Since March, the lithium battery sector of the capital market has continued to be hot, breaking out of a strong reversal ahead of schedule. The Hong Kong stock company, Caike New Energy, also recently released its 2023 financial report.
According to financial reports, the company achieved revenue of 2,065 billion yuan, a decrease of about 2.7% over the same period in 2022, mainly because iron phosphate, the main product in the battery materials sector, was affected by market fluctuations; the Group's net profit was 45 million yuan, a decrease of 82% over the previous year.
We noticed that the sharp drop in upstream battery material prices last year had a huge impact on the entire industry. The decline in Caike New Energy's performance was to some extent within expectations. Surprisingly, the company's overall revenue scale only declined slightly, and this financial report also revealed some positive expectations.
The traditional main business is stable, and dyes and agrochemical intermediates continue to grow
Caike New Energy's business is divided into three segments: dyes and agrochemical intermediates (DSD acid, etc.), battery materials (iron phosphate, etc.), and pigment intermediates (DMAS, DMS products). The revenue of these three segments in 2023 was 1.19 billion, 499 million, and 377 million, respectively, accounting for 58%, 24%, and 18% respectively; in 2022, revenue was 1,072 million, 690 million, and 361 million, respectively, accounting for 51%, 32%, and 17%, respectively.
Source: Company Information
As can be seen from the data, the main changes on the revenue side this year were dyes and agrochemical intermediates and battery materials. Among them, revenue from the dye and agrochemical intermediates business increased by 118 million yuan, an increase of 11% over the previous year, which largely covered the decline in revenue in the battery materials sector.
Furthermore, dyes and agricultural chemical intermediates were further split. The income of agricultural chemical intermediates was relatively stable compared to last year. This increase was mainly due to the growth contribution of the dye intermediate DSD acid products.
As the world's largest producer of DSD acid, Caike New Energy has a significant market advantage in DSD acid products, accounting for 63% of the global market share. DSD acid is mainly used in the production of fluorescent whitening agents. The terminal is used for paper whitening, washing products brightening, and textile whitening.
In DSD acid products, PNT is the main upstream raw material. As one of the world's top three nitrotoluene (PNT, ONT, MNT) manufacturers, the company is already self-sufficient in the supply of raw materials for DSD acid.
It can be said that the company has opened up the DSD acid upstream and downstream industrial chain, and has certain pricing power and cost advantages.
In 2023, sales of DSD acid increased sharply by 27% due to the gradual recovery of terminal demand for dye intermediate products. Although the average unit price decreased by 13% compared to the same period in 2022, the company still achieved revenue of 529 million yuan, an increase of 38% over the previous year, and its contribution to the company's overall revenue increased from 18% last year to 25.6% this year.
Dyes and agricultural chemical intermediates are currently the biggest revenue support for Caike New Energy. This business has been the company's comfort zone for many years. Because it has taken a leading position in various product segments, the company has a certain price voice, and unless extreme circumstances occur, it will lead to large fluctuations in price.
Overall, based on the stable market share of the company's core business, the revenue and profitability of the company's dye and agrochemical intermediates sector will continue to improve in the future as the economy recovers and inflation eases and the prosperity of the downstream industry increases.
Iron phosphate fell close to a historic low, and actively adjusted strategies to meet the inflection point in the market
As the company's newly developed second growth curve, the battery materials business has shown good development prospects and broad room for growth in the past few years. However, the imbalance in the market supply and demand pattern in 2023 and the sharp drop in iron phosphate prices posed huge challenges to the battery materials business.
Since the early battery technology route was dominated by lithium iron phosphate, the industry was in short supply and strong downstream demand, and the sales price of iron phosphate was strongly supported. From 2019 to 2022, iron phosphate ushered in a sharp rise in volume and price. The revenue scale of the company's battery materials business doubled rapidly in the past three years, and the hot market of iron phosphate attracted domestic iron phosphate suppliers to actively expand production.
Caike New Energy is no exception. By the end of 2022, the company's planned production capacity will reach 80,000 tons/year. The long-term goal is that iron phosphate production capacity will reach 150,000 tons by 2025, and it will grow into a leading enterprise in the iron phosphate industry.
