Power energy storage resonates, and lithium iron phosphate is in broad demand. (1) New energy vehicles: In the context of the high penetration rate of domestic new energy passenger vehicles, commercial vehicles that are more sensitive to battery costs are future growth points for lithium iron phosphate demand; there is room for improvement in the penetration rate of foreign new energy vehicles and the penetration rate of lithium iron phosphate. (2) Energy storage: The global consensus on renewable energy development and the economy of optical storage promote the development of energy storage, while lithium iron phosphate accounts for a relatively high share of electrochemical energy storage, further stimulating demand for lithium iron phosphate. Based on the energy storage and power market demand forecasts, we believe that the demand for new lithium iron phosphate cathodes in 2024-2025 will be 2.0124 million tons and 2.8667 million tons, respectively, and the industry will continue to grow at a growth rate of 40%.

The pattern is reshaped, anticipated restoration, and waiting for the inflection point to arrive. The concentrated influx of large amounts of capital during the peak of the industry caused the market's negative sentiment about the threshold and competitive pattern of the lithium iron industry to ferment. After the lithium battery boom slowed down, expectations for an improvement in the supply of lithium iron and a reversal of the cycle also became more pessimistic. However, judging from the industry tracking over several quarters, there is actually a big gap in expectations. Leading battery manufacturers are enthusiastic about iterating new high-end lithium iron products, and they need the cooperation of stable, reliable, and mature suppliers that respond quickly. It is difficult for new players to break the game. Traditional lithium iron leaders are always strong, and the industry pattern is stabilizing, and concentration is expected to continue to increase. First-tier manufacturers use differences in cost and customer structure to accelerate the liquidation of the lithium iron industry, and from a medium- to long-term perspective, the trend of price return to value has been established. Increased concentration has brought a higher share to leaders while also bringing greater reversal flexibility.

Technological innovation is a spear, supply chain cost control is a shield, and both offense and defense. In terms of new technology, Changzhou Lithium, a holding subsidiary of the company, released the newly developed fourth-generation high-pressure lithium iron phosphate S501 and “Lithium Energy No. 1” lithium iron phosphate cathode materials in April '24. S501 powder compaction density reached 2.65 g/cm? ; “Lithium Energy No. 1” increased the number of cycles by 15.6%, and the energy efficiency increased by 10%. The technological update of cathode materials is the cornerstone of the iteration of dynamic storage battery technology. As one of the few manufacturers with fourth-generation high-pressure technology, the company's technical superiority has been fully reflected. In terms of cost, by the end of 2023, the infrastructure for the Shandong Lithium Source 0.1 million ton iron phosphate project and the Hubei Lithium Source 0.05 million ton iron phosphate project had been completed, with a total annual production capacity of 0.15 million tons of iron phosphate. The 0.04 million-ton lithium carbonate processing plant jointly built by the company and Ningde Times is expected to reach the intended usable state by the end of June 2024, and the raw material layout will be further deepened.

The internationalization strategy is clear, and overseas production capacity orders have both been placed. The penetration rate of new energy vehicles and the penetration rate of lithium iron phosphate in overseas markets all have a lot of room for improvement, and overseas energy storage construction is in full swing. The company has clarified its overseas strategy and is expected to gain a differentiated advantage among leading lithium iron phosphate companies. The 0.03 million ton lithium iron phosphate cathode material production base built by the company in Indonesia is the first overseas lithium iron phosphate cathode material factory of 10,000 tons or more. Trial production began in April '24. It is expected to be officially put into operation in 24Q3, and the second phase of the 0.09 million ton project in India will be built before the end of the year. Furthermore, the company expects to start construction of production capacity at the Korean base in 2025, with a total production capacity of 0.12 million tons in the two phases. In terms of orders, the company signed a long-term agreement with LG to sell 0.16 million tons of lithium iron phosphate cathode material products from Changzhou Lithium Source to LGES between 2024 and 2028. According to estimates, the total amount of the agreement exceeds 7 billion yuan.

Investment advice: The company is expected to achieve operating income of 8.328, 11.682, and 16.446 billion yuan in 2024-2026, and net profit of 0.101, 0.392, and 0.664 billion yuan, with year-on-year increases of 108.2%, 287.8%, and 69.5%. The corresponding EPS is 0.18, 0.69, and 1.18, respectively. The PE multiples corresponding to the current stock price are 38.9X, 10.0X, and 5.9X. The company takes the lead in overseas production capacity construction, and is deeply tied to leading customers to improve the certainty of capacity absorption. Increased concentration and improved industry sentiment are expected to bring impressive performance flexibility, coverage for the first time, and a “buy” rating.

Risk warning: global political and economic risks; downstream demand falls short of expectations; capacity construction falls short of expectations; technology iteration risks, etc.