Materials 5 May 2020

Ganfeng Lithium (1772 HK)

Target price: HKD29.00 (from HKD26.00) Share price (5 May): HKD25.95 | Up/downside: +11.8%

Upgrade on NEV policy and Tesla’s expansion in China Dennis Ip, CFA (852) 2848 4068  Domestic NEV demand supported by policies and Tesla’s expansion [email protected]  Strong 2Q20 guidance with 2Q20 net profit up 2.0-3.4x YoY Anna Lu, CFA (852) 2848 4465  Upgrading to Outperform (2) from Hold (3); lifting TP to HKD29 [email protected]

What's new: Ganfeng’s share price has risen by only 4% since the start of Forecast revisions (%) April, but we see catalysts emerging, including: 1) supportive NEV policies, Year to 31 Dec 20E 21E 22E and 2) Tesla’s development in China, which will likely support recovery of Revenue change - 8.0 24.7 Net profit change - 11.2 30.7 its share price despite its weak 1Q20 results (see our memo). We upgrade Core EPS (FD) change - 11.2 30.7 it to Outperform (2) with a TP of HKD29 on 3.5x 12-month forward PBR. Source: Daiwa forecasts

What's the impact: Supportive NEV policy and Tesla’s expansion. Share price performance

We believe the enactment of a series of positive NEV policies (see P.2) will (HKD) (%) reinforce mainland investors’ interest in EV-related names, and we look for 37 295 more NEV policies (which fit “New Infrastructure” theme of Chinese 29 234 Government, also see P.2) to come during Liang-hui. We also see lithium 21 173 13 111 demand in China to be stabilised after the series of encouraging actions 5 50 taken by Tesla (TSLA US): 1) ’s meeting with May-19 Aug-19 Nov-19 Feb-20

Secretary (see shanghai.gov), 2) ASP cut of Model 3 in China (see Ganfeng Li (LHS) Relative to HSI (RHS)

Reuters), 3) 33% production ramp-up of (see China Daily), and 4) plan for sales of China-made Model Y following doubling of the size 12-month range 9.05-36.20 of Giga Shanghai (see Electrek). With A-H valuation gap widening to 108% Market cap (USDbn) 4.33 (2020 average: 95%), we expect investors to opt for Ganfeng-H as seen by 3m avg daily turnover (USDm) 26.48 recovery of Southbound on 29 April to 52.01%, from 51.95% on 24 April. Shares outstanding (m) 1,293 Major shareholder Li Liangbin (20.5%)

Ganfeng sees a turnaround in 2Q20. Ganfeng guides for 2Q20 net profit Financial summary (CNY) of CNY132-192m, up 202-342% YoY or 39-102% QoQ (although it still Year to 31 Dec 20E 21E 22E projects recurring net profit to be down 16-43% YoY). Our check confirmed Revenue (m) 5,444 7,426 9,507 the forecast was based on: 1) fair value loss of CNY88m in 1Q20 mainly on Operating profit (m) 844 2,186 3,161 Net profit (m) 567 1,568 2,273 a 39% fall in share price of Pilbara Minerals (PLS AU), and 2) no fair value Core EPS (fully-diluted) 0.439 1.213 1.759 change in 2Q20. We see a likelihood of 2Q20 results hitting the high-end of EPS change (%) 126.0 176.5 45.0 its guidance or seeing further upside as it will likely have a fair value gain in Daiwa vs Cons. EPS (%) (33.6) 18.9 n.a. 2Q20 given: 1) PLS’ share price was at its lowest level since 2016 by end- PER (x) 53.8 19.5 13.4 Dividend yield (%) 1.3 1.5 2.2 March, and 2) sharp rebound in AUD/CNY (up 10% since end-March). DPS 0.300 0.354 0.512 PBR (x) 3.3 3.0 2.6 Lithium prices still weak. We keep our 2020E lithium ASP unchanged as EV/EBITDA (x) 27.8 12.4 8.9 ROE (%) 6.3 16.2 20.5 lithium prices went further down in April due to auto plant closures globally, Source: FactSet, Daiwa forecasts but we see potential upside if there is any operational disruption or delay in capacity growth for deeply-troubled Tianqi (002466 CH) (see ft.com). Meanwhile, we lift our 2021-22E lithium hydroxide output addition for Xinyu Mahong III to 50kt from 25kt given higher demand visibility in China.

What we recommend: We upgrade Ganfeng to O/P (2) and lift our TP to HKD29 (from HKD26), based on a new 12-month forward target PBR of 3.5x (from 3.0x). We lift our 2021-22E EPS by 11-31% on our higher output forecast for Xinyu Mahong III. Key risks: worse-than-expected lithium price.

