Asia Ex-Japan Battery Materials

Asia ex Japan Materials 11 September 2020

Asia ex-Japan Battery Materials

Tesla’s Battery Day: re-thinking cell chemistries

 “Million-mile” battery probably ready for mass production, with low/no- cobalt, single crystal cathode, dry electrode and novel electrolytes  Update on “next-generation” battery with pre-lithiated anode and novel Dennis Ip, CFA dual-salt electrolyte likely; solid state battery not needed for 400Wh/kg (852) 2848 4068  We like Ecopro BM and Ganfeng Lithium for their well-hedged [email protected] technological risk; avoid CMOC on the low/no-cobalt trend Henny Jung

(82) 2 787 9182 [email protected]

See important disclosures, including any required research certifications, beginning on page 53

Asia ex Japan Materials 11 September 2020

Asia ex-Japan Battery Materials

Tesla’s Battery Day: re-thinking cell chemistries

 “Million-mile” battery probably ready for mass production, with low/no- cobalt, single crystal cathode, dry electrode and novel electrolytes  Update on “next-generation” battery with pre-lithiated anode and novel Dennis Ip, CFA dual-salt electrolyte likely; solid state battery not needed for 400Wh/kg (852) 2848 4068  We like Ecopro BM and Ganfeng Lithium for their well-hedged [email protected] Prev. technological risk; avoid CMOC on the low/no-cobalt trend Ecopro BM (247540 KS)Henny Jung

Rating (82) Buy2 787 9182 Buy Target [email protected],000 210,000 Upside p 41.9%

Ganfeng Lithium (1772 HK) Rating Buy Buy What's new: We expect Tesla to introduce a number of breakthroughs in KeyTarget stock calls 51.00 46.50 disruptive battery technology during its Battery Day on 22 September. In this Upside p 41.3%New Prev. report, we summarise Tesla’s developments at the cell chemistry level, based ShenzhenEcopro BM Capchem (247540 KS)Technology - A (300037 CH) Rating Buy Buy on publicly available patents/research papers, and discuss their potential Target 210,00071.00 210,00071.00 impact on our covered battery material names. Upside p 40.2%41.9% ShanghaiGanfeng Lithium Putailai (1772 New EnergyHK) Tech – A (603659 CH) What's the impact: Commercialisation of a million-mile battery? In April Rating OutperformBuy OutperformBuy 2019, Tesla CEO Elon Musk promised that in a year’s time, Tesla would Target 115.0051.00 115.0046.50 Upside p 19.8%41.3% introduce a battery pack that lasts up to 1m miles. We believe it is likely ChinaShenzhen Molybdenum Capchem (3993Technology HK) - A (300037 CH) Tesla and Musk will honour that promise during Tesla’s Battery Day. Our Rating HoldBuy OutperformBuy educated guess is that single-crystal cathode, advanced electrolyte Target 71.002.90 71.003.40 additives and dry battery electrode will be adopted for the prevention of DownsideUpside qp 40.2%2.7% micro-cracking, suppression of voltage hysteresis, and improvement of ShanghaiSource: Putailai Daiwa New forecasts Energy Tech – A (603659 CH) energy intensity, respectively, which in combination would contribute to Rating Outperform Outperform Target 115.00 115.00 better capacity retention and a long cycle life culminating in a battery that Upside p 19.8% can last for 1m miles. On the cost side, we believe dry battery electrode, China Molybdenum (3993 HK) which can help reduce costs by c.20% per cell, will once again play an Rating Hold Outperform important role, together with the introduction of cathode with low-cobalt, Target 2.90 3.40 or no cobalt enabled by core-shell gradient (CSG) coating technology. Downside q 2.7%

Battery Day teasers for “next-gen” technologies. Similar to Autonomy Day on 22 April 2019, in which Musk talked not just about a breakthrough in existing automation systems but also the future Tesla “robo-taxi” network facilitated by automation, we believe Musk and his team will once again provide a roadmap for future development during the Battery Day. Among different future pathways, we see pre-lithiation technology in the form of

lithium metal/anode-free battery enabled by a novel LiDFOB/LiBF4 dual salt, which Tesla’s leading scientist, Jeff Dahn, credits as “the next- generation” battery that can enable electrified urban aviation, being highlighted. We also see a slight possibility of Tesla touching on the development of high-loaded silicon-carbon anode. The introduction of other cell chemistries, including hybrid battery-capacitor cathode or even solid-state battery, is less likely, in our view.