Due to the fact that domestic iron phosphate production capacity is expanding faster than the growth rate of terminal demand, there is an imbalance between supply and demand in the market, and the iron phosphate market price has dropped sharply compared to 2022.
Judging from the price of battery materials disclosed in the company's financial report, the price of battery materials fell by as much as 83% throughout the year. As a result of this sharp drop in prices, the gross margin of the company's battery materials business fell to -14.6% from 36.4% last year, and segment performance fell from profit of 186 million yuan last year to loss of 180 million yuan.
Source: Company Financial Report
Judging from the company's sales growth, the strong downstream demand trend has not changed. The company's sales volume of battery materials this year is still 33% higher than last year, mainly due to the decline in unit prices.
According to SMM research, iron phosphate and lithium iron phosphate companies are currently at serious losses. Regardless of the process route, the cost exceeds the market price of iron phosphate.
Source: SMM Research
Currently, iron phosphate companies are facing the challenge of removing production capacity. Either take orders at a low price and lose money, or adjust your business strategy.
As the core material of lithium iron phosphate batteries, iron phosphate has remarkable customized characteristics and has a critical impact on the performance of cathodes and batteries. In the procurement process, although reducing the price of a single ton of iron phosphate by 1,000 yuan may seem to save one million in a kiloton order, this cost reduction strategy harbors huge risks.
When the purchase price is so low that it is close to or below the cost of production, the quality of the product is likely to be affected. This decline in quality may cause performance problems or safety hazards during battery use.
In the long run, simply pursuing cost reduction is not in line with the principle of sustainable development. A low price strategy can help enterprises obtain temporary orders but cannot bind a stable cooperative relationship with downstream, and continued losses can also lead to increased capital chain risks.
Through strict quality management and reasonable cost control, a win-win situation between product quality and economic benefits can be achieved.
Judging from the financial information disclosed by the company, the lottery players are actively adjusting their business strategies.
On the one hand, it is to adjust production capacity and reduce capital expenses: the company postponed the plan to build a new production line of 80,000 tons/year to be completed by the end of 2023 and the expansion plan to expand the existing 30,000 tons/year production line to 60,000 tons/year, and postponed it until the end of 2024 or further adjusted according to actual market conditions.
The purpose of this adjustment is to prevent blindly expanding production capacity when there is an oversupply in the market, thereby avoiding the risk of increasing market competition and triggering price wars. At the same time, the capital expenses and payments for Shandong Caike New Materials for production line construction have also been reduced from 300 million last year to 64 million yuan.
Source: Company Financial Report
On the other hand, it is increasing investment in R&D, improving and improving the production process and product quality of existing products, developing new battery materials, and improving the overall market competitiveness of products.
In 2023, the company invested 39 million in R&D, an increase of 55% over the previous year.
These include continuously optimizing the production process for battery material lithium iron phosphate products, successfully developing high-capacity long-cycle lithium iron phosphate precursors and high-pressure solid lithium iron phosphate precursors; opening up the entire lithium iron phosphate resource recovery process to achieve resource recovery of major elements such as lithium, iron, phosphorus, etc.; and continuing research and development of novel lithium iron phosphate lithium manganese and sodium ion battery materials to seize market opportunities and expand the Group's business categories.
Source: Company Financial Report
These R&D investments will not only help improve the performance and quality of the company's existing products and reduce costs, but are also expected to open up new growth points for the company in new energy battery materials.
Currently, compared with many companies mired in price competition and facing financial pressure due to operating losses, Caike New Energy will have sufficient cash flow to support the steady development of the company in the future process of recovering production capacity with its balance ratio of only 15.4% and sufficient liquidity.
Furthermore, the current price of lithium carbonate (another key raw material for the production of lithium iron phosphate) showed a big rebound in February of this year. According to Hongyuan Futures research, lithium carbonate is currently in the stage of minor inventory removal, and there is limited room for lithium carbonate prices to continue to decline.
