Incident: Vanadium and Titanium Co., Ltd. released its 2023 annual report on the evening of March 25, 2024, achieving operating income of 14.38 billion yuan, a year-on-year decrease of 4.7%; net profit to mother of 1.06 billion yuan, a year-on-year decrease of 21.3%; deducted non-net profit to mother was 1.05 billion yuan, a year-on-year decrease of 19.3%. 2023Q4's net profit for a single quarter was 190 million yuan, up 61.3% year on year and down 29.1% month on month.

Comment:

Falling vanadium prices dragged down performance. The price of vanadium pentoxide fell quarterly in 2023. The average price of vanadium pentoxide in 2023Q1-2023Q4 was 13.7/11.2/10.3/86,000 yuan/ton, respectively. Revenue from vanadium products in 2023 was 5.2 billion yuan, down 10% year on year; output was 49,800 tons of vanadium pentoxide, up 6.1% year on year; sales volume was 50,000 tons; gross profit margin was 27.45%, down 4.6 pct year on year; average annual sales price (excluding tax) was 104,000 yuan/ton, down 12% year on year, and the cost fell to 76,000 yuan/ton, down 6% year on year, mainly due to the decline in raw material costs.

The overall profit of the titanium business is stable. In 2023, titanium dioxide revenue was 3.43 billion yuan, down 6.0% year on year; gross profit margin was 10.6%, up 3.0 pct year on year; sales volume of titanium dioxide was 255,000 tons, up 6.5% year on year; the average annual sales price of titanium dioxide products was 13,000 yuan/ton, down 12% year on year, and gross profit margin was 10.6%, up 3.0 pct year on year, mainly due to the cost reduction exceeding the price drop of the product. Sales of titanium slag amounted to 820 million yuan, down 6.5% year on year; sales volume of titanium slag was 193,000 tons, up 7.8% year on year; gross profit margin was 0.8%, down 2.4 pct year on year.

Sales of the company's vanadium products in the energy storage sector are expected to increase 82% year over year in 2024. In 2023, the company's vanadium products produced and sold more than 8800 tons of vanadium pentoxide equivalent in the field of energy storage. Following the successful completion of the cooperation plan with its strategic partner Dalian Rongke in 2023, the company increased its investment in vanadium in the field of vanadium energy storage in 2024 and signed a strategic agreement with Dalian Rongke to supply 16,000 tons of vanadium raw materials per year, an increase of about 82% over 2023.

Vanadium for energy storage is expected to increase sharply year over year, and the decline in vanadium used in steel may narrow, which is expected to drive the price of vanadium back up. At present, the capacity utilization rate for processing vanadium slag into vanadium oxide has exceeded 80%, and the supply of vanadium has increased dramatically, making it more difficult. According to our statistics, in 2023, the scale of the vanadium battery energy storage power plant tender project exceeded 900 mW/3864.5 MWh, and the capacity increased 119 percent year on year; in addition, the vanadium battery project started more than 442 mW/2252 MWh, with a capacity increase of 753% year on year; it is expected that delivery of vanadium batteries will increase dramatically in 2024. Demand for rebar in the steel sector may continue to decline, but steel used in manufacturing may increase, the decline in the amount of vanadium used in steel may narrow, and the vanadium price center is expected to move upward.

Profit forecast, valuation and rating: Assuming that the average price of vanadium pentoxide is 10.5/11.0/115,000 yuan/ton in 2024/2025/2026, the estimated net profit for 2024/2025 is 12.1/1.37 billion yuan (down 39% and 38% from the previous forecast), adding the 2026 forecast to 1.53 billion yuan, an increase of 14%/14%/12% year-on-year, and PE corresponding to the current stock price is 24/21/19 times, respectively. We believe that benefiting from the development of all-vanadium flow batteries, the value of the company's vanadium products is expected to be re-valued and maintain the “gain” rating.

Risk warning: Risk of a sharp drop in prices for products such as vanadium and titanium; risk that the progress of electrolyte cooperation projects falls short of expectations.