Tianqi’s Strong Q4 as Guided

Narrow-moat Tianqi 002466 reported strong fourth-quarter net profit growth of 4 times year over year, around the midpoint of the company’s preliminary announcement. Significant profit growth was mainly underpinned by record lithium prices due to robust demand for lithium compounds from new energy vehicle demand. 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 66 (CNY 58) from HKD 102 (CNY 92), which implies a 2023 price/earnings ratio of 5 times. At the current price, H-shares are trading in 4-star territory, but investor interest in Tianqi may be muted until lithium prices look to be stabilizing.

Tianqi’s fourth-quarter revenue grew significantly by 3 times year over year to CNY 15.8 billion. The robust growth is mainly supported by strong growth 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 above CNY 500,000 per metric ton levels. Coupled with CNY 1.9 billion equity income from the 23.77% interest in Sociedad Quimica Y Minera De Chile SA, Tianqi’s fourth-quarter net profit came in at CNY 8.1 billion, up 4 times year over year.

Despite the solid results, we cut our 2023-24 net profit forecasts by 34% and 38%, respectively, to factor in lower lithium prices in the first quarter and lower margin assumptions. The battery grade lithium carbonate price in China dropped to CNY 245,000 this week from the peak of CNY 570,000 in November last year. We believe the price decline was mainly due to soft demand during the low season for new energy vehicle sales. While we anticipate demand from lithium battery production to remain strong, we expect new greenfield supplies to start production and ramp up yield in second-half 2023 to 2024, which should ease the lithium supply deficit witnessed last year.