2023 and 1Q24 results miss our expectations
Huayou Cobalt announced its 2023 results: Revenue rose 5.2% YoY to Rmb66.3bn, and net profit attributable to shareholders fell 14.3% YoY to Rmb3.35bn. In 4Q23, revenue rose 6.2% YoY but fell14.3% QoQ to Rmb15.2bn, and net profit attributable to shareholders fell 62.6% YoY and 63.6% QoQ to Rmb338mn. The firm announced its 1Q24 results: Revenue fell 21.7% YoY and 1.6% QoQ to Rmb15bn, and net profit attributable to shareholders fell 49% YoY and rose 54.7% QoQ to Rmb522mn. The firm's 2023 and 1Q24 results missed our expectations due to falling prices of metal and LiB materials.
Notable growth in output and sales volume of major products in 2023 partly offset the impact of falling prices. In 2023, the firm's output of nickel, lithium, and ternary precursors increased by 83%, 141%, and 21% YoY. Sales volumes for these products also rose by 88%, 104%, and 31% YoY. Despite falling prices, the sharp increases in output and sales volumes of these major products partly offset the impact. According to iFinD and Asian Metal, the domestic ASP of cobalt, nickel, lithium carbonate, ternary precursors, and cathode materials decreased by 39%, 13%, 48%, 22%, and 34% YoY in 2023. As a result, the firm's overall GM declined by 4.5ppt YoY due to falling prices.
Trends to watch
A small write-back of asset impairment was recorded in 1Q24, indicating easing impairment pressure. As of the end of 1Q24, domestic metal cobalt prices and overseas MB cobalt prices had fallen by 1.6% and 2.2%, compared to the beginning of the year, indicating a slowing decline in cobalt prices. According to the announcement, the firm reversed Rmb13mn of asset impairment in 1Q24, an increase of Rmb346mn QoQ. Recently, the Democratic Republic of the Congo (DRC), the world's largest cobalt producer, has sought advice from international industry organizations on measures to increase the price of this battery metal. We believe that the DRC's actions will have a significant impact on cobalt supply, supporting cobalt prices. As a result, the firm's impairment risk is expected to gradually ease.
The firm has been optimizing its industrial structure and strengthening its competitive advantages. The nickel business is expected to continue ramping up. According to the announcement, in response to upgrades in downstream lithium battery products and technologies, as well as changes in the lithium battery industry chain's market environment, the company has adjusted the timelines for its 50,000t/yr ternary cathode material project and 100,000t/yr ternary precursor integration project. These adjustments were made based on its production capacity and the industry's development cycle.
In 2024, the company plans to implement a business strategy focused on comprehensive planning, technological support, cost reduction, and efficiency enhancement. The aim is to expand its share of existing orders, seize opportunities from incremental orders, and continue building competitive advantages through leading products and cost-efficiency measures to further strengthen its industry-leading position. Given that Huafei's 120,000t hydrometallurgy project for nickel metal reached close to its designed capacity by the end of 1Q24, we estimate that the firm's stake in nickel products will grow by 46% YoY in 2024.
Financials and valuation
We lower our assumptions for prices and output of the firm's main products, and lower our 2024 and 2025 earnings forecasts 50.7% and 54.7% to Rmb2.6bn and Rmb2.9bn. The stock is trading at 18.1x 2024e and 16.1x 2025e P/E. Considering earnings revisions and the uptrend in the nonferrous metal sector, we cut our TP 31.6% to Rmb32.55, implying 21x 2024e and 19x 2025e P/E and offering 17.7% upside. Given the company's counter-cyclical expansion driven by integrated cost advantages and promising growth prospects, we maintain an OUTPERFORM rating.
Risks
Sharper-than-expected decline in metal prices; disappointing progress of projects; disappointing AFV sales.