Key points of investment:

The traditional copper and cobalt business is stable, providing stable cash flow for the company's other business development, and is the source of the company's lithium battery material integration. Over the years, the company has been deeply involved in high-quality copper and cobalt resources for Congolese gold, and its own PE527 copper-cobalt ore provides a low-cost, stable and reliable raw material guarantee for the company's production and operation. As the largest supplier of cobalt products in China, the company's leading position in the cobalt industry is stable. Against the backdrop of high copper product prices in 2024, the copper-cobalt business is expected to maintain steady growth.

The nickel and lithium resource business accelerated the layout, creating the company's second growth curve. Since 2018, the company has laid out laterite nickel ore smelting projects in Indonesia, mainly using the wet HPAL process. The total production capacity of the company and plans to be under construction has reached 0.645 million tons. After Huayue's 0.06 million ton wet process project and Huake's 0.045 million ton fire method project successively reached production and surpassed production, Huafei's 0.12 million ton wet process project reached production at the end of 23, which is expected to provide a significant increase in the company's performance in 2024. Since the company acquired Zimbabwe's Prospect Lithium Company in 2021, the Arcadia lithium project has progressed rapidly. It was put into trial production in March 2023. The 0.05 million ton supporting lithium salt project in Guangxi was put into trial production in June 2023, and gradually scaled up in the second half of 2023. The layout of upstream lithium mines further consolidates the resource base and is expected to become an important driving force for the company's performance growth.

Production capacity for ternary precursor & cathode materials was quickly released, and the integrated layout contributed to steady profit growth. Thanks to the integrated layout of upstream resources, the company's product cost control is excellent. In 2023, the company's gross margin for the three precursors was 18.26%, leading the way among enterprises of the same type. The company's high-nickel ternary materials account for more than 82%. As the share of high-nickel shipments increases further, the product gross margin is expected to be further optimized. Downstream signed long order agreements for precursor sales of 0.81 million tons or more with customers such as Rongbai, Dangsheng, Funeng, Tesla, etc., to deeply bind customers. As projects under construction are put into operation one after another, the company's precursor and ternary cathode production capacity has entered the accelerated release stage, and shipments of lithium battery materials are expected to grow rapidly.

A different view from the market: We believe that with the rational return of upstream nickel-cobalt-lithium prices of ternary materials, the high energy density advantages of ternary materials compared to lithium iron phosphate are expected to become more prominent, thus driving up the installed capacity of ternary batteries. The cost advantage of the company's own resources is obvious. At the same time, it is deeply bound to downstream customers through a long order agreement, so production and sales are safe. The company has many projects under construction. In the context of price reduction of lithium battery materials, it is expected to achieve quantitative price compensation and cross the cycle with integrated advantages.

Profit forecasting and investment ratings. The company's overall operating performance in 2024-2026 is expected to be weak in volume and price growth. As projects such as nickel products, lithium salt, and tertiary precursors continue to expand, sales growth is expected to hedge and cover falling prices. Operating income and net profit to mother will continue to grow, at 78.846/88.196/91.741 billion yuan and 3.561/4.271/4.976 billion yuan, respectively. The first coverage gives a buy rating.

Risk warning: Project progress falls short of expectations; market demand falls short of expectations; increased market competition and risk of structural overcapacity in the industry.