3Q19 earnings preannounced to decline YoY
Ganfeng preannounced its attributable net profit may fall 64–73%YoY to Rmb300–400mn in 1–3Q19, and reach Rmb4–104mn in 3Q19(down 61–98% YoY; between -90% and +142% QoQ). We attributethe YoY earnings decline to fair value loss and a drop in lithium prices.
　　Trends to watch
　　Falling Pilbara prices lead to fair value loss. 3Q19’s fair value lossreached Rmb175mn, including Rmb164mn from falling share pricesat Pilbara. As of end-3Q19, Pilbara’s share price had declined 41%from end-1H19 to AU$0.32/sh and its market-cap had fallen 37% toAU$632mn. Currently, Ganfeng holds a 7.7% equity stake in Pilbara. Excluding Pilbara, we estimate Ganfeng’s 3Q19 attributable net profitwas Rmb127–227mn (down 16–53% YoY and up 196-428% QoQ).
　　Lithium prices fall. 3Q19 ASP of domestic lithium carbonate wasRmb56.3k/t (-32% YoY and -14% QoQ), and ASP of imported lithiumconcentrate was US$596/t (-28% YoY and -8% QoQ). Falling ore pricesshould mitigate cost pressure.
　　New capacity comes online. Ganfeng’s lithium hydroxide project inXinyu (20kt/yr) and lithium carbonate project in Ningdu (17.5kt/yr)began operation in 2018, and may reach designed capacity in 2019. We think expanding capacity should offset earnings headwinds fromfalling lithium prices.
　　Lithium prices approach bottom. We see cost support for lithiumconcentrate at US$500/t and for lithium carbonate at Rmb45k/t, asabout one-third of mines would be loss-making at such prices. Wethink lithium prices are approaching bottom. We expect peak seasonin 4Q19 to support lithium prices, and believe lithium demand mayrecover in 2020.
　　Valuation and recommendation
　　We cut Ganfeng A-share and H-share’s 2019 EPS forecast 18% and17% to Rmb0.49 and Rmb0.50, and maintain a 2020 forecast atRmb0.78 and Rmb0.79. Ganfeng A-share and H-share are trading at29.2x and 16.5x 2020e P/E. Maintain OUTPERFORM on GanfengA-share and H-share with target prices at Rmb28 (35.7x 2020e P/Ewith 22.4% upside) and HK$16 (18.2x 2020e P/E with 10.5% upside).
　　Risks
　　Disappointing sales of alternative-fuel vehicles; falling lithium prices.