How we differ: We are more pessimistic about near-term lithium ASPs.

See important disclosures, including any required research certifications, beginning on page 5

Ganfeng Lithium (1772 HK): 5 May 2020

China: government policies related to NEV Ganfeng: capacity addition pipeline Title Analyst Date Project Stake 2020E 2021E 2022E 2023E

China NEVs: official subsidy extension announced Kelvin Lau 23-Apr-20 Current Capacity (31kt LiOH + 40.5kt Li2CO3) 100.0% 6.8 6.8 6.8 6.8

Shanghai releases auto stimulus package Kelvin Lau 23-Apr-20 1) Cauchari-Olaroz Project (50kt LiOH) 50.0% 4.4 4.4 4.4 4.4

“New” infrastructure: charging pole investment on the rise Fiona Liang 14-Apr-20 2) Xinyu Mahong III Project (25kt Li2CO3 + 100.0% 4 4 4 4

More spending on ‘New’ infrastructure Fiona Liang 11-Mar-20 25kt Li2CO3)

3) Sonara Clay Project (17.5kt Li2CO3) 22.5% 1.8 1.8

4) Mariana Brine Project (20kt Li2CO3) 82.8% 2

Total Equity Capacity 13 13 13.4 15

Source: Daiwa Source: Company, Daiwa estimates Note a: LiOH = Lithium Hydroxide; Li2CO3 =Lithium Carbonate, Lithium Metal excluded Note b: All unit in kt LCE assuming 1 LiOH = 0.88 Li2CO3 Note c: Output from 1) and 2) to be incorporated from 2021E, while 3) and 4) unincorporated

Lithium product price Ganfeng: A-H share premium and southbound position (USD/t) 25,000 60% 180% 160% 50% 20,000 140% 40% 120% 15,000 100% 30% 10,000 80% 20% 60% 5,000 40% 10% 0 20%

0% 0%

Nov-19 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18 Nov-20 Nov-21 Nov-22

May-20 May-14 May-15 May-16 May-17 May-18 May-19 May-21 May-22

Jul-19

Apr-19 Oct-19 Apr-20

Jan-19 Jun-19 Jan-20

Mar-19 Mar-20 Feb-20

Lithium Carbonate spot (LHS) Lithium Hydroxide spot Feb-19

Aug-19 Nov-18 Dec-18 Sep-19 Nov-19 Dec-19 May-19 Lithium Carbonate forecast (LHS) Lithium Hydroxide forecast Southbound position (LHS) A-share premium (RHS)

Source: Bloomberg, Daiwa forecasts Source: Company, Daiwa estimates

PLS: share price vs. AUD/CNY exchange rate Number of auto plants suspended

0.9 5 70 Global Lithium prices to be suppressed by overseas 0.8 4.8 60 0.7 demand destruction 4.6 50 0.6 Appreciation of AUD 40 0.5 since end-March 4.4 0.4 4.2 30 0.3 4 20 0.2 10 0.1 Lowest since 2016 3.8 0.0 3.6 0 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jan Feb March Share price (AUD) AUD/CNY (RHS) China U.S. Japan Korea Germany Italy France U.K. Others

Source: Bloomberg, Daiwa Source: Bloomberg, Daiwa

Ganfeng: 1Q20 results summary CNYm 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 YoY Turnover 1,050 1,282 1,262 1,410 1,330 1,493 1,388 1,036 1,079 -19% Cost of sales (566) (740) (905) (986) (1,046) (1,068) (1,090) (805) (869) -17% Gross Profit 484 542 357 424 284 425 298 231 210 -26% Selling and distribution expenses (8) (23) (18) (32) (24) (28) (28) 17 (19) -23% Admin expenses (80) (88) (27) (103) (34) (151) (33) (151) (23) -31% Other expenses (18) (6) (23) (31) (24) (24) (27) (492) (27) 12% EBIT 377 424 288 258 202 221 210 (394) 142 -30% Finance costs (17) (14) (18) (32) (45) 6 (40) 1 (66) 49% JV/Asso (25) 35 71 42 42 51 (13) 73 9 -79% Non-operating income 32 2 (31) 19 9 (8) 44 (366) 20 130% PBT 305 533 290 119 299 87 38 40 23 -92% Taxation (64) (55) (43) (1) (47) (45) (6) (24) (18) -62% PAT 241 479 247 118 252 43 33 16 6 -98% Profit attributable to - Shareholders 241 478 247 118 252 43 32 12 8 -97% - Minority interests (0) (0) 0 1 (0) (0) (1) (4) (2) 1982% One-off items (20) 64 (35) (181) 102 (188) (172) 331 (88) -186% Net income ex- one-off items 261 414 282 299 150 231 204 (319) 95 -36% Basic EPS 0.21 0.28 0.22 0.06 0.22 0.01 0.03 0.03 0.01 -97% Diluted EPS 0.21 0.28 0.22 0.07 0.22 0.01 0.03 0.03 0.01 -97% Basic EPS (Recurring) 0.23 0.25 0.26 0.13 0.13 0.16 0.19 (0.81) 0.07 -43%

