Inventory impairment is disrupted, and profitability is temporarily under pressure
Tianci Materials released its annual report. In 2023, it achieved revenue of 15.405 billion yuan (yoy -30.97%), net profit to mother of 1,891 billion yuan (yoy -66.92%), and deducted non-net profit of 1,824 billion yuan (yoy -67.08%). Considering the interest on the company's convertible bonds, we have omitted the company's expenses during the repair period. We expect the company's net profit to be 14.82/17.57/2,388 billion yuan in 2024-2026, respectively (previous value: 15.07/1,760 billion yuan in 2024-2025). Referring to the average PE of comparable companies in 24 years, the average PE is 15 times. Considering that the electrolyte industry is already at the bottom of the profit cycle, the cost curve of the industry is steep. Profitability bottomed out or earlier than other aspects. The company had a significant cost advantage. The company was given a reasonable PE of 30 times in 24 years, corresponding to a target price of 23.11 yuan (previous value of 21.93 yuan), maintaining a “buy” rating.
Profitability declined markedly in '23 due to the fall in electrolyte prices
The company's Q4 net profit was 139 million yuan, -89.74%/-70.00% month-on-month, mainly due to falling product prices and asset impairment losses of 146 million yuan (it is estimated that the prices of raw materials lithium carbonate and iron phosphate products fell rapidly). The company sold 396,000 tons of electrolyte in 2023, +24% year over year, but profitability declined year-on-year due to falling prices of raw materials such as lithium hexafluorophosphate and falling electrolyte prices. The overall gross profit margin for 2023 was 25.92%, -12.05pct year on year, and the net profit margin was 11.96%, -14.23pct year on year. The cost ratio for the 23-year period was +2.93pct to 9.97%, with sales, management, R&D, and finance expenses ratios of 0.66%, 4.16%, 4.19%, and 0.97%, respectively. Net cash flow from operating activities was $2,274 million, -45.38% YoY.
Q1 The price of lithium hexafluorophosphate stabilized. The discontinuation of production or bottoming out of leading electrolyte prices was mainly dominated by lithium hexafluorophosphate. Since the second half of '22, along with the oversupply of lithium hexafluorophosphate, the unit price and gross profit of electrolyte have declined. However, since the beginning of '24, the price of lithium hexafluorophosphate has stabilized. On March 9, the company announced the suspension of production and maintenance of the 30,000 ton liquid lithium hexafluorophosphate (about 10,000 tons) production line. We believe that the company, as the leading cost leader in the industry, is discontinuing production or is an important sign that prices have bottomed out. We expect that there will be limited room for future downward fluctuations in lithium hexafluorophosphate prices, and that there will be little room for lithium hexafluorophosphate overcapacity. If demand improves, a subsequent price rebound is not ruled out.
Deepen industrial chain integration and enhance core cost advantages
On December 7, '23, the company announced an investment of no more than 1.07 billion yuan to build a 30,000 ton lithium carbonate project. The construction period is expected to be 14 months, and annual revenue of 2.53 billion yuan can be achieved after commissioning. After completion, the project can deepen the integration of the company's electrolyte industry chain, open up the entire production process from mining to lithium carbonate to lithium hexafluorophosphate/lithium iron phosphate, and enhance the core cost advantage of the product. Furthermore, the company is leading the layout of the new lithium salt LiFSi, which helps the company maintain its competitive advantage and increase profits. Also, on March 25, '24, the company announced that it plans to distribute 577 million yuan in dividends for fiscal year 23, accounting for 30.49% of net profit attributable to mother for that year.
Risk warning: demand for electrolyte fell short of expectations; LiFSi application and profitability fell short of expectations; lithium hexafluorophosphate prices fell faster than expected.