Tianqi Earnings: Profit Missed on Weak Lithium Compound Business Amid Price Decline

Narrow-moat Tianqi’s 002466 third-quarter net profit fell 71% year over year. While year-to-September revenue is in line with our forecast, net profit only makes up 54% of our full-year forecast. The profit miss was mainly due to a decline in lithium product sales and drop in equity income. Despite plunging lithium prices in the quarter, gross margin still managed to stay at around 85%, demonstrating the resilient margin profile of its upstream lithium mining business.

In view of the weaker-than-expected earnings, we cut our 2023-25 net profit forecasts by 16%-27% to factor in higher minority interest related to the lithium mining business and lower equity income contribution. We lower our fair value estimate to HKD 51.00 (CNY 45.40) from HKD 55.00 (CNY 48.50), which implies a 2024 price/earnings ratio of 6.5 times. At the current price, the H-shares are trading in 4-star territory, but 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 this week from the peak of CNY 570,000 in November last year.

Third-quarter revenue slipped 17.1% year over year to CNY 8.6 billion. The decline was mainly attributable to the weak sales volume and selling price drop of lithium compounds due to a significant lithium price drop. In the third quarter, the average prices of battery-grade lithium carbonate and lithium hydroxide in China dropped 50% and 52% year on year, respectively. As Tianqi effectively owns about 26% equity interest in the Greenbushes mine, minority interest expanded 1.2 times in the quarter from a year ago because of surging profit at the company’s mining segment. Coupled with a 28.20% decline in equity income from the 23.77% interest in Sociedad Quimica Y Minera De Chile SA, or SQM, third-quarter net profit came in at CNY 1.6 billion, down 70.9% from a year ago.