Description of the event

Hunan Yuneng released its 2024 quarterly report. 2024Q1 achieved revenue of 4.520 billion yuan, a year-on-year decrease of 65.69%, and net profit to mother of 159 million yuan, a year-on-year decrease of 43.56%. After deducting non-net profit of 152 million yuan, a year-on-year decrease of 43.13%.

Incident comments

Looking at the breakdown, 2024Q1 shipped 136,000 tons. The growth rate was better than the industry, and its market share maintained an upward trend. Gross profit per ton recovered and increased month-on-month, thanks to the weakening of the negative impact of the fall in the price of lithium carbonate, but the Q1 off-season still affected capacity utilization rate and depreciation per ton; single-ton costs declined month-on-month, which was further reflected in the company's cost reduction and fee control; the impressive net operating profit performance of a single ton once again confirmed the company's cost advantage. In addition, the company's other revenue for 2024Q1 was $0.12 billion, and credit impairment surged back to $0.29 billion.

In terms of other financial data, the company's inventory at the end of 2024Q1 was 2.01 billion yuan (2023Q4 was only 1,325 billion yuan). As a leading company, the company clearly showed the advantages of active inventory management in the past two years based on downstream customers and scale advantages. Fixed assets of 10.476 billion yuan, and the original value is expected to be basically stable from month to month. The company is currently constructing 923 million yuan after concentrating on consolidating nearly 1.5 billion yuan in 2023Q4. The probability of a significant subsequent consolidation is not high. The company's depreciation is stable in a single quarter. It is expected that in 2024Q2 and the second half of the year, the decline in depreciation per ton will support improved profitability.

Furthermore, the company announced that its wholly-owned subsidiary Guizhou Yuneng Mining has completed the transfer of prospecting rights to mining rights for the Huangjiapo phosphate mine, with a production scale of 1.2 million tons/year to accelerate the construction and implementation of mining projects. It is expected that large-scale mining will be achieved in the second half of 2025, which is expected to drive the company's integrated profits to increase.

Looking forward to the future, the overall profit of the lithium iron industry is currently low. Cash flow pressure is compounded by tightening financing. As demand recovers and the desire to stabilize lithium iron prices increases, production capacity expansion is slowing down. The company's current production capacity has maintained a steady pace of expansion. At the end of '23, it had 700,000 tons of production capacity to ensure steady growth in subsequent shipments; the company's top two customers are still deeply cooperating, while shipments from other battery manufacturers are steadily increasing, and the market share level is expected to remain stable. In terms of profit, the overall profit level of the lithium iron industry is currently low. As production capacity expansion slows and demand grows, the recovery in production capacity utilization is expected to drive the industry's profit back to a reasonable ROE level. The company is expected to achieve a certain amount of excess profit with its scale advantage and subsequent phosphate ore layout. It is expected to achieve a net profit of 10-12 billion yuan in 2024, and continues to be recommended.

Risk warning

1. Market competition increases risk;

2. The risk that demand in the power battery industry falls short of expectations.