On the evening of March 29, Lithium King$GANFENGLITHIUM (01772.HK)$The annual report results for 2022 were announced. According to the announcement, Ganfeng Lithium achieved operating income of 41.82 billion yuan for the full year of 2022, an increase of 274.68% over the previous year; the net profit of the mother reached 20.503 billion yuan, an increase of 292.16% over the previous year; gross margin surged 10 percentage points to 49.5%, and net interest rate increased slightly by 0.4 percentage points to 48.92%, all of which reached record highs.

Among them, in the fourth quarter of 2022, Ganfeng Lithium's revenue reached 14.21 billion yuan, an increase of 245.89% over the previous year, an increase of 7.92% over the previous year; Guimu's net profit was 5.709 billion yuan, an increase of 107.17% over the previous year, but a decrease of 24.3% over the previous year; gross margin and net interest rate also fell to the lowest points of the whole year, falling 13.83 and 19.48 percentage points respectively to 37.03% and 38.52%.

According to Wall Street insight and insight research, the biggest differentiation between Ganfeng Lithium and most lithium salt manufacturers is that it has shifted part of its focus to midstream power, energy storage, and consumer batteries, as well as downstream lithium battery recycling business, thereby integrating lithium salt lithium batteries, and most lithium salt manufacturers have continued their old path of purchasing lithium ore and participating in lithium resources.

In the era where resources are king, lithium resource prices are in a continuous upward cycle. Ganfeng Lithium is betting that it will actually drag down the overall gross margin level. There is indeed a certain gap in gross margin of 60%-80% compared to other lithium salt manufacturers in 2022, but in 2023, when lithium resource prices quickly receded and even fell short of previous highs, business diversification became Ganfeng Lithium's unique advantage. It is expected that with its huge advantages on the lithium resource side and advanced layout in the solid-state battery field, it is expected that it will also have a place in the lithium battery industry.

1. The lithium salt business remains the core contributor to profit and revenue

Ganfeng Lithium's two major businesses are mainly lithium series products and lithium battery series products, covering almost the upstream and midstream of the lithium battery industry. The first major business is still the sale of lithium products such as lithium carbonate and lithium hydroxide, while the second largest business includes sales of three types of batteries, such as consumer batteries, energy storage batteries, and power batteries, as well as the recycling of decommissioned lithium batteries.

Although as of late March 2023, the price of lithium carbonate had already experienced a sharp correction that was close to the bottom, but looking at 2022 alone, lithium salt prices basically maintained their upward growth until mid-November, so Ganfeng Lithium's lithium series product business also fully benefited from the impact of the continuous increase in lithium salt product prices. In terms of production, sales and inventory, Ganfeng Lithium achieved production of 97,200 tons in 2022, an increase of 8.31% over the previous year; sales reached 97,400 tons, an increase of 7.32% over the previous year; and the inventory volume was 4,802 tons, a decrease of 3.21% over the previous year

However, in terms of price, Ganfeng Lithium's average sales price of lithium products in the second half of the year increased 9.68% compared to the first half of the year. As volume and price rose sharply, the annual revenue of Ganfeng Lithium's lithium product business reached 34.58 billion yuan, accounting for 82.68% of revenue, and gross margin also increased from 47.77% to 56.11%. Looking at the lithium product business alone, there is not much gap with many lithium salt manufacturers. Currently, this business is still Ganfeng Lithium's main source of profit revenue and profit.

However, it is also important to note that the overall capacity utilization rate of Ganfeng Lithium actually declined slightly compared to 2021. Among them, the capacity utilization rate of lithium hydroxide with a design capacity of 81,000 tons fell 13.39 percentage points to 74.59%, the capacity utilization rate of 2150 tons of lithium metal fell to 88.29% from the previous 96.92%, and the capacity utilization rate of only 41,000 tons of lithium carbonate increased slightly by 3.16 percentage points to 71.95%.

2. The potential of the lithium battery business is outstanding, but it has not yet been able to stand alone

Ganfeng Lithium's lithium battery series products include four directions, namely consumer batteries, TWS batteries, power/energy storage batteries, solid state batteries, and decommissioned lithium battery recycling.

Among them, consumer, TES batteries, and battery recycling have formed relatively mature production lines. The 30 million/year fully automatic polymer lithium battery production line at the Ganfeng base in Dongguan has already been put into operation, and is now expanding to 60 million units. Xinyu Ganfeng Electronics' TWS wireless Bluetooth headphone batteries have now also formed a fully automated TWS battery production line with a daily output of 400,000 TWS batteries. In addition, Ganfeng Lithium's lithium battery recycling business is already at the top of the industry. The comprehensive battery processing capacity ranks in the top three in the industry, and the total recycling capacity has reached 70,000 tons/year.

However, the progress of power, energy storage, and solid-state batteries has been slow, but it represents a more promising outlook. Shipments of more than 6 GWh have been achieved throughout 2022. Among them, the 20GWh lithium battery project at the Chongqing Ganfeng base and the new phase of the 10GWh lithium battery project in the second phase are under construction and expansion. Solid-state batteries are also gradually being developed from first-generation mixed solid-liquid electrolyte battery products to second-generation solid-state batteries using ternary cathodes, solid diaphragms, and metal-containing lithium anode materials. Under the rapid upgrading of lithium battery technology, Ganfeng Lithium is expected to cross power battery manufacturers and cooperate effectively with terminal new year car companies.

Of course, although the prospects for Ganfeng Lithium's lithium battery series products are promising and are expected to become Ganfeng Lithium's profit growth curve, looking at 2022 alone, the profitability of this business has not yet reached the point where it is alone.

In 2022, Ganfeng Lithium's lithium battery series products completed production of 195 million units, an increase of 50.72% over the previous year, sales volume of 186 million units, an increase of 56.55% over the previous year. Annual revenue reached 6.478 billion yuan, accounting for 15.49% of revenue, a decrease of 2.63 percentage points, but gross margin increased from the previous 11.98% to 17.85%. Obviously, there is still a big gap between Ganfeng Lithium's proactive downstream layout, but Ganfeng Lithium's proactive downstream layout is still worth looking forward to.

3. With the arrival of an inflection point in lithium prices, can 2023 continue to be brilliant?

Lithium prices are rising throughout 2022 until mid-November, so Ganfeng Lithium, the lithium king, can achieve both high growth in revenue and profit, but what needs to be faced now is that after the price of battery-grade lithium carbonate reached a high of 610,000 yuan/ton in mid-November 2022, it has broken 600,000 yuan/ton, 500,000 yuan/ton, and 400,000 yuan/ton in a row and reached the 300,000 yuan/ton range in just 4 months.

Moreover, judging from the lithium carbonate (electric carbon) spot contract price on the Wuxi stainless steel platform, the spot forward contract price in August has already fallen below 200,000 yuan/ton. It can be seen that the downward trend in lithium prices is unlikely to stop at 300,000 yuan/ton.

According to Wall Street news and insight research, in 2023, as the growth rate of terminal NEV sales decelerated (the year-on-year growth rate fell to about 20% in January-February) and the sharp correction in lithium prices, as a supplier of lithium salt, Ganfeng Lithium's profitability will definitely weaken compared to 2022, but it won't completely collapse in profits.

On the one hand, during the previous period when lithium salt prices were high, most downstream manufacturers signed long-term cooperation contracts with lithium salt manufacturers. While ensuring stable supply channels, they were also able to get relatively favorable prices. However, when the spot price of lithium carbonate fell sharply in 2023, in fact, the long-term agreement prices signed between Ganfeng Lithium and downstream companies did not fluctuate much, so the extent to which Ganfeng Lithium's profits were affected was not as serious as it was.

On the other hand, whether lithium salt manufacturers can complete their own supply of lithium resource raw materials to a large extent is critical. For the time being, there are no manufacturers with their own mines or salt lakes, and raw material costs are still high. Faced with a rapid correction in lithium salt prices, they will obviously be the first to fall into trouble.

However, Ganfeng Lithium has many channels for supplying high-quality lithium resources around the world, including Mount Marion (reimburses 49% of the total production of lithium concentrate per year), Finniss (reimburses at least 75,000 tons of lithium concentrate per year), Goulamina (reimburses 50% of annual output), Pilgangbara Pilgangoora (phase I provides no more than 160,000 tons of lithium concentrate per year; after the second phase is put into operation, it provides no more than 150,000 tons of lithium concentrate per year), Cauchari-Olaroz (underwriting of 76% production of the first phase of the project), Cauchari-Olaroz (underwriting of 76% of the production volume of the first phase of the project) Rights) and Mariana (underwritten according to the project's equity ratio), etc., so cost pressure can be minimized.

Finally, the raw materials of Ganfeng Lithium are mainly lithium concentrate. Compared with the high preparation cost of lithium mica (about 100,000 yuan/ton), lithium concentrate and brine extraction is quite cheap. The cost is around 30,000 to 70,000 yuan/ton, so even if the price of lithium carbonate falls to the range of 20-250,000 yuan/ton in the second half of 2022, as expected by the market, Ganfeng Lithium can still have good profit margins.