Our Positive Views on Tianqi, Ganfeng Unchanged

Stock prices of the H-shares of Chinese lithium producers Ganfeng Lithium 002460 and Tianqi Lithium 002466 fell 23% and 21%, respectively, over the past month on concerns of prolonged lithium prices decline. The battery grade lithium carbonate price in China dropped to the CNY 380,000 level on Monday from the peak of CNY 570,000 in November last year. This comes amid media reports (as first reported by 36Kr on Feb. 17) that battery producer Contemporary Amperex Technology, or CATL, plans to offer four of its customers a battery price that fixes lithium carbonate prices at CNY 200,000 per metric ton, roughly half that of current spot prices.

The market fears a prolonged lithium price drop beyond current levels, which may lead to a depressed earnings outlook for lithium producers under our coverage. Investors may also think CATL’s purported plan likely indicates much lower lithium prices for the second half of the year. However, we believe the decline of the lithium carbonate price in the first two months this year was mainly a result of temporary soft demand during the low season for new energy vehicle, or NEV, sales. In addition, we think CATL would only be offering cheaper batteries to a limited number of automakers and this would result in no change to the broader lithium supply/demand balance that drives lithium prices.

Accordingly, our U.S. analyst Seth Goldstein maintains our lithium price forecast. The market concern on near-term lithium prices is too pessimistic, in our view. As we anticipate lithium demand for NEV purposes to remain strong and grow throughout 2023, we expect spot prices to eventually rise. We maintain our valuations for Ganfeng and Tianqi. The H-shares of both lithium producers are trading below our fair value estimates. At current prices, H-shares of Tianqi trade in 5-star territory and Ganfeng’s, in 4-star territory.