The decline in lithium prices and tax litigation dragged down the company's Q1 results. The company's Q1 revenue in 2024 was 2.59 billion yuan, a decrease of 77.4%; net profit attributable to mother was a loss of 3.90 billion yuan. We believe that the company's Q1 losses were mainly affected by the drop in lithium prices and the SQM tax lawsuit ruling.

Lithium production reached a record high, demonstrating Greenbush's resource endowment. The company also lays out high-quality hard rock lithium ore and salt lake lithium ore resources, using Greenbush spodumene ore and Sichuan Yajiangzola mine as resource bases, and further expanded the layout of high-quality salt lake lithium resources at home and abroad by investing in SQM and Zabuye in Shigatse. The company is 100% self-sufficient in lithium resources. By the end of 2023, the company's equity in lithium resources was about 17.77 million tons. In 2023, the company produced 1.52 million tons of lithium concentrate, an increase of 12.9%; sold 845,000 tons of lithium concentrate, an increase of 11.3%; and stocks of lithium concentrate were 409,000 tons, an increase of 38.3%.

We believe that the increase in the company's lithium concentrate production reflects the excellent resource endowments and effective technical upgrading of the Greenbush lithium mine. However, there was a time cycle mismatch between the higher-stored lithium concentrate and the pre-2024 lithium concentrate and lithium salt pricing mechanism, causing the company to be under operating pressure to absorb high-priced lithium ore in the first half of '24.

The pricing mechanism for lithium ore was adjusted, and the profitability of lithium salt was restored. The company has built five lithium compound production bases at home and abroad, and the annual production capacity of lithium compounds has reached 88,800 tons. The company plans to build another 30,000 tons and 24,000 tons of lithium hydroxide projects in Zhangjiagang and Quinana, bringing the company's lithium salt production capacity to 143,800 tons.

In 2023, the company's output was 50,714 tons, up 7.3%; sales volume was 56,654 tons, down 2.5%.

By the end of '23, the company's lithium salt inventory was 13,186 tons, an increase of 350% over the same period. We believe that the company's supply of high-quality lithium resources is the main source of the company's lithium salt environmental competitiveness. With the adjustment of the pricing mechanism between the company and Greenbush lithium concentrate, the profitability of the company's lithium salt chain is expected to recover.

SQM's tax litigation has had an impact on performance. According to Bloomberg, the results of the company's affiliate SQM in the first quarter of 2024 will drop sharply year over year. Meanwhile, according to SQM, it is re-examining the accounting treatment of all tax dispute amounts based on the latest tax litigation rulings and is expected to reduce its net profit for the first quarter of 2024 by approximately $1.1 billion. Considering the company's shareholding ratio, the impact on the company's performance was US$240 million.

Profit forecasting and ratings. The company is the core target of the entire lithium industry chain. It owns Tellison, the world's highest quality lithium mine. It controls the world's top salt lake resources through participation in SQM, etc., and the cost of mining and lithium salt products is in a leading position. We expect the company's 2024-2026 EPS to be -0.53, 1.83 and 2.63 yuan/share, respectively, with net assets of 30.84, 32.67 and 35.30 yuan per share. Due to the impact of the company's 24Q1 SQM tax dispute, etc., the impact on the company's net profit in '24 was quite obvious, so we chose PB as the valuation method. Referring to the valuation level of comparable companies, a PB valuation of 1.4-1.6 times 2024 was given, corresponding to a reasonable value range of 43.18-49.34 yuan, giving a “superior to the market” rating.

Risk warning. The price of lithium salt fell, and the construction and climbing progress of new lithium salt projects such as Quinana fell short of expectations.