Source: Company, Daiwa

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Ganfeng Lithium (1772 HK): 5 May 2020

Financial summary Key assumptions Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Lithium carbonate (CNY/ ton) 39,955 81,029 122,209 112,953 76,525 61,220 63,363 65,264 Lithium hydroxide (CNY/ ton) 50,468 96,698 128,826 129,227 87,551 70,041 72,492 74,667 Lithium metal price (CNY/ ton) 343,923 438,241 591,273 639,002 543,152 515,994 490,194 514,704 Lithium compound volume (ton) 13,765 18,253 25,215 31,061 46,991 63,400 94,882 125,730 Lithium metal volume (ton) 1,226 1,126 1,384 1,519 1,435 1,600 1,600 1,600

Profit and loss (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Lithium Compound 646 1,735 2,880 3,182 3,218 3,527 5,524 7,565 Lithium Metal 422 493 818 971 934 826 784 824 Other Revenue 277 405 473 737 1,095 1,092 1,118 1,118 Total Revenue 1,344 2,633 4,171 4,890 5,246 5,444 7,426 9,507 Other income 0 0 0 0 0 0 0 0 COGS (1,044) (1,628) (2,496) (3,136) (4,009) (4,269) (4,810) (5,832) SG&A (117) (160) (246) (443) (432) (332) (430) (513) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 183 845 1,429 1,311 806 844 2,186 3,161 Net-interest inc./(exp.) (11) (20) (55) (56) (77) (163) (225) (276) Assoc/forex/extraord./others 70 364 993 796 (260) 33 5 (37) Pre-tax profit 243 1,189 2,367 2,051 468 714 1,965 2,848 Tax (25) (71) (272) (163) (121) (143) (393) (570) Min. int./pref. div./others (0) 1 (0) 1 (5) (5) (5) (5) Net profit (reported) 217 1,119 2,095 1,889 342 567 1,568 2,273 Net profit (adjusted) 160 684 1,261 838 255 567 1,568 2,273 EPS (reported)(CNY) 0.198 0.993 1.886 1.666 0.265 0.439 1.213 1.759 EPS (adjusted)(CNY) 0.146 0.606 1.136 0.738 0.197 0.439 1.213 1.759 EPS (adjusted fully-diluted)(CNY) 0.146 0.605 1.135 0.726 0.194 0.439 1.213 1.759 DPS (CNY) 0.149 0.097 0.401 0.300 0.300 0.300 0.354 0.512 EBIT 183 845 1,429 1,311 806 844 2,186 3,161 EBITDA 261 934 1,535 1,457 1,029 1,090 2,499 3,527

Cash flow (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit before tax 243 1,189 2,367 2,051 468 714 1,965 2,848 Depreciation and amortisation 78 89 106 146 223 246 313 366 Tax paid (25) (71) (272) (163) (121) (143) (393) (570) Change in working capital (624) (189) (747) (1,071) (276) (3) (1,180) (1,290) Other operational CF items 694 (359) (950) (279) 375 10 72 123 Cash flow from operations 366 658 504 685 669 825 777 1,478 Capex (131) (506) (353) (1,248) (1,921) (1,533) (1,033) (1,033) Net (acquisitions)/disposals (668) (317) (657) (1,724) (1,322) 0 0 0 Other investing CF items 249 (61) 170 612 421 227 213 181 Cash flow from investing (550) (884) (840) (2,360) (2,823) (1,306) (820) (853) Change in debt (73) 308 965 495 1,412 862 200 0 Net share issues/(repurchases) 108 0 588 2,916 0 0 0 0 Dividends paid (35) (57) (71) (293) (388) (388) (457) (662) Other financing CF items (16) (20) 855 (397) (783) (237) (286) (304) Cash flow from financing (17) 231 2,337 2,721 241 238 (543) (966) Forex effect/others 2 1 (4) 7 22 0 0 0 Change in cash (199) 6 1,996 1,053 (1,891) (244) (586) (341) Free cash flow 235 152 151 (562) (1,252) (709) (256) 445 Source: FactSet, Daiwa forecasts

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Ganfeng Lithium (1772 HK): 5 May 2020

