Incident: On June 17, 2024, Ningde Kaixin, a wholly-owned subsidiary of the company, signed a “Material Supply Agreement” with Ningde Times. The agreement stipulates that from the effective date of the agreement until December 31, 2025, Ningde Kaixin (including its affiliated companies) is expected to supply the corresponding amount of electrolyte products using 58,600 tons of solid lithium hexafluorophosphate to Ningde Era (including its affiliated companies). This amount can fluctuate no more than 5% according to negotiations between the two parties. The price of lithium hexafluorophosphate, a raw material for electrolyte products, consists of battery-grade lithium carbonate and other costs. Among them, the price of battery-grade lithium carbonate is the average price of the previous month multiplied by the agreed consumption factor. If the price of lithium hexafluorophosphate continues to fluctuate greatly compared to the average market price, then the two parties renegotiate the pricing. Specific product names, specifications, unit prices, quantities, technical standards, etc. are subject to orders or other written documents confirmed in writing by both parties.

The supply of lithium hexafluorophosphate continues to be concentrated at the top, and the signing of the agreement is expected to have a positive impact on the company's operating results for 24-25 years. The signing of this agreement also marks the recognition of the company's R&D capabilities, quality systems, and production and supply capabilities by the Ningde Era. The company will further increase its supply to the Ningde Era, which is expected to have a positive impact on the company's business performance over 24-25 years. According to GGII data, using 58,800 tons of solid lithium hexafluorophosphate, it is possible to produce about 488,300 tons of electrolyte, corresponding to the battery demand of about 574.5 GWh. 488,300 tons of electrolyte were about 123% of the company's electrolyte sales in '23, and 574.5GWh batteries were about 147% of lithium battery sales in the Ningde Era in '23. At the same time, lithium hexafluorophosphate is currently still in a state of overcapacity. According to Baichuan Yingfu data, as of May '24, China's current lithium hexafluorophosphate production capacity is 377,300 tons/year, and the market share (capacity caliber) CR5 is 60.1%. The signing of this agreement indicates that the supply pattern of the lithium hexafluorophosphate industry continues to be concentrated on leading companies, and the industry's production capacity will be cleared at an accelerated pace.

The construction of lithium battery material production capacity continues to be promoted, and the self-supply ratio of core raw material production capacity continues to increase. The company continues to promote the production capacity layout of lithium battery materials, and the self-supply ratio of core raw materials continues to increase. The company currently has an electrolyte production capacity of about 850,000 tons/year and a lithium hexafluorophosphate (folding) production capacity of 112,000 tons/year. In '23, the company's self-supply ratio of liquid lithium hexafluorophosphate and LiFSi reached more than 93%, and the self-supply ratio of some core additives reached more than 80%. According to the 23-year report, the company is building a 41,000t/a lithium-ion battery material project (phase I), a lithium battery basic material project with an annual output of 95,000 tons and a 100,000 ton dichloropropanol project, a lithium battery material project with an annual output of 200,000 tons, an annual output of 300,000 tons of iron phosphate project (phase II), an annual output of 300,000 tons of lithium battery electrolyte and a 100,000 ton lithium iron battery recycling project, an annual output of 200,000 tons of lithium battery electrolyte recycling project, and the expansion of 200,000 tons of lithium battery electrolyte 10,000 ton lithium iron battery recycling project, A lithium battery basic material project with an annual output of 75,500 tons, a lithium iron phosphate cathode material with an annual output of 25,000 tons, and a lithium battery additive material project with an annual output of 80,000 tons.

Profit forecast, valuation and rating: Since the current price of lithium battery materials is still low, we lowered the company's 24-26 profit forecast. We expect the company's net profit to be 11.03 (21.6% reduction) /19.31 (9.0% reduction) /24.43 (6.3% reduction) billion yuan for 24-26, respectively. As a leading enterprise in the electrolyte industry, the company has significant advantages in capacity planning and industrial chain layout, and maintains the company's “buy” rating.

Risk warning: production capacity construction risk, downstream demand falling short of expectations, risk of product price fluctuations.