Our view: 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. We gave the company a target price of HK$86.15, corresponding to PE of 6.2x, 5.4x, and 5.3x for 2022-2024, and corresponding PB of 3.7x, 2.3x, and 1.6x, respectively; the target price increased by 39.5% compared to the current price, maintaining a “prudent increase in holdings” rating, and investors are advised to pay attention.
The 2022-Q3 performance forecast was released. Profit increased significantly: 2022Q1-3. Tianqi expects to achieve net profit of 152-16.9 billion yuan, an increase of 27.9-30.9 times over the previous year; net profit not attributable to income is expected to be 142-15.8 billion yuan, a significant improvement from -120 million yuan in the same period last year. 2022Q3, the company expects net profit to be 5-6.5 billion yuan, an increase of 10.3-13.6 times over the previous year; net profit not attributable to parent is estimated at 4.98-6.48 billion yuan, a significant improvement over -140 million yuan in the same period last year. Reasons for the increase in profits in 202Q1-3:1) the volume and price of lithium products rose sharply during the period (of which the investment income confirmed by 202H1 was 2,326 billion yuan); 3) the participating company SES was listed on the New York Stock Exchange. The passive dilution of SES shares held by Tianqi no longer had a significant impact on it. From long-term equity investment to FVOCI, the investment income generated by passive disposal of long-term equity investments was 1,207 billion yuan in non-recurring profit and loss.
Resource advantages translate into profit: 1) The profit portion of the 2022H2 lithium industry is concentrated on the mining side, and integrated companies benefit even more.
Tianqi effectively controls Greenbush mining rights, merges revenue, and undersells 50% of chemical-grade lithium concentrate. 100% of lithium resources are self-sufficient at low cost, and enjoy profits on the beneficiation side and smelting side. 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; it is expected that 2022/Q3 gross margin will maintain its leading position. 2) Industry boom, profit release. According to our estimates, the overall supply and demand balance of global lithium resources will be balanced in 2023, the price of lithium salt is expected to remain relatively high, and the profits of leading lithium resources+lithium salt integrated leaders will be released.
Profit growth of the associated company SQM: As of the end of 2022H1, Tianqi held 22.16% of SQM's shares, which was 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, which is number one in the world. The sharp rise in the volume and price of lithium salt and the rise in the price of fertilizer and chemical products drove 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 Chemical, 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.