Key points of investment
Our view: “prudent increase” rating, target price HK$95.42. Tianqi Lithium is the world leader in the integration of middle and upstream lithium salts. The company's lithium resources are 100% self-sufficient at low cost, and enjoy profits on the beneficiation side and smelting side. According to our estimates, there is a balance between global supply and demand of lithium resources this year and next two years, and the prices of lithium concentrate and lithium salt are expected to remain relatively high, helping Tianqi and its associated company SQM release profits. Furthermore, Tianqi currently has low financial leverage and sufficient cash flow, and lithium salt production capacity and downstream business layout are expected to accelerate. According to the PE and PB valuation methods, we gave the company a target price of HK$95.42, corresponding to PE of 6.8x, 6.0x, and 5.9x for 2022-2024, and corresponding PB of 4.1x, 2.5x, and 1.8x, respectively. The target price increased by 32.8% compared to the current price. For the first time, it covered a “prudent increase in holdings” rating. Investors are advised to pay attention.
Industry boom: The supply of lithium resources is tight, and integrated enterprises benefit. The global power battery and energy storage battery industry is booming. Demand for lithium salt is rising, but supply is limited by lithium resource extraction. We measure downstream demand based on power batteries, energy storage batteries, consumer electronic batteries, and traditional industrial lithium; we measure the amount of lithium resources mined based on the production plans, climbing pace, and capacity utilization rate of 76 major global lithium resources. The global lithium resource planning production capacity increased dramatically from 2022-2024, but the pace of release is uncertain and the climbing cycle is long; it is expected that the supply and demand of lithium resources will be balanced this year and next; the prices of lithium ore and lithium salt are relatively strong; and lithium resources+lithium salt integrated enterprises will continue to benefit.
Resource advantages translate into profit: integrated layout of lithium resources+lithium salt production capacity, enjoy profits on the beneficiation side and smelting side.
1) Lithium resources are 100% self-sufficient at low cost: The Thalyson-Greenbush mine has large reserves, high grade and low cost. The unit cost of 2022Q2 6% grade lithium concentrate (including equity) is only 618 Australian dollars/ton, equivalent to less than 24,000 yuan/ton of LCE; currently, its chemical grade lithium concentrate has an annual production capacity of 1.48 million tons, and the 2022Q2 output is about 300,000 tons. Tianqi effectively controls Greenbush mining rights, merges revenue, and underwrites 50% of chemical-grade lithium concentrate, and is 100% self-sufficient in lithium resources at low cost.
2) Lithium salt production capacity expansion: By the end of 2021, Tianqi's lithium salt production bases in Shehong, Sichuan, Zhangjiagang, Jiangsu, and Tongliang, Chongqing had a total production capacity of 44,800 tons. Among them, the nominal production capacity of lithium carbonate, lithium hydroxide, lithium chloride, and lithium metal was 34,500, 5,000, 4,500, and 800 tons, respectively. In 2022-2025, 48,000 tons of lithium hydroxide, Suining Anju, 20,000 tons of lithium carbonate, and Tongliang will be added. It is estimated that by the end of 2025, Tianqi's total lithium salt production capacity is 114,800 tons, an annualized increase of 26% over the end of 2021.
3) Leading gross margin: Thanks to the advantages of lithium resources, 2022H1 Tianqi's gross profit margin is 84.1%, of which the gross profit margin of lithium concentrate is 77.05% and the gross profit margin of lithium salt is 87.54%, leading the industry.
Associated companies: SQM's profits are released, boosting Tianqi's profits. As of the end of 2022H1, Tianqi held 22.16% of SQM's shares, which were recorded according to the equity method. SQM has mining rights at Atacama Salt Lake. Currently, it has a production capacity of 210,000 tons of lithium salt, the highest in the world; of these, the production capacity of lithium carbonate and lithium hydroxide is 180,000 and 30,000 tons, respectively; it is planned to rise to 210,000 and 40,000 tons, respectively, by 2024. The sharp rise in the volume and price of lithium salt and the price of fertilizer and chemical products boosted SQM 2022H1's net profit to +949% year-on-year. Tianqi confirmed an investment income of 2,326 million yuan. SQM's profit is expected to remain high this year and next two years.
Financial improvements and strategic depth: Hong Kong stocks are listed, financial leverage ratio is low, and downstream business is planned. Tianqi went public in Hong Kong in July 2022, raised a net capital of HK$13.062 billion and paid off the balance of the SQM merger and acquisition loan. At the end of July, the balance ratio fell to 28%, leading the subsequent balance ratio to remain within 40%. Furthermore, Tianqi Hong Kong shares introduced cornerstone investors such as China Innovation Aviation, LG Chem, and German Nano, which are tied to the interests of downstream customers. The company cooperates with China Innovation Aviation and Beijing Weilan to develop downstream lithium salt business and expand long-term space.
Risk warning: Fluctuations in lithium prices, overseas lithium resource policy risks, company capacity expansion falling short of expectations, order fulfillment risks, etc.