Can Ganfeng Lithium Group (01772) take advantage of the rebound in the lithium industry?

The collective rebound of lithium stocks brings a glimmer of warmth to the falling lithium prices. On November 16th, lithium stocks rebounded in the morning session, with Ganfeng Lithium Group (01772) rising 6.68% and Tianqi Lithium Corporation (09696) rising 5.06% by the close. From then until the 17th, lithium stocks continued to rise, with Ganfeng Lithium Group and Tianqi Lithium Corporation closing up 1.22% and 0.24% respectively, at HK$29.1 and HK$41.6. As you may know, lithium prices have been on a downward trend since the end of last year with an increase in lithium mine supply. According to relevant data, from the end of last year to early October of this year, the price of battery-grade lithium carbonate plummeted from RMB 600,000 per ton to RMB 175,000 per ton, a drop of over 70%. With the sharp decline in lithium prices, lithium mining stocks have also had a tough time, experiencing a "double blow" in their performance. Ganfeng Lithium Group, as one of the industry leaders, also suffered a significant drop in its stock price. The company's stock price reached a high of HK$185 in September 2021 but is now less than HK$30. Now, with the collective rebound of lithium stocks, can Ganfeng Lithium Group take advantage of this? Facing "Growth Challenges" In fact, Ganfeng Lithium Group's growth challenge is "obvious". In the third quarter of this year, the company achieved a revenue of RMB 7.537 billion, a year-on-year decrease of 43% and a quarter-on-quarter decrease of 13%. The net profit attributable to the parent company was RMB 160 million, a year-on-year decrease of 98% and a quarter-on-quarter decrease of 95%. The non-net profit attributable to the parent company was RMB 239 million, a year-on-year decrease of 96% and a quarter-on-quarter decrease of 88%, slightly lower than expected. The decrease in both the company's revenue and net profit is mainly due to the lag in the decline of lithium prices and the pressure caused by high-priced inventory. It is understood that Ganfeng Lithium Group has not achieved complete self-sufficiency in lithium mines and mainly relies on external purchases of lithium ore as the main raw material. The price of lithium ore is influenced by the sales price mechanism, and the price changes have lagged behind the changes in lithium salt prices since 2023. According to SMM, the price of battery-grade lithium carbonate has decreased by 42.3% in the past three months, while the price of lithium concentrate has decreased by 31%. The lithium ore purchased by the company is mainly based on long-term contracts, which are less timely in response to price declines. If we further explore Ganfeng Lithium Group's downward trend, there have been signs of it. It is understood that Ganfeng Lithium Group is a leading company in the lithium battery industry chain and has a layout in the upstream lithium mining resources, midstream materials, including lithium metal and lithium compounds, and also in the end battery products. In terms of structure, the upstream mainly supplies the resources internally and does not contribute significantly to performance, the midstream accounts for the largest proportion of income, over 80%, and the downstream products have only started to contribute to performance in recent years, with a relatively low contribution. However, the performance of the company is most affected by the electric vehicle (EV) battery industry. The downstream demand relies on the development of new energy vehicles. From 2020 to 2022, the compound annual growth rate of new energy vehicles remained at three digits, slowing down in 2023. The growth rate of demand for EV batteries also slowed down, while the growth rate of battery production capacity far exceeded that of new energy vehicles, leading to overcapacity. According to EVTank statistics, in the first half of 2023, China's cumulative production of EV batteries was 293.6 GWh, while the cumulative installation of EV batteries during the same period was only 152.1 GWh, equivalent to inventory of 141.5 GWh accumulated in six months, with an overcapacity ratio of 48.2%. The increasing inventory means a decrease in the purchasing willingness of upstream materials and a continuous decline in prices. According to data, in the first half of this year, the price of lithium iron phosphate materials and NCM 5-series ternary materials fell by more than 35%, while the price of battery-grade lithium carbonate fell by more than 50%. At the same time, Ganfeng Lithium Group's inventory remains high. As of the end of the third quarter this year, inventory reached RMB 10.92 billion, an increase of 28 percentage points compared to the same period last year, at a historically high level. The negative effects of high inventory are also reflected in the company's latest financial report. In the first three quarters of this year, the company's impairment losses amounted to RMB 952 million, an increase of 3963.52% compared to the previous period, nearly 40 times higher. The company stated that this was mainly due to the cyclical impact of the lithium industry, which led to impairment testing of inventory and provision for the decline in inventory value. Last year, major lithium salt manufacturers made significant profits due to a surge in domestic demand for lithium batteries and the rising price of lithium salts. This year, factors such as weak downstream demand and a sharp drop in lithium prices have prompted lithium salt manufacturers to collectively present a disappointing performance and enter a "growth challenge", and Ganfeng Lithium Group is no exception. "Expansion" as a Strategic Move Although facing a "growth challenge", Ganfeng Lithium Group has not stopped moving forward. From three perspectives, Ganfeng Lithium Group is enriching its upstream resources through extensive acquisitions and expanding its production capacity. Specifically, in the first half of 2023, the company expanded its upstream resources by acquiring a 90% stake in the Songshugang Tantalum-Niobium Mine Project held by Xinyu Ganfeng Mining.Equity; the company holds a 70% stake in the Ganzi Niobium-Tantalum Mine through the acquisition of Mongolian Jin Mining. The project construction work is nearing completion. The company's subsidiary, Cauchari-Olaroz