What we recommend: We like companies with hedged technology risks, including Ecopro BM (riding on development of single-crystal cathode and CSG coating) and Ganfeng (riding on elevated per-battery lithium usage). We recommend selective avoidance of China Molybdenum (CMOC) on a potential low/no-cobalt trend.

How we differ: We believe we are the first broker to dissect the implications of cell chemistries that Tesla will potentially introduce on Battery Day.

See important disclosures, including any required research certifications, beginning on page 53

Asia ex-Japan Battery Materials: 11 September 2020

Sector stocks: key indicators EPS (local curr.) Share Rating Target price (local curr.) FY1 EPS (local curr.) FY2 Company Name Stock code SharePrice NewRating Prev. TargetNew price (localPrev. curr.)% chg New FY1Prev. % chg New FY2Prev. % chg ChinaCompany Molybdenum Name 3993Stock HK code Price2.98 HoldNew OutperformPrev. New2.90 Prev.3.40 (14.7%)% chg 0.123New 0.123Prev. %0.0% chg 0.139New 0.139Prev. %0.0% chg EcoproChina Molybdenum BM 2475403993 HK KS 148,0002.98 HoldBuy OutperformBuy 210,0002.90 210,0003.40 (14.7%)0.0% 2,2310.123 2,2310.123 0.0% 4,3090.139 4,3090.139 0.0% GanfengEcopro BM Lithium 1772247540 HK KS 148,00036.10 Buy Buy 210,00051.00 210,00046.50 9.7%0.0% 0.4442,231 0.4542,231 (2.3%)0.0% 1.2134,309 1.1894,309 2.0%0.0% Ganfeng Lithium - A 0024601772 HK CH 46.8536.10 Buy Buy 65.0051.00 46.50 9.7% 0.444 0.454 (2.3%) 1.213 1.189 2.0% POSCOGanfeng ChemicalLithium - A 003670002460 KSCH 88,10046.85 OutperformBuy Outperform 96,00065.00 96,000 0.0% 0.444796 796 0.0% 1,9221.213 1,922 0.0%

Source:ShanghaiPOSCO Bloomberg, Chemical Putailai New Daiwa Energy forecasts Tech –; Anote: prices603659003670 as of close CHKS on 10 88,100September96.00 Outperform 2020 Outperform 115.0096,000 115.0096,000 0.0% 1.556796 1.556796 0.0% 2.5941,922 2.5941,922 0.0% ShenzhenShanghai PutailaiCapchem New Technology Energy Tech - A – A 300037603659 CH 50.6396.00 OutperformBuy OutperformBuy 115.0071.00 115.0071.00 0.0% 1.2681.556 1.2681.556 0.0% 1.6232.594 1.6232.594 0.0% EVTianqiShenzhen battery Lithium Capchem - Amaterials: Technology company- A list002466300037 CH 19.1750.63 OutperformBuy OutperformBuy 22.5071.00 22.5071.00 0.0% (1.227)1.268 (1.227)1.268 0.0%n.a. 0.0611.623 0.0611.623 0.0% Tianqi Lithium - A 002466 CH 19.17 Outperform OutperformMkt cap22.50 Turnover22.50 0.0% (1.227)PER (x) (1.227) n.a. 0.061PBR (x)0.061 0.0% Company BBG code Rating Share price (USDm) (USDm) 2020E 2021E 2022E 2020E 2021E 2022E Cathode

