3Q19 earnings fell QoQ and in line with preannouncement
3Q19 revenue was Rmb1.39bn (+10% YoY and -7%QoQ) andattributable net profit was Rmb33.38mn (-86% YoY and -22% QoQ), inline with preannouncement. The YoY and QoQ earnings decline isattributable to lower lithium prices and Pilbara’s share-price decline.
Comments: ASP of domestic industrial lithium carbonate wasRmb56.3k/t in 3Q19 (-32% YoY and -14% QoQ). Gross profit declined30% or Rmb127mn QoQ, and dropped 17% or Rmb59mn YoY. Grossmargin fell 7ppt QoQ and 6.8ppt YoY. 3Q19 loss from fair valuechange and investment totaled Rmb144mn, up Rmb143mn YoY andlargely flat QoQ due to Rmb164mn of fair value loss from a drop inPilbara’s share price. 3Q19 G&A expenses fell 78% or Rmb118mnQoQ. 1–3Q19 operating cash flow rose 104% YoY to Rmb228mn.
Trends to watch
Company guides 55–65% YoY decline in 2019 attributable net profitto Rmb428–551mn, implying 4Q19 at Rmb99–221mn (up 197–563%QoQ and between -15% and +90% YoY).
New capacity gradually coming on line. The firm expects its20kt/year lithium hydroxide project and 17.5kt/year lithiumcarbonate project to reach designed capacity in 2019. Its 50kt/yearlithium hydroxide project is scheduled to begin operations in 2020.
Lithium prices approaching bottom. Lithium carbonate price isRmb49k/t, close to our estimated bottom of Rmb45k/t. We expect arecovery in electric vehicle sales volume and 5G handsets to boostlithium consumption in 2020.
Financials and valuation
Given our change in assumption on prices, we cut A-share 2019 and2020 earnings forecasts by 25% and 21% to Rmb483mn andRmb796mn, and cut H-share forecasts by 25% and 22% toRmb488mn and Rmb792mn.
A-shares and H-shares are trading at 35.4x and 20.7x 2020e P/E.Maintain OUTPERFORM on A-shares and H-shares. Lower A-shareTP by 10.7% to Rmb25 (40.6x 2020e P/E with 14.7% upside) andmaintain H-share TP at HK$16 (23.4x 2020e P/E with 12.7% upside)given narrowing price spread between A- and H-share.
Risks: AFV sales missing expectations; lithium prices falling sharply.