Ganfeng Earnings: Significant Margin Contraction Amid Declining Lithium Prices; Shares Fairly Valued

Narrow-moat Ganfeng’s 002460 second-quarter results reflected weak selling prices, with revenue declining 4.1% year over year and 7.7% quarter on quarter to CNY 8.7 billion. According to management, the sales volume of lithium components in the first half remained flattish compared with last year, which indicates the top-line drop was mainly attributable to the decline in lithium product prices from record levels last year amid soft demand. In the second quarter, the average prices of battery-grade lithium carbonate and lithium hydroxide in China were down 36% and 39% quarter on quarter, respectively.

As a result, second-quarter gross margin contracted significantly by 50.3 percentage points year over year to 6.6% and net profit came in at CNY 3.5 billion, down 7% year over year. Excluding the fair value gain and impairment loss, net profit is tracking to decline by 60% compared with the prior-year period. First-half revenue and net profit accounted for 41% and 34% of our original full-year forecasts, respectively.

To factor in lower lithium spot prices and Ganfeng’s declining realized lithium components prices in the first half, we cut our 2023-25 revenue forecasts by 11%-12%. Meanwhile, our lithium compound capacity and production volume estimates are unchanged. With lower margin assumptions due to the lithium price drop, our 2023-25 net profit estimates are reduced by 17%-28%. We lower our fair value estimate to HKD 46.00 (CNY 41.00) from HKD 56.00 (CNY 48.50), which implies a 2024 P/E ratio of 6.8 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 around the CNY 220,000 level this week from the peak of CNY 570,000 in November last year.