Beijing Easpring Material 300073 CH NR 37.83 2,415 71.7 52.4 36.4 29.0 4.90 4.32 3.74 Ningbo Shanshan 600884 CH NR 10.24 2,437 109.9 45.9 30.4 27.6 1.44 1.45 1.27 L&F 066970 KS NR 40,800 964 33.3 179.3 35.8 24.9 5.91 5.15 4.32 Ecopro BM* 247540 KS Buy 148,000 2,620 64.5 66.3 34.3 24.7 7.75 6.39 5.20 Sumitomo Metal Mining 5713 JP Hold 3,543.0 9,715 41.0 20.9 12.7 11.3 0.93 0.89 0.84 Nichias 5393 JP Hold 2,515.0 1,608 3.8 13.7 11.4 10.4 1.25 1.17 1.09 Umicore UMI BB NR 39.28 11,454 28.2 34.4 26.4 22.8 3.51 3.25 3.04 Simple average 58.9 26.7 21.5 3.67 3.23 2.78 Weighted average 38.5 23.4 19.6 2.97 2.67 2.38 Lithium

Ganfeng Lithium-H* 1772 HK Buy 36.10 8,416 18.8 70.6 25.9 16.2 4.97 4.44 3.73 Tianqi Lithium* 002466 CH - 19.17 4,140 263.7 n.a. 315.8 78.9 2.63 2.61 2.52 Ganfeng Lithium-A* 002460 CH - 46.85 8,416 222.1 103.8 38.0 23.8 7.30 6.52 5.47 Sichuan Yahua 002497 CH NR 8.86 1,240 49.3 36.5 29.2 22.2 2.29 2.15 2.00 Simple average 70.3 102.2 35.3 4.29 3.93 3.43 Weighted average 68.1 84.7 31.1 5.26 4.76 4.07 Cobalt CMOC-H* 3993 HK Hold 2.98 11,869 17.7 21.3 19.0 18.8 1.35 1.30 1.25 CMOC-A 603993 CH NR 4.01 11,869 158.7 45.1 28.8 25.2 2.04 1.91 1.79 Huayou Cobalt 603799 CH NR 36.49 6,088 271.6 50.6 31.1 22.3 4.78 4.00 3.46 Hanrui Cobalt 300618 CH NR 69.27 3,068 110.6 65.9 34.6 28.9 8.34 6.76 5.19 GEM 002340 CH NR 5.09 3,560 131.8 29.9 20.9 16.6 1.84 1.71 1.51 Simple average 42.6 26.9 22.4 3.67 3.14 2.64 Weighted average 38.5 25.7 22.1 2.78 2.45 2.15 Precursor GEM 002340 CH NR 5.09 3,560 131.8 29.9 20.9 16.6 1.84 1.71 1.51 Huayou Cobalt 603799 CH NR 36.49 6,088 271.6 50.6 31.1 22.3 4.78 4.00 3.46 Hanrui Cobalt 300618 CH NR 69.27 3,068 110.6 65.9 34.6 28.9 8.34 6.76 5.19 Simple average 48.8 28.9 22.6 4.98 4.16 3.39 Weighted average 48.5 29.1 22.3 4.81 4.02 3.33 Anode Putailai* 603659 CH - 96.00 6,108 59.5 61.7 37.0 27.7 5.48 4.97 4.41 Ningbo Shanshan 600884 CH NR 10.24 2,437 109.9 45.9 30.4 27.6 1.44 1.45 1.27 Hunan Zhongke 300035 CH NR 8.60 808 25.5 27.0 18.6 13.9 2.60 2.33 2.04 POSCO Chemical* 003670 KS Outperform 88,100 4,527 61.1 110.6 45.8 35.0 5.20 4.77 4.31 Mitsubishi Chemical 4188 JP Hold 661.0 9,388 30.3 24.4 10.7 8.8 0.80 0.76 0.72 Simple average 53.9 28.5 22.6 3.10 2.86 2.55 Weighted average 53.3 26.8 21.0 3.02 2.77 2.49 Electrolyte Shenzhen Capchem* 300037 CH - 50.63 3,041 55.5 39.9 31.2 22.5 4.42 4.03 3.59 Guangzhou Tinci 002709 CH NR 38.68 3,088 71.8 35.3 32.9 30.0 6.51 5.72 5.24 Ube Industries 4208 JP Hold 1,959.0 1,962 8.1 13.4 9.3 7.2 0.58 0.55 0.52 Mitsubishi Chemical 4188 JP Hold 11,500 9,388 30.3 24.4 10.7 8.8 0.80 0.76 0.72 Central Glass 4044 JP NR 2,201.0 892 1.2 59.3 22.3 19.8 0.56 0.56 0.55 Soulbrain 036830 KS NR 48,200 391 18.3 3.0 2.8 2.5 0.47 0.40 0.35 Foosung 093370 KS NR 11,500 897 41.8 234.7 33.6 22.4 4.94 4.31 3.61 Chunbo* 278280 KS Buy 154,900 1,305 36.6 38.6 28.9 n.a. 6.23 5.13 n.a. Simple average 56.1 21.5 16.2 3.06 2.68 2.08 Weighted average 38.2 19.3 14.1 2.64 2.36 1.85

