Event: On August 25, the company released its 2022 semi-annual report. In the first half of 2022, the company achieved revenue of 1,221 million yuan, an increase of 439% over the previous year, net profit of 475 million yuan, an increase of 1018% over the previous year, after deducting non-net profit of 4.7 billion yuan, an increase of 992% over the previous year. The final results are in the median performance forecast.

Analysis and judgment: The best semi-annual performance in history, a sharp rise in volume and price boosts performance growth. Looking at a single quarter, the company achieved revenue of 868 million yuan in 2022 Q2, an increase of 861% over the previous year, an increase of 146% over the previous year; Guimu's net profit was 343 million yuan, an increase of 1430% over the previous year, an increase of 160% over the previous quarter; after deducting non-net profit of 344 million yuan, an increase of 1414% over the previous year, an increase of 173% over the previous year. Reasons for changes in 22Q2 performance: In the first half of the year, the company expects to achieve sales of 6,840.6 tons of lithium concentrate, 198.27 tons of industrial-grade lithium carbonate, and 64,000 tons of chromite, and actively cultivate new strategic customers such as Ningde Shidai and Shengxin Lithium Energy, and increase the signing of long-term agreements. 2) Price: Lithium salt and lithium concentrate prices rose across the board in the first half of 2022. The price of lithium carbonate rose from 270,000 yuan/ton at the beginning of the year to 475,500 yuan/ton, and the average price of lithium carbonate rose to 447,000 yuan/ton in the first half of the year; the price of lithium concentrate rose from 2505 US dollars/ton at the beginning of the year to 4,940 US dollars/ton, and the average price of lithium concentrate rose to 3,922 US dollars/ton in the first half of the year. The average price of lithium salt rose month-on-month in Q2 2022. According to Asian Metal Network data, the average price of industrial grade lithium carbonate Q2 including tax was 445,700 yuan/ton. Compared with 22Q1, up 10.6% month-on-month from 22Q1, the company's lithium concentrate products basically rose at the same time as lithium salt prices. 3) Revenue and gross profit: The lithium sector accounts for 87.2% of revenue and 86.6% of gross profit.

Q2 Most of the company's gross revenue comes from the lithium salt sector. The gross margin of the company's lithium sector reached 94.5% in the first half of 2022, fully demonstrating the company's high-quality resource endowments and low cost advantages of Zabye Salt Lake.

A new energy supply contract was signed to further remove the obstacles to development in Zabouye. On July 22, the company announced that Baowu Qingneng won the bid for the Zabye Salt Lake Green Comprehensive Development Project using 10,000 tons of battery-grade lithium carbonate for energy supply. Baowu Qingneng is a holding subsidiary of Baowu Group, the actual controller of the company, and forms related parties under the same controlling enterprise. The bid price was: power supply price 0.998 yuan/kW; steam supply price 598 yuan/ton. We believe that the re-signing of the energy supply contract between the company and related parties this time is expected to accelerate the construction progress of the Zabye salt lake and guarantee the smooth completion of the second phase of the Zabouye project next year. The actual postponement of the company's project will generally be manageable.

World-class salt lakes have ushered in accelerated development, and the company's performance and future growth can be expected. (1) The company's sales model is to produce lithium products at the end of each year and sell them the following year. According to the 2021 report, the company has an inventory of 11298.69 tons of lithium products, and there are still a large number of lithium concentrate products available for sale in the second half of the year. It is expected that the average sales price in the second half of the year will increase month-on-month, and the company's performance can be expected. (2) The company expects to form a lithium salt scale of 3-5 million tons in 2025. The strategic goal is for Zabouye to produce 5,000 tons of lithium carbonate in 2022, no less than 10,000 tons in 2023, 17,000 tons in 2024, and no less than 30,000 tons in 2025-2026. The company can be expected to grow in the future.

Investment suggestions: High-quality chromite resources contribute to stable gross profit, and the Zabouye Phase II salt lake lithium extraction project opens up room for future growth. We expect the company's net profit to the mother for 2022-2024 to be 1,139 million yuan, 1,584 million yuan, and 2,550 million yuan. Corresponding to the closing price of August 29, 2022, PE in 2022-2024 will be 24, 17, 11 times in that order, maintaining the “recommended” rating.

Risk warning: terminal demand fell short of expectations; lithium prices fell sharply; project progress fell short of expectations.