Ganfeng’s Strong Q4 As Guided

Narrow-moat Ganfeng’s 002460 strong fourth-quarter net profit growth of 107% year over year was in line with its preliminary announcement. Significant profit growth was mainly due to record lithium prices, given robust demand for lithium compounds from new energy vehicle production. However, with year-to-date average lithium prices plunging more than 20% from a record fourth quarter last year, we reduce our fair value estimate to HKD 56 (CNY 48.50) from HKD 75 (CNY 66), which implies 2023 P/E ratio of 5.8 times. At the current price, H-shares are trading at 3-star territory, fairly valued, in our view.

Fourth-quarter revenue grew 2.5 times year over year to CNY 14.2 billion. The robust growth is underpinned by the strong rise in demand for lithium products, which led lithium prices to record levels. During the quarter, average prices of battery-grade lithium carbonate and lithium hydroxide in China were up about 159%-184% from a year ago and stayed at above CNY 500,000 per metric ton levels. As a result, Ganfeng’s fourth-quarter net profit came in at CNY 5.7 billion, up 107% year over year. Excluding the CNY 1.1 billion in equity income, CNY 195 million fair value and impairment loss, and CNY 37 million in foreign exchange gain items, core net profit grew 2 times from a year ago.

Despite the solid results, we cut our 2023-24 net profit forecasts by 7% and 10%, respectively, to factor in lower lithium spot prices in the first three months and lower margin assumptions. Battery grade lithium carbonate prices in China dropped to CNY 260,000 this week from the peak of CNY 570,000 in November last year. We believe the year-to-date price decline was mainly due to soft demand during the low season for new energy vehicle sales. While we anticipate lithium demand from NEV battery production to remain strong, we expect new greenfield supplies to start production and ramp up yield from second-half 2023 to 2024, which should ease the lithium supply deficit witnessed last year.