Sullivan report, the average price of lithium carbonate increased significantly from RMB 106,000/ton in 2021 to RMB 426,900/ton in 2022, then dropped to RMB 241,000/ton in 2023, and is expected to average RMB 82,900/ton in 2024. The average price of nickel sulfate increased from RMB 31,100/ton in 2021 to RMB 36,000/ton in 2022, then dropped to RMB 29,800/ton in 2023, and is expected to average RMB 25,900/ton in 2024. Jinshengxin pointed out that considering the time difference between raw material procurement and completion of product processing and sales, if product prices are in a declining cycle, the company's gross profit margin may be adversely affected. In addition, a decrease in product prices can lead to impairment losses on inventory, negatively impacting the company's gross profit. In addition, since 2023, the increase in production capacity of new production lines and the increase in expenses due to business expansion have also led to gross and net losses. The prospectus shows that in 2023, Jinshengxin's inventory impairment loss reached RMB 109 million, a year-on-year increase of 91.5%; in the first half of 2024, the company's inventory impairment loss reached RMB 69 million, a year-on-year increase of 93.2%. Listing for capital infusion and capacity expansion Jinshengxin stated in the prospectus that the company has taken multiple measures to drive performance and profitability. These measures include enhancing resilience to product and raw material price fluctuations, enriching product categories and application scenarios, improving operational efficiency and achieving economies of scale, and optimizing procurement strategies and inventory management to respond to constantly changing market dynamics. Overall, Jinshengxin's decisions are based on the rapid growth of the industry in which the company operates and its significant development opportunities in the future. According to Frost & Sullivan data, the number of retired lithium batteries in mainland China is expected to grow at a compound annual growth rate of 41.5% from 2019 to 2023 and is forecasted to grow at a compound annual growth rate of 37.5% from 2023 to 2030. With the arrival of the wave of retiring lithium batteries in electric vehicle power batteries, the significant increase in the number of retired lithium batteries will continue to drive growing demand and sufficient raw material supply in the battery recycling and reuse solution market. In this context, Jinshengxin has a need to further expand its production capacity. The prospectus shows that the company has three production facilities in Zhaoqing, Guangdong Province, and Yichun and Ganzhou, Jiangxi Province. According to the Frost & Sullivan report, the company's lithium battery recycling capacity and production capacity of products produced through lithium battery recycling ranked second in the world in 2023. As of the first half of 2024The company's comprehensive production capacity is 38,100 tons, with a comprehensive utilization rate of 72.3%.It is noted that since 2021, Jinsheng New Energy's operating cash flow has been in a net outflow state overall, making it difficult to cover the funds needed for investment activities. From 2021 to the first half of 2024, the company raised nearly 3.1 billion yuan through financing activities. As of the first half of 2024, the company's asset-liability ratio reached 64.4%; the year-end cash and cash equivalents were only 40 million yuan. In this context, Jinsheng New Energy hopes to solve its business development needs by raising funds through listing. Jinsheng New Energy plans to use the funds raised through listing for: expanding production capacity; expanding upstream raw material resources; strengthening research and development capabilities and attracting talent; and for operational and general corporate purposes. Regarding the expansion of production capacity, the company plans to use the funds raised through listing mainly for the construction of a base in Ganzhou City, Jiangxi Province, for the processing of retired lithium iron phosphate batteries (lithium iron phosphate processing plant). The main expenses include the construction of the plant and the funds needed to purchase and install the main production machinery and equipment. It is estimated that the total cost of the lithium iron phosphate processing plant will be around 1 billion yuan. The lithium iron phosphate processing plant is expected to start operation in 2027, with a designed annual processing capacity of 100,000 tons of retired lithium iron phosphate batteries.