Incident: The company released the 2024 three-quarter performance forecast. In the first three quarters, it achieved net profit to mother of -58.5 to -5.45 billion yuan, -172.2% to -167.3% year over year; realized deducted non-net profit of -58.7 to -5.47 billion yuan, or -173.5% to -168.5% year over year. Among them, 3Q24 achieved net profit of 6.4 to -0.32 billion yuan, compared to -138.9% to -119.4%, narrowing month-on-month losses; deducted non-net profit of -6.5 to -0.33 billion yuan, or -141.3% to -121.0% year-on-year, narrowing month-on-month losses.

The rapid decline in lithium prices and the inversion of mineral salt prices were the main causes of the company's losses, and SQM's supplementary income tax payments further hampered performance. 1) 2024Q1-Q3's net profit to mother decreased sharply by 13.55-13.95 billion yuan year-on-year, the main reason: ① There is a time cycle mismatch between the pricing mechanism for the company's raw lithium concentrate and the sales pricing mechanism for finished lithium salt products. Before 2024, the pricing cycle for the company to purchase lithium concentrate from its subsidiary Thalison was a quarter, and lithium salt products were produced and sold immediately. Therefore, when lithium prices fall unilaterally, there will be a loss in raw material inventory value. In the profit statement, “minority shareholder profit and loss” is significantly higher than the company's net profit. ② The price of lithium continues to weaken, and the increase in volume makes it difficult to make up for the price drop. Although the company's lithium salt sales increased year on year in the first three quarters of 2024, SMM's average price of electric carbon fell sharply by 67.9% year on year to 0.0953 million yuan/ton. ③ The SQM tax lawsuit turned investment income into loss. SQM confirmed income tax expenses of about 1.1 billion US dollars and reduced net profit accordingly after the 1Q24 tax lawsuit was re-ruled, which affected the company's investment income by about 1.7 billion yuan. 2) Quarterly losses gradually narrowed, and the company's performance bottomed out. 3Q24's losses have further narrowed mainly due to: ① Since 2024, the lithium concentrate pricing cycle has changed from quarterly to monthly, and the impact of the mismatch between cost and selling prices has gradually weakened; ② 3Q24's lithium salt sales have continued to increase month-on-month.

Release an equity incentive plan to demonstrate the company's confidence in improving performance. 2024/10/14 The company issued a draft equity incentive plan. It plans to grant 26 executives and core staff a total of 0.468 million restricted shares. The sales restrictions can be lifted in three phases after meeting the performance assessment. The assessment goals are: ① EBITDA in 2025 is not less than 4.38 billion yuan, and lithium salt sales are not less than 2024; ② the cumulative EBITDA for 2025-2026 and 2025-2027 will not be less than 80% and 120%, respectively. Furthermore, the cumulative sales volume in 2025-2026 and 2025-2027 grew no less than 120% and 260% compared to 2024.

There is limited room for lithium prices to fall, and stocks may be placed on the left. In the short to medium term, lithium prices have bottomed out and fluctuated. However, considering that stocks have fully reflected expectations of falling lithium prices in the past 3 years, and that the pullback has generally reached 60% +, we can focus on the current point in time.

Profit forecast and valuation: As lithium prices fell more than expected, the company's net profit from 2024-2026 was lowered to -4.908, 3.567, and 5.494 billion yuan, but considering that the company has the highest quality lithium resources in the world and the cost is on the far left side of the cost curve, it was given an “increase in weight” rating.

Risk warning: Profit forecasts and valuation models fall short of expectations, and the risk that commodity prices will fall beyond expectations