Source: *Daiwa forecasts, Bloomberg; Note: share prices as of 10 September 2020; NR = not rated

Asia ex-Japan Battery Materials: 11 September 2020

Table of contents

Executive summary ...... 6 Million-mile battery likely to be introduced ...... 6 Highlighted stocks for Battery Day ...... 8 Ecopro BM (247540 KS, KRW148,000, Buy [1]) ...... 8 Ganfeng Lithium (1772 HK, HKD36.10, Buy [1]) ...... 8 Shenzhen Capchem ...... 8 Why and how Tesla matters...... 9 Single-crystal cathode: a crystal clear future path ...... 10 Positive watchlist – Ecopro BM, Ganfeng...... 11 Advanced electrolyte additives ...... 13 Positive watchlist – Capchem ...... 14 Low cobalt a certainty; no cobalt a possibility ...... 15 Positive watchlist – Ecopro BM ...... 16 Negative watchlist – CMOC ...... 17 Dry battery electrode (DBE) – “much bigger deal than it may seem” ...... 18 Positive watchlist – Capchem ...... 18 Negative watchlist – Putailai ...... 19 Pre-lithiation technology – which route(s) to take? ...... 20 Positive watchlist – Ganfeng, Tianqi ...... 21 Neutral watchlist – POSCO Chem, Putailai ...... 21 Novel dual-salt electrolyte for lithium metal cell ...... 23 Positive watchlist – Capchem ...... 24 High-loaded SiC anode – a fatal blow to graphite? ...... 25 Negative watchlist – POSCO Chem, Putailai ...... 26 Hybrid battery-capacitor cathode – best of both worlds...... 27 Positive watchlist – Capchem ...... 27 Solid-state battery – an unlikely end game ...... 28 Positive watchlist – Ganfeng ...... 29 Neutral watchlist – Capchem ...... 29

Company Section Ecopro BM ...... 30 Ganfeng Lithium ...... 34 POSCO Chemical ...... 40 China Molybdenum ...... 44

Asia ex-Japan Battery Materials: 11 September 2020

Please also see: POSCO Chemical (003670 KS): Initiation: from anode to cathode – an all-round player - 9 Sep 2020, Henny Jung

Ecopro BM (247540 KS): Initiation: ready for multi-year growth from EV batteries – 9 Sep 2020, Henny Jung

Korea EV Battery and Battery Materials: Singling out beneficiaries of the burgeoning EV market – 9 Sep 2020, Henny Jung

Asia ex-Japan Battery Materials: 11 September 2020

Daiwa Research contributors Hong Kong China Everbright International 257 HK ENN Energy 2688 HK China Gas 384 HK Flat Glass Group 6865 HK Dennis Ip, CFA China Longyuan Power 916 HK Ganfeng Lithium 1772 HK Head of Hong Kong/China Energy China Oilfield Services 2883 HK GCL-Poly Energy 3800 HK (PURE, Oil and Gas, Coal, EV LiB China Resources Gas 1193 HK Guangdong Investment 270 HK Materials, ESG); Regional Head of China Resources Power 836 HK Hong Kong & China Gas 3 HK Power, Utilities, Renewable and China Shenhua Energy 1088 HK Kunlun Energy 135 HK Environment (PURE) China Suntien Green Energy 956 HK Sinopec Kantons 934 HK CK Infrastructure 1038 HK Towngas China 1083 HK (852) 2848 4068 CSPC Pharmaceutical Group 1093 HK Xinyi Solar Holdings 968 HK [email protected] Daqo New Energy DQ US

