Ganfeng Earnings: Margins Remain Under Significant Pressure Due to a Declining Lithium Price

Narrow-moat Ganfeng’s 002460 third-quarter revenue fell 43% year over year leading to a net profit decline of 98%. The first nine months’ revenue and net profit accounted for 66% and 49% of our full-year forecast, respectively. The profit miss was mainly due to a decline in lithium product sales and a drop in the gross margin. With third-quarter average lithium prices plunging more than 50% from the prior-year period, the gross margin contracted to only single-digit levels from 51% a year ago.

In view of the weaker-than-expected earnings, we cut our 2023-25 revenue forecast by 9%-14% to factor in lower lithium spot prices and Ganfeng’s declining realized lithium components price. With lower margin assumptions due to the lithium price drop, our 2023-25 net profit forecasts are reduced by 26%-36%.

We lower our fair value estimate to HKD 33.00 (CNY 29.30) from HKD 46.00 (CNY 41.00), which implies a 2024 price/earnings ratio of 7.5 times. At the current price, the H-shares are trading in 3-star territory, fairly valued in our view.

We believe investor interest in lithium producers may be muted in the near term until lithium prices look to be stabilizing. The battery-grade lithium carbonate price in China further dropped to below the CNY 180,000 level last week from the peak of CNY 570,000 in November last year.

With declining lithium prices offsetting battery demand and capacity expansion at the Cauchari-Olaroz brine project, we forecast a negative 4% revenue CAGR in 2022-25 for Ganfeng. Together with an average 20% drop in average selling price for compounds and declining gross margins compared with last year, we estimate net profit to contract by a three-year CAGR of 20% to CNY 10.4 billion in 2025.