1H24 results fall short of our expectations

The company achieved total operating income of 3.569 billion yuan (YoY -6.4%) in the first half of 2024; realized net profit attributable to shareholders of listed companies - 0.221 billion yuan, of which 2Q24 achieved operating income of 2.094 billion yuan (QoQ +42.03%); and realized net profit of -0.143 billion yuan, a year-on-year loss reduction.

In the main business, the H24 lubricant/diesel engine exhaust treatment fluid/antifreeze/vehicle maintenance products/lithium iron phosphate business achieved revenue of 3.68/3.07/0.249/0.037/2.476 billion yuan (YoY +1.3%/-5.1%/+22.5%/-2.8%/-13.2%), of which 2Q24 achieved revenue of 1.54/1.51/0.126/0.016/1.607 billion yuan (QoQ -27.6%/-3.1%/+3.0%) /- 25.6%/+84.9%). Affected by the decline in lithium carbonate prices, the company's 1H24 asset impairment losses totaled 94.743 million yuan. Among them, inventory price drop losses and contract performance cost impairment losses reached 69.494 million yuan. The performance was lower than our expectations.

Development trends

2Q24 lithium iron phosphate sales increased year-on-year, and gross margin recovered. According to the company's operating data disclosure, 2Q24 lithium iron phosphate sales volume was 47,872 tons (YoY +87.9%, QoQ +79.8%); the average sales price was 33,560 yuan/ton (YoY -32.7%, QoQ +3%). The company's 2Q24 gross margin was 13.4%, up 9.1 ppts month-on-month. We believe that the company has sufficient orders for lithium iron phosphate, the operating rate of additional production capacity is expected to increase further, and the cost-side pressure on lithium iron phosphate is expected to slow down further after the self-built lithium carbonate production capacity is put into operation. At the same time, as the price of lithium carbonate stabilizes, the impact of inventory impairment on the profit side is also expected to slow down.

Overseas production capacity and raw material production capacity have been implemented, and integrated layout and production capacity going overseas have accelerated. Within the first half of 2024, the 0.04 million-ton lithium carbonate project in Longpan Era in Yichun was basically completed and reached the intended state of use; the 0.03 million-ton lithium iron phosphate project in Indonesia has also entered the trial production and commissioning stage and is about to be mass-produced. The company became the first Chinese company to launch a large-scale lithium iron phosphate cathode material factory overseas. At the same time, the company signed a 5-year long-term supply agreement with LGES for lithium iron phosphate, and some future production capacity will be locked in. We believe that the advantages of the company's integrated layout are gradually becoming prominent. The Indonesian project has landed and entered high-value overseas customers, and the scarce overseas production capacity of lithium iron phosphate is expected to usher in a harvest period.

Profit forecasting and valuation

Taking into account depreciation costs or increases after the conversion of additional production capacity and the impact of inventory impairment due to lower lithium carbonate prices, we lowered our 2024/25 profit forecast by 40.8%/37.5% to 0.208/0.456 billion yuan. Currently, the company's stock price corresponds to the 2024/25 price-earnings ratio of 18.7/8.5x. Taking into account the adjustment of profit forecasts and the long-term growth brought about by the company's new lithium iron phosphate production capacity, we lowered our target price by 29.8% to 8.5 yuan, corresponding to the 23.7% increase space and 23.1/10.5x price-earnings ratio in 2024/25. The company is full of orders for lithium iron phosphate and is expected to gain a first-mover advantage by taking the lead in going overseas. We maintain our outperforming industry rating.

risks

Overseas demand for lithium iron phosphate fell short of expectations, and lithium carbonate prices continued to decline.