China's Baoan's controlling shareholders have changed hands, and group governance is expected to improve. China's Baoan is an established industrial group company with nearly 200 subsidiaries. Previously, most of its management had government and state-owned backgrounds, and development was relatively conservative.
In August '20, Chairman of Betry, He Xueqin, became Baoan's vice president, and in '21, Shaoguan Gaochuang (a wholly-owned subsidiary of Guangdong People's Investment) controlled Baoan, removed the clause in the company's articles of association that restricted normal management changes [if an executive is dismissed early, the company must pay financial compensation equivalent to ten times more than the sum of their annual salary and benefits], and sent Xu Biao to the board of directors. Changes in management and company articles of association have initiated more market-based management in Baoan, China. Chairman Beitri, who is from Guangdong Mininvestment+ Industrial, who is a financial investor, is eager to enter the market, and the group's governance is expected to improve.
The core asset of its lithium battery company, Betterie (which holds 68% of the shares), is expected to see both positive and negative poles blossom.
Negative electrode highlight 1: Accelerated release of production capacity & excellent customer structure. 1) For many years in a row, Betry has shipped the world's most negative electrodes, and production capacity is expanding at an accelerated pace. The effective production capacity in 2020 was 106,000 tons, and the equity effective production capacity is expected to reach 160,000 to 260,000 tons in 21/22. 2) The customer structure is of high quality, which is the core target of the overseas supply chain.
Major overseas battery manufacturers are Betterie's customers, such as Panasonic, Samsung SDI, and LG Chem, which have cooperated with the company for nearly 10 years. We expect the company to be in the same position as Panasonic and Samsung SDI.
Negative pole highlight 2: Holding two major new technologies to help the company increase efficiency and reduce costs.
Efficiency increase: The industrialization performance of silicon-based anodes is excellent, and they enjoy higher technology premiums. The silicon carbon anode was supplied to Samsung SDI for 13 years, and the silicon-oxide anode was supplied to Panasonic Tesla for 17 years. Currently, the silicon-based production capacity is 3,000 tons, and the net profit per ton is expected to be 65,000 yuan, enjoying higher technology premiums.
Cost reduction: Continuous graphitization technology can reduce costs, which is expected to be about 30% lower than traditional processes. Graphitization is the bulk of the cost of artificial anodes. Most peers have reduced costs by building bases in low electricity price areas+improving furnaces. Betry introduced a continuous graphitization process. Since it is in the early stages of application, we speculate that it is currently mainly used for some low-end anodes. It is estimated that after the process matures, the cost of graphitization will be reduced by about 30% compared to traditional processes.
Positive: Capacity utilization has increased, customers are mainly overseas, and volume profits are expected to rise sharply. On the one hand, production capacity is being released at an accelerated pace. We expect the company's effective equity production capacity to reach 33,59,000 tons in 22/23; on the other hand, Gaoniki has been certified by major customers Panasonic and SKI.
We expect China's Baoan to achieve revenue of 166.24.8 billion yuan this year and next year, and net profit of 1.22 billion yuan to the mother, an increase of 85% and 62% over the previous year, corresponding to PE 48 to 30 times. Using the segmental valuation method for valuation, Betry was given a 45X valuation next year, and Ma Yinglong's 20X valuation, corresponding to Baoan's total market value of 80 billion yuan, with a target price of 31 yuan/share. For the first time, coverage was given, and a “buy rating” was given.
Risk warning: Production capacity fell short of expectations, negative electrode prices fell beyond expectations, electric vehicle sales fell short of expectations, coke prices rose more than expected, estimates were subjective, and changes in the governance layer exceeded expectations