Tianqi Earnings: Strong Top-Line Growth With Resilient Margin Despite Lithium Price Decline

Narrow-moat Tianqi 002466 reported first-quarter net profit growth of 46% year over year to CNY 4.9 billion, accounting for 26% of our full-year estimate. Despite first-quarter average lithium prices plunging more than 20% from a record fourth quarter last year, gross margin still managed to gain 5 percentage points from last quarter to 89.8%, demonstrating the resilient margin profile of its upstream lithium mining business and the value of its self-sufficiency in lithium resource supply.

We maintain our fair value estimate at HKD 66 (CNY 58), which implies a 2023 price/earnings ratio of 5 times. At the current price, the H-shares are trading in 4-star territory but investor interest is likely to be muted in the near term until lithium prices stabilize.

First-quarter revenue more than doubled from last year to CNY 11.4 billion but fell 28% compared with last quarter. The sequential decline was likely due to soft demand for lithium products, which led to a significant price drop from last quarter. During the quarter, average prices of battery grade lithium carbonate and lithium hydroxide were down 28% and 21% from last quarter, respectively. Coupled with CNY 1.4 billion equity income from the 23.77% interest in Sociedad Quimica Y Minera De Chile SA, net profit came in at CNY 4.9 billion, up 46% from a year ago but down 40% sequentially.

Battery grade lithium carbonate prices in China dropped to below the CNY 200,000 level in April 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 for NEV batteries to remain strong, we expect new greenfield supply to start production and ramp up yield in second-half 2023 to 2024, which would ease the lithium supply deficit witnessed last year. However, with higher-cost operations entering the market, this would further enhance leading producers’ cost advantage in the long term.