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Cash & short-term investment 163 169 2,165 3,219 1,328 1,084 498 158 Inventory 313 534 915 1,905 2,334 2,222 2,899 3,675 Accounts receivable 479 577 945 1,406 1,132 1,347 1,933 2,605 Other current assets 144 825 542 1,386 936 936 936 936 Total current assets 1,099 2,105 4,568 7,915 5,730 5,588 6,266 7,373 Fixed assets 744 1,166 1,620 2,620 3,008 4,309 5,043 5,724 Goodwill & intangibles 374 159 245 280 381 368 354 341 Other non-current assets 380 852 1,566 3,395 5,674 5,674 5,674 5,674 Total assets 2,597 4,282 7,999 14,209 14,793 15,939 17,338 19,112 Short-term debt 179 539 1,211 1,356 1,969 1,969 1,969 1,969 Accounts payable 0 0 0 0 0 0 0 0 Other current liabilities 304 652 1,603 2,476 1,290 1,390 1,474 1,632 Total current liabilities 483 1,191 2,814 3,832 3,259 3,359 3,442 3,600 Long-term debt 106 56 1,018 1,420 2,219 3,082 3,282 3,282 Other non-current liabilities 55 71 123 292 324 324 324 324 Total liabilities 644 1,318 3,956 5,544 5,803 6,765 7,049 7,207 Share capital 378 753 742 1,315 1,293 1,293 1,293 1,293 Reserves/R.E./others 1,574 2,209 3,295 7,297 7,643 7,831 8,951 10,571 Shareholders' equity 1,952 2,962 4,037 8,612 8,935 9,124 10,243 11,864 Minority interests 1 2 6 54 55 50 46 41 Total equity & liabilities 2,597 4,282 7,999 14,209 14,793 15,939 17,338 19,112 EV 30,461 30,515 29,782 27,694 29,163 30,265 31,045 31,381 Net debt/(cash) 122 425 64 (443) 2,860 3,966 4,752 5,093 BVPS (CNY) 5.167 3.935 5.443 6.549 6.913 7.058 7.924 9.178

Key ratios (%) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Sales (YoY) n.a. 95.9 58.4 17.2 7.3 3.8 36.4 28.0 EBITDA (YoY) n.a. 257.3 64.4 (5.1) (29.4) 6.0 129.3 41.2 Operating profit (YoY) n.a. 360.8 69.1 (8.3) (38.5) 4.8 159.0 44.6 Net profit (YoY) n.a. 328.4 84.5 (33.6) (69.5) 122.3 176.5 45.0 Core EPS (fully-diluted) (YoY) n.a. 315.1 87.6 (36.0) (73.3) 126.0 176.5 45.0 Gross-profit margin 22.3 38.2 40.2 35.9 23.6 21.6 35.2 38.7 EBITDA margin 19.4 35.5 36.8 29.8 19.6 20.0 33.6 37.1 Operating-profit margin 13.6 32.1 34.3 26.8 15.4 15.5 29.4 33.3 Net profit margin 11.9 26.0 30.2 17.1 4.9 10.4 21.1 23.9 ROAE n.a. 27.8 36.0 13.2 2.9 6.3 16.2 20.5 ROAA n.a. 19.9 20.5 7.5 1.8 3.7 9.4 12.5 ROCE n.a. 29.2 29.1 14.8 6.5 6.2 14.7 19.3 ROIC 7.9 29.1 33.7 19.6 6.0 5.4 12.4 15.8 Net debt to equity 6.2 14.4 1.6 net cash 31.8 43.2 46.2 42.8 Effective tax rate 10.3 6.0 11.5 7.9 25.9 20.0 20.0 20.0 Accounts receivable (days) n.a. 73.2 66.6 87.7 88.3 83.1 80.6 87.1 Current ratio (x) 2.3 1.8 1.6 2.1 1.8 1.7 1.8 2.0 Net interest cover (x) 16.8 42.6 26.1 23.4 10.4 5.2 9.7 11.4 Net dividend payout 25.9 6.5 14.2 20.9 110.3 67.3 29.0 29.0 Free cash flow yield 0.8 0.5 0.5 n.a. n.a. n.a. n.a. 1.5 Source: FactSet, Daiwa forecasts

Company profile

Ganfeng Lithium is the world's third largest and China's largest lithium compounds producer. The company has a diversified product portfolio offering more than 40 lithium compounds and metals product. By the end of 2019, it has an annual designed production capacity of 40.5k tons and 31k tons of lithium carbonate and lithium hydroxide.

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Ganfeng Lithium (1772 HK): 5 May 2020

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Ganfeng Lithium (1772 HK): 5 May 2020

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Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 70.04% Hold** 24.21% Sell*** 5.75% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2020. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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