Source: Hongyuan Futures Research
According to SMM research, since the price of iron phosphate fell all the way down in 2023, the price has stabilized. There was also a wave of price increases after this year, and due to rising prices of raw materials such as phosphoric acid and industrial monoammonium, which further supported the reasons for raising iron phosphate prices. Beginning in March, iron phosphate companies also began sending price increases downstream, hoping to reduce losses.
Source: SMM Research
For the field of new energy vehicle batteries and energy storage, where downstream demand is still strong, future volume growth is still guaranteed, and prices are currently close to historic lows. Once reversed, the performance of battery materials will reach an inflection point.
High dividends, high potential, continuous repurchases by the company
During the period 2021-2023, despite poor stock price performance in the capital market, 49%, 40%, and 232% of the net profit earned by the company in each year were distributed to shareholders, and a dividend rate of around 8% was maintained.
Source: WIND
This shows that the company has considerable financial soundness and profitability, and also reflects their firm confidence in future business prospects and is willing to give back to shareholders.
Furthermore, returning to the value level, the company also has plenty of potential for future growth.
The company's current market value is 700 million yuan, with net book assets of 2.1 billion yuan. The market value is only 1/3 of net assets. The total amount of cash and cash equivalents on the company's books, as well as notes receivable with good acceptance, is 680 million yuan, which means that excluding these cash flow assets, the company almost gave away the remaining assets to investors free of charge.
Furthermore, as can be seen from the share transfer and spin-off listing plans of the company's two subsidiaries, the company's market capitalization has great potential to grow.
The company's non-wholly-owned subsidiary, Caike Technology (holding 71.75% of the shares), focuses on the pigment intermediates and new materials business, and has been successfully promoted to the innovation level. In June 2023, Caike Chemical (Hong Kong) transferred approximately 6.12% of Caike Technology's shares to independent investors at a total price of RMB 55 million. The deal reflects the post-investment valuation of Lottery Technology as high as $899 million. As Caike Technology is expected to transfer to the Beijing Stock Exchange in the future, the company's overall valuation is expected to be further enhanced.
In addition, Shandong Caike New Materials (holding 90.16% shares), another non-wholly-owned subsidiary of the company engaged in the battery materials business, successfully attracted ten investors from March to April 2023, including Sinopec Capital and China Minmetals Double Venture Fund. These investors injected a total of 229 million dollars into the company and obtained about 9.84% of the shares after the capital increase. Based on this calculation, the valuation of the battery materials business reached 2.33 billion.
According to the company's development plan, the battery materials business is expected to be independently listed on the China Stock Exchange in the future. Considering this outlook, the company's current overall market value of 700 million clearly does not fully reflect its potential value.
The management themselves are aware that the current stock price is unreasonable. In 2023, the company initiated repurchases several times, and bought more as it fell, which also showed their confidence in the future of the company, and all of the shares purchased by the company have already been cancelled.
Source: WIND
Source: Company Financial Report
epilogue
In summary, in the past year, Caike New Energy has experienced industry difficulties and challenges in transforming its business, but its traditional main business is still growing steadily. In terms of battery materials business, the company has shown a high level of market acumen and strategic vision, and has responded to market changes through flexible adjustments to production expansion plans. It is worth mentioning that the company was not discouraged by short-term difficulties. Instead, it increased R&D investment in battery materials and new materials, committed to improving product performance and quality, and laying out new battery material technology.
Furthermore, the company's new materials business is expected to be transferred to the Beijing Stock Exchange, and the battery materials business is also expected to be spun off. These all indicate that the company's current market value does not fully reflect its future growth potential.
Judging from the company's development history, operating performance and financial indicators, Caike New Energy has always adhered to steady management, while actively seeking change and being brave in innovation. During the adjustment period, the company paid more attention to refining basic skills, laying a solid foundation for future development. At the same time, the company has fully demonstrated the importance it attaches to shareholders' interests through generous dividend payments and substantial secondary market repurchases.
For investors, Caike New Energy is certainly an investment target worth paying attention to. Its untapped growth potential and continued steady operating performance all provided strong support for future stock price increases.
Therefore, all investors who value the long-term investment value of Caike New Energy should wait patiently for the roses to bloom.