salt lake, has produced the first batch of lithium carbonate products, with a planned production capacity of 40,000 tons by 2024. The Mt Marion lithium spodumene project in Australia has expanded to 900,000 tons per year and is currently ramping up production capacity. The company's resources include lithium spodumene, salt lake, lithium clay, and lithium mica, with a total resource volume of 79.1 million tons of lithium carbonate equivalent (LCE), of which the equity resource volume is 47.85 million tons of LCE.It is worth noting that the acquisition and expansion of Ganfeng Lithium Group is not blind, but rather follows the industrial chain. In addition to increasing production capacity, it aims to reduce costs. It is reported that the company's lithium resources are mainly distributed in Australia, Africa, Ireland, and Jiangxi Province in China. Currently, the self-sufficiency rate of resources is 27%, but according to future plans, it is expected to increase to 69%. With the improvement of the supply chain structure, it is expected to offset the downward pressure on prices in the industry chain. At the same time, its expansion plan will solidify its leading position in the upstream market and continuously increase market share, benefiting from the long-term demand-driven price recovery. Furthermore, Ganfeng Lithium Group adopts a vertically integrated business model to enhance the synergy among its various business segments, thereby effectively improving the company's operational efficiency and profitability. It is understood that Ganfeng Lithium Group's business covers lithium resource development in the upstream, lithium salt refining and lithium metal smelting in the midstream, and lithium battery manufacturing and retired lithium battery comprehensive recycling in the downstream. With its market and technological advantages in the lithium product business, the company has expanded upstream to lithium resource development and downstream to battery manufacturing and recycling, thereby constructing a closed-loop lithium industry chain and effectively enhancing its competitiveness. As of now, Ganfeng Lithium Group has 7 major lithium metal and compound production bases, 6 lithium battery production bases, and 1 lithium battery recycling base. The main products include lithium hydroxide with a capacity of 81,000 tons, lithium carbonate with a capacity of 81,000 tons, and metallic lithium with a capacity of 2,150 tons. Meanwhile, the company plans to expand its capacity to achieve a total annual supply capacity of not less than 600,000 tons of lithium carbonate equivalent (LCE) by 2030 or earlier, based on future market demand and assessments. With the effective synergy among its various business segments, Ganfeng Lithium Group is expected to further improve its operational efficiency and profitability. Finally, Ganfeng Lithium Group is rapidly expanding its battery capacity to create a second growth driver. To boost the prices in the industry chain, it is no longer feasible to solely rely on the digestion of new energy vehicles. Instead, the rapid development of energy storage businesses is needed. Currently, the electrochemical energy storage market continues to grow at a double-digit rate, although its share in the entire energy storage industry is relatively low, it is continuously increasing and has exceeded 20%. Focusing on Ganfeng Lithium Group's battery business, the company's lithium battery business covers five categories of more than 20 products including consumer batteries, polymer small cells, solid-state lithium batteries, lithium power batteries, and energy storage batteries. Currently, the company has a designed capacity of 2.06 billion units for 3C batteries and a total capacity of 20 GWh for power and energy storage batteries. The company is also planning and constructing a total capacity of 51 GWh of lithium batteries. In terms of battery recycling, the company has a comprehensive recycling and treatment capacity of 70,000 tons of retired lithium-ion batteries and metal waste, with lithium recovery rate above 90% and nickel-cobalt metal recovery rate above 95%. It has become one of the top three battery recycling enterprises in China in terms of comprehensive battery processing capacity and the largest in terms of the recycling capacity of lithium iron phosphate batteries and waste materials. In the longer-term capacity planning, the company expects the proportion of lithium recovery from battery recycling to account for 30% of its total lithium recovery capacity. As Ganfeng Lithium Group gradually releases its battery capacity, its battery business is expected to become the second growth driver. In conclusion, influenced by factors such as industry procurement strategies, inventory management, and changes in demand expectations, the lithium price has shown a downward trend this year, which has a negative impact on Ganfeng Lithium Group. However, looking forward, the industry is expected to reach a turning point, which will undoubtedly have a repairing effect on lithium stocks. According to a research report released by China Securities Co., Ltd., the supply and demand for lithium resources are expected to be significantly loose in 2023 (corresponding to a rapid decline in lithium prices), with the exception of the supply-demand balance for separators, other links will be in a state of oversupply. For 2024, due to an expected 20%-30% decline in terminal demand in Q1, all links will enter a stage of oversupply, with the lowest capacity utilization and unit profitability. Starting from Q2, with the recovery of demand and improvement in supply and demand, the industry is expected to reach a turning point. However, in the short term, the price of lithium carbonate is expected to continue to explore new lows, which may continue to put pressure on the valuation of Ganfeng Lithium Group. However, in the medium to long term, as a leader in the industry chain, Ganfeng Lithium Group will benefit from the continuous expansion of its production capacity for lithium metal products and its extended timeline until 2030, which will accommodate long-term demand. Furthermore, through the optimization of its supply chain channels through acquisitions, the company is expected to enhance its profitability and still have the ability to capitalize on opportunities.