Leo Ho China Molybdenum 3993 HK HK Electric Investments 2638 HK CIMC Enric 3899 HK Power Assets 6 HK Power, Utilities, Renewable and CLP Holdings 2 HK PetroChina 857 HK Environment (PURE) – Oil & Gas, EV CNOOC 883 HK LiB materials & ESG (China); Utilities (Hong Kong) (852) 2848 4469

[email protected]

Korea Henny Jung Chunbo 278280 KS POSCO Chemical 003670 KS Ecopro BM 247540 KS SK Innovation 096770 KS EV Battery and Battery Materials; Hana Materials 166090 KS SK Materials 036490 KS IT/Electronics (Small/Mid Cap) LEENO Industrial 058470 KS Soulbrain 036830 KS (82) 2787 9182 LG Chem 051910 KS Wonik QnC 074600 KS [email protected]

Asia ex-Japan Battery Materials: 11 September 2020

Executive summary

In April 2019, Tesla CEO Elon Musk pledged that in a year, Tesla (TSLA US, USD371.34, Hold [3]) would introduce a battery pack that would last for up to 1m miles – “The current battery pack is about maybe 300,000 to 500,000 miles. The new battery pack that will probably go into production next year is designed explicitly for a million miles of operation.” Tesla’s Battery Day, finally confirmed for 22 September 2020 after several delays, is expected to be the date Tesla reveals the million-mile battery as well as its masterplan ahead.

Million-mile battery likely to be introduced Tesla expected to Given Tesla’s track record of disclosing breakthroughs or new product offerings that are announce a million-mile readily available for commercialisation rather than just prototypes, we believe the Battery battery which is ready Day will be no exception. We suspect that one of the reasons Tesla postponed its Battery for commercialisation Day several times this year was to ensure the new product offerings announced during the event can be commercialised shortly thereafter to eliminate the adverse “Osborne effect” (a social phenomenon of customers cancelling or deferring orders for the current soon-to-be- obsolete product as an unexpected drawback of a company's announcing a future product prematurely). We expect Tesla to announce its million-mile battery on the Battery Day that is readily available for commercialisation. Moreover, we expect Tesla to provide further updates on encouraging findings with its next-generation battery development.

This report focuses In this report, we focus our discussion on the cell chemistry that is currently being exclusively on cell developed by Tesla. While Tesla also will likely also announce other exciting chemistry breakthroughs in physical cell architecture (eg, tabless electrode patent, Google Patents, 14 May 2020), manufacture architecture (eg, dry particle fusion instrument, IOP Publishing, 6 July 2020), pack architecture (eg, Tesla’s own version of the cell-to-pack system, Google Patents, 10 October 2019) as well as recycling technology (potential collaboration with affiliated Redwood Materials, CleanTechnica, 5 January 2020; Reuters, 14 May 2020), we focus on the company’s developments in cell chemistry in this report, which most directly affect the battery materials companies under our coverage. After reviewing patents and research papers filed by Tesla, we summarise the key technologies Tesla has developed at the cell chemistry level, and rank these technologies based on the relative likelihood of them being announced during the upcoming Battery Day and commercialised shortly thereafter.

