1H24 results are in line with our expectations

The company announced 1H24 results, achieving operating income of 9.59 billion yuan, -47% year-on-year, net profit to mother of 0.76 billion yuan, -113% year-on-year, and net profit to mother of 0.16 billion yuan after deduction. The company achieved operating income of 4.53 billion yuan in 2Q24, -48% YoY, -10% month-on-month, net profit to mother -0.32 billion yuan, net profit to mother after deduction of 0.09 billion yuan, -95% YoY, +137% month-on-month, in line with our expectations.

First, the decline in the price of lithium salt has led to a decline in operating income. According to Asia Metal Network, the average price of 1H24 domestic electricity including tax was 0.102 million yuan/ton, -68% year over year. We believe that the decline in lithium salt prices is the main reason for the month-on-month decline in 2Q24's revenue.

Second, the increase in gross margin reflects the rapid digestion of the company's high-priced inventory. 2Q24's gross margin was 16.0%, +9.8ppt month-on-month. We believe that in the context of declining lithium prices, the increase in the company's gross margin reflects changes in the company's inventory management strategy in response to the downturn cycle, and the gradual digestion of high-priced inventory in the early stages.

Third, the profitability of the lithium battery business has declined. 1H24's battery business achieved revenue of 2.71 billion yuan, -34% YoY, gross margin 9.9%, YoY -9.5ppt. We believe that the decline in the profitability of the company's battery business is mainly due to intense market competition.

Development trends

Own resources with short-term profitability are progressing smoothly, slowing down forward capital expenditure investments. The company's own resource project progressed smoothly during the reporting period. First, the construction of the first phase of the flotation production line at the Goulamina lithium mine in Mali is being completed and started. The company expects to produce the first batch of spodumene within this year. Second, the company continues construction work on Mariana Salt Lake in Argentina and plans to test production by the end of 2024. Third, production capacity at Cauchari Salt Lake, which is currently being produced, has climbed smoothly. Currently, output has climbed to about 70% of the design capacity. According to the company's announcement, the decline in lithium salt prices poses new challenges to the company. The company plans to more carefully control the pace of capital expenditure, postpone capital expenditure for some medium- and long-term projects where short-term returns are not obvious, and avoid ineffective expansion and vicious competition in the lithium battery sector. We believe that slowing the company's forward capital expenditure will help improve the efficiency of capital use in the downstream cycle and have greater strategic flexibility at the bottom of the cycle.

Profit forecasting and valuation

Considering the downward trend in lithium prices and the impact of fair value changes in profit and loss, we lowered net profit by -104% and -65% to -0.13 billion yuan and 1.29 billion yuan in 2024 and 2025. The current A and H share prices correspond to the price-earnings ratios of 42.6 times and 24.2 times in 2025. Since the expected decline in lithium prices has been fully reflected in the stock price, we have maintained our outperforming industry ratings. We lowered our target prices for A shares and H shares by 31% and 35% to HK$35.5 and HK$23.3. Because we expect losses in 2024, we will switch our valuation to 2025. The target prices for A shares and H shares correspond to 55.5 times and 31.9 times the 2025 price-earnings ratio, respectively. There is 30% and 32% room for growth compared to the current stock price, respectively.

risks

The price of lithium salt fell beyond expectations; the price of lithium ore remained high; progress in resource projects fell short of expectations.