Explosive performance triggered a letter from regulators to inquire. The secondary market opened low, and stock prices fell by nearly 20%. On April 24, Tianqi Lithium (09696) ushered in the “darkest hour.”

The Zhitong Finance App learned that on the evening of April 23, Tianqi Lithium released a performance forecast for the first quarter of this year: net loss for the first quarter of this year is expected to be 36.43 billion yuan, compared with net profit of 4.875 billion yuan for the same period last year, changing from profit to loss year-on-year. Tianqi Lithium's sudden large advance loss attracted the attention of regulators. Soon after, Tianqi Lithium received a letter of concern from the Shenzhen Stock Exchange requesting it to quantitatively analyze the reasons for the sharp increase in losses and explain whether there is a risk of continuing losses.

Tianqi Lithium said in its announcement that its performance declined sharply due to fluctuations in the lithium product market and the impact of both factors linked to the decline in the performance of its affiliate SQM.

Despite getting vaccinated, the performance of the secondary market was still bleak the next day. The Zhitong Finance App observed that on April 24, Tianqi Lithium's A share price collapsed and came to a standstill. Hong Kong stocks once fell 19.86% in the intraday period. From the beginning of the year to today, the cumulative decline in Qi Lithium H shares has reached 33.95%. Also, driven by Tianqi Lithium, the lithium battery sector in AH and AH also showed a simultaneous decline on the same day.

The “black swan” may be the direct reason for the explosion of performance

Although Tianqi Lithium mentioned in the profit warning that there were two factors that caused the pre-loss in performance, the direct cause of the collapse in its stock price on the 24th was not fluctuations in the market price of lithium products, but was involved in the decline in the performance of the associated company SQM.

Judging from the current price trend of lithium carbonate, the price of battery-grade lithium carbonate in 2023 fell from over 500,000 yuan/ton at the beginning of the year to around 100,000 yuan/ton at the end of the year, a drop of more than 80%. The futures price of lithium carbonate on April 23 this year was 107,500 yuan/ton, indicating that the trend of low lithium prices in 2023 has continued. This is also the main reason why many companies in the lithium products industry lost money.

However, according to data previously disclosed by Tianqi Lithium, the company's current average cost of lithium salt is only about 61,000 yuan/ton, which has an outstanding cost advantage. Precisely because of this, in the face of the sharp drop in lithium salt prices, Tianqi Lithium lost money in a single quarter in the fourth quarter of last year, but the net loss was only 800 million yuan. However, the current price of industrial-grade lithium carbonate has clearly not broken through its cost reserve price, so it is difficult to cause it to lose more than 3 billion yuan in profits.

Compared to the lithium product market fluctuations and losses that the market already had psychological expectations, the “black swan” brought about by “stock trading failure” at SQM is more like the main reason for the explosion in Tianqi Lithium's performance.

According to the Tianqi Lithium announcement, one of the reasons for the loss was “the first-quarter results of the company's important affiliate SQM are expected to drop sharply year-on-year. Since tax rulings may reduce SQM's net profit for the first quarter of 2024 by about 1.1 billion US dollars, the investment income confirmed by the company in this reporting period fell sharply compared to the same period last year.”

According to the Zhitong Finance App, due to factors such as resource endowments and lithium extraction routes, the production costs of lithium salt companies vary greatly. According to relevant data disclosed by the 12 sample A-share companies in their 2022 annual reports, the average production cost of lithium salt was 124,400 yuan/ton.

However, as the Chilean SQM company in which Tianqi Lithium is a shareholder, it operates the Atacama project, which has the largest lithium reserves in the world. According to Fastmarket's data for the fourth quarter of 2023, Atacama Salt Lake is the project with the highest production of lithium salt lakes in the world in 2023, accounting for 44% of the total global salt lake supply. Under the influence of resource endowments, SQM became the company with the lowest lithium extraction cost in salt lakes in the world. The cost of lithium extraction was about 3,000 US dollars/LCE ton, equivalent to 22,000 yuan.

In 2018, Tianqi Lithium spent 4 billion US dollars to become the second largest shareholder of SQM. According to Tianqi Lithium's 2023 annual report, it currently holds 22.16% of SQM's shares and uses equity method accounting to confirm investment income.

It is worth mentioning that during the period of sharp rise in lithium prices in previous years, Tianqi Lithium's profit growth was inseparable from SQM's investment income contribution. The Zhitong Finance App learned that in 2021 and 2022, SQM's performance increased dramatically, bringing Tianqi Lithium's investment income of 760 million yuan and 5.641 billion yuan respectively. This has also led to a sharp increase in Tianqi Lithium's performance. In 2021 and 2022, Tianqi Lithium's revenue and net profit both achieved 3-digit growth. Among them, in 2022, Tianqi Lithium's revenue and net profit to mother surged 427.82% and 1060.47%, respectively.

However, in April of this year, a court in Santiago, Chile suddenly announced a ruling on SQM's tax litigation for the 2017 and 2018 tax years. According to the latest ruling, SQM needed to re-examine the accounting treatment of all tax dispute amounts, and expected to reduce net profit by about 1.1 billion US dollars in the first quarter of 2024. Compared to SQM's net profit of 750 million US dollars for the same period last year, the above tax accounting treatment will undoubtedly cause it to lose money in the first quarter of this year.

Based on Tianqi Lithium's current shareholding, SQM's net profit for the first quarter of this year decreased by 1.1 billion US dollars, which may have an impact on Tianqi Lithium's revenue of 244 million US dollars, or about RMB 1,768 billion.

The price of lithium is expected to stabilize; can it be a lifesaver?

As a typical cyclical product, lithium price fluctuations are closely related to supply and demand, volume and price. In particular, changes in demand in the downstream power battery and new energy vehicle industry have a great impact on its production and sales.

According to the Zhitong Finance App, in the first quarter of this year, China's cumulative power battery load was 85.2 GWh, a cumulative year-on-year increase of 29.4%; in terms of battery exports, from January to March this year, China's total exports of power and other batteries reached 28.9 GWh, a cumulative year-on-year decrease of 2.2%. In contrast, the total cumulative domestic power and other battery output was 184.6 GWh, a cumulative year-on-year increase of 33.5%.

In other words, in the first quarter of this year, domestic power battery stocks were clearly accumulated. The reason for this phenomenon is that the downstream NEV market was in a low season during the same period, and sales were not in other quarters.

The data shows that in the first quarter of this year, China's NEV production and sales data showed a seasonal decline. According to data from the China Association of Automobile Manufacturers, from January to March 2024, production and sales of new energy vehicles completed 2.115 million units and 2.09 million units respectively, up 28.2% and 31.8% year on year, respectively, and down 34.7% and 34.2%, respectively. However, in March of this year, due to the rapid recovery of upstream and downstream production and sales in the industrial chain, domestic NEV production and sales data increased significantly from month to month.

It is easy to see that the current demand side of lithium products is showing signs of warming in the latter half of the first quarter of this year, while on the supply side, the price increase effects brought about by increased domestic production and slowing imports are also gradually being released.

According to SMM statistics, from January to March 2024, China's cumulative output of lithium carbonate was 116,800 tons, an increase of 20% over the previous year; the cumulative output of lithium hydroxide (mainly used to process ternary materials with high nickel) was 67,500 tons, down 2.8% year on year. From January to March of this year, the ratio between China's monthly production of lithium carbonate (10,000 tons) and the monthly output of cathode materials (10,000 tons) continued to decline, indicating that the production of lithium carbonate raw materials was relatively insufficient, and stocks of lithium carbonate raw materials were reduced.

On the other hand, in January-February of this year, China imported 22,000 tons of lithium carbonate, an increase of only 2.1% over the previous year. Of this, 15,000 tons were imported from Chile, a year-on-year decrease of 20.4%.

In other words, after the first quarter of this year, the driving force of lithium prices on both sides of supply and demand increased. Referring to the seasonal production and sales patterns of new energy vehicles in previous years, the middle and late second quarter of this year may usher in a wave of demand-side increases. If demand exceeds expectations, it may drive lithium prices to rise upward, and this is expected to be a “lifesaver” to save Tianqi Lithium's subsequent performance.