Tesla: technology related to cell chemistry Technology Likelihood of Announcement Commercialisation? Single-crystal Cathode (NMC532, NMC622, NCA) High Yes Advanced Electrolyte Additives High Yes Low/No-cobalt Cathode High Yes Dry Battery Electrode High Yes Pre-lithiation Technology High No LiDFOB/LiBF4 Dual-salt Electrolyte High No High-loaded Silicon-Carbon (SiC) Anode Medium No Hybridized Cathode Medium Yes Solid-state Battery Low No

Source: Daiwa

Four technologies Tesla will likely introduce an advanced version of the NMC/NCA cell which is readily enabling the realisation available for commercialisation of the million-mile battery at an affordable cost. of a million-mile battery According to Tesla’s filing in June 2020, the “Roadrunner” project is about the production of at an affordable cost NMC and NCA cell (Electrek, 24 June 2020). At the cell chemistry level, we see: 1) single- crystal cathode, 2) advanced electrolyte additives, and 3) dry battery electrode as vital enablers for Tesla to achieve the level of energy density and capacity retention needed for 1m miles of battery life. Meanwhile, the dry battery electrode along with a breakthrough in 4) low/no-cobalt cathode should be revealed to ensure that the million- mile battery comes at an affordable cost, potentially below USD100/kWh at the pack level.

Asia ex-Japan Battery Materials: 11 September 2020

Tesla: potential cell chemistries for the million-mile battery Battery Materials Watch-list

Cathode Anode Electrolyte Positive Neutral Negative

Single-crystal Ecopro BM & Cathode Ganfeng

Advanced Electrolyte Additives Capchem

Low/No-cobalt Cathode Ecopro BM CMOC

Exposure of Technology Exposure Dry Battery Electrode Capchem Putailai

Source: Daiwa Note: Dry Battery Electrode (DBE) refers to the manufacturing of electrodes (cathode and anode) with a solid and dry binder namely PTFE, unlikely conventional process with the usage of liquid, wet and toxic solvents (like NMP). It is noteworthy that DBE has nothing to do with solid-state battery, which refers to the use of solid electrolyte in battery. In other words, electrodes manufactured under DBE technology can work with either liquid or solid electrolyte.

Pre-lithiation anode plus Battery Day teasers for the next-generation battery. As with Tesla’s Autonomy Day on novel dual salt likely be 22 April 2019, in which Musk discussed not just breakthroughs in existing automation the ingredients for the systems, but also talked about a future Tesla “robo-taxi” network facilitated by automation, next-generation battery we believe Musk and his team will once again provide a roadmap for future developments during the Battery Day. We reckon Jeff Dahn’s team has been developing: 5) pre-lithiation technology in the form of lithium metal/anode-free battery enabled by a 6) novel

LiDFOB/LiBF4 dual salt that can store 60% more energy per volume than conventional lithium-ion cells at 400Wh/kg and even enable electrified urban aviation. The research findings match Musk’s latest tweet that “400Wh/kg *with* high cycle life, produced in volume (not just a lab) is not far. Probably 3 to 4 years”. (Twitter, 24 August 2020). We also see the likelihood, although slimmer due to various reasons elaborated in respective sections, for introducing 7) high-loaded silicon-carbon (SiC) anode, 8) hybrid battery- capacitor cathode and 9) solid-state battery.

Tesla: potential cell chemistries for the next-generation battery Battery Materials Watch-list

Cathode Anode Electrolyte Positive Neutral Negative

Ganfeng & POSCO Chem Pre-lithiation Tianqi & Putailai

LiDFOB/LiBF4 Electrolyte Capchem

High-loaded SiC POSCO Chem Anode & Putailai

Hybrid Cathode Capchem Exposure of Technology Exposure

Solid-state Battery Ganfeng Capchem

Source: Daiwa Note: Pre-lithiation of anode (be it pure lithium metal/anode-free battery or lithium metal coating on graphite) is a more common way. Yet, Tesla has also been developing pre-lithiation of cathode involving addition of a lithium-nickel-copper complex oxide (LNCO) made of lithium hydroxide.

Asia ex-Japan Battery Materials: 11 September 2020

Highlighted stocks for Battery Day Ecopro BM (247540 KS, KRW148,000, Buy [1]) Ecopro BM could come Although Ecopro BM is not currently involved in the Tesla supply chain, it has close under the spotlight for relationships with Korean battery cell makers such as Samsung SDI and SK Innovation. its single-crystal and We believe Ecopro BM could take centre stage with its single-crystal cathode technology NCMX cathode and NCMX cathode materials mix. Ecopro BM announced on its 2Q20 results conference technology in the short call that it had completed development of a single-crystal and NCMA cathode and was term; and its ability in already carrying out qualification testing with customers. If Tesla unveils “million-mile” vertical integration in the cathode technology (eg, single-crystal), we believe Ecopro BM’s new technology will come mid to long term under the spotlight with a real possibility of other cell makers adopting the new technology.

Apart from the Tesla effect, we forecast Ecopro BM’s cathode revenue from EV batteries to rise by an 88% CAGR over 2020-22E, along with its strategic partnerships with SK Innovation and Samsung SDI. With its relatively high market share (c.20%) in global high- nickel cathode active materials, we believe Ecopro BM stands to enjoy the benefits of the leading battery makers’ capacity expansion in high-nickel batteries over the next 3-5 years. On a longer-term perspective, Ecopro BM is readying itself for long-term structural growth, with its vertical integration in precursors and battery materials re-cycling business, which should enhance its competitiveness in the global cathode materials space going forward.

Ganfeng Lithium (1772 HK, HKD36.10, Buy [1]) Per battery lithium As the largest battery quality (BQ) lithium hydroxide supplier for Tesla, Ganfeng Lithium (lithium hydroxide and stands to benefit enormously from Tesla’s developments, in our view. Our research metal) usage likely to be indicates a high likelihood that single-crystal cathode will be one of the key features of the boosted by Tesla’s new million-mile battery, which requires high sintering temperature (950-970°C vs. the technology conventional polycrystalline method at 700-800°C) and excessive lithium hydroxide doping to facilitate particle growth (see pages 10-12). We see Ganfeng benefiting from an incremental BQ lithium hydroxide demand hike if Tesla decides to set up an in-house cell production line while the adoption of single-crystal cathode will further boost per battery lithium hydroxide usage by c.10-20%. Besides, we see a battery with pre-lithiated anode being the key feature of Tesla’s next-generation battery (see page 20) given DBE technology enables the use of elemental lithium metal rather than expensive Stabilized Lithium Metal Powder (SLMP) for pre-lithiation (see page 18). With Ganfeng being the largest lithium metal producer in the world with over a 50% market share together with self- developed lithium metal anode technology, we do not rule out the possibility of its collaboration with Tesla extending to the lithium metal segment as well. We believe Ganfeng’s ratification of long-term offtake contracts with Tesla, likely by end-2020E, will be proof of our hypothesis.

Shenzhen Capchem Capchem’s We believe the market has yet to fully recognise Capchem’s readiness for Tesla’s preparedness for Tesla technology. For the million-mile battery, we believe it likely Capchem has been supplying technology may not be lithium difluorophosphate (LFO, LiPO2F2) to Tesla’s research team, which has concluded fully recognised that electrolyte containing LFO works best with single-crystal NMC622 and NMC811 cathodes (see page 13). Besides, polytetrafluoroethylene (PTFE), a fluorine-based binder necessary for Maxwell’s dry battery electrode (DBE) technology, will become one of the key product offerings of Capchem within 1-2 years (see pages 18-19). As for the “next-

gen” battery, we see LiDFOB/LiBF4 dual-salt electrolyte as a vital enabler for sufficient capacity retention and cycle life for lithium metal cell (see pages 23-24). Capchem

currently supplies both LiDFOB and LiBF4 to Tesla’s research team for the development of the novel dual-salt system. Given Capchem’s existing close ties with Tesla, we see a possibility of Capchem becoming a direct supplier of electrolytes and/or additives to Tesla if it introduces an in-house cell production line.

Asia ex-Japan Battery Materials: 11 September 2020

Why and how Tesla matters Fundamentals aside, the We believe it is crucial to anticipate what may be announced during the upcoming Battery share prices of battery Day and the corresponding implications for the LiB material names under our coverage. In materials names are line with Chinese investors’ appetite for “positive momentum” in stocks (see SOE reforms: reactive to Tesla impacts a new chapter, published on 10 June 2020, by Daiwa’s China strategist, Patