Tianqi Earnings: Strong Upstream Mining Growth and Margin Offset Declining Compound Segment

Narrow-moat Tianqi’s 002466 second-quarter revenue grew 48% year over year to CNY 13.4 billion on a resilient lithium mining segment with revenue growth and margin expansion. However, due to the significant lithium price fall, the compound segment saw drops in both product selling price and revenue. In the second quarter, the average prices of battery-grade lithium carbonate and lithium hydroxide in China slid 46% and 43% year on year, respectively.

Helped by margin expansion at its mining business, gross margin gained 1.2 percentage points in the second quarter from the prior-year period to 84.8%. In the first half, the mining segment’s gross margin expanded 15 percentage points from a year ago, while the lithium compounds business lost 9 percentage points. As Tianqi effectively owns about 26% equity interest in the Greenbush mine, minority interest surged five times in the second quarter from a year ago, because of strong profit at the company’s mining segment. Coupled with a 78% decline in equity income from the 23.77% interest in Sociedad Quimica Y Minera De Chile SA, or SQM, second-quarter net profit came in at CNY 1.6 billion, down 77% year on year.

To factor in higher lithium concentrate prices and mining capacity utilization, we raise our 2023-25 revenue forecasts by 15%-21%. However, offset by lower margin assumptions for compound production, lower equity income from SQM, and higher minority interest deduction, we reduce our 2023-25 net profit estimates by 12%-21%.

We lower our fair value estimate to HKD 55.00 (CNY 48.50) from HKD 66.00 (CNY 58.00), which implies a 2024 price/earnings ratio of 5.7 times. At current share prices, 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 around the CNY 220,000 level this week from the peak of CNY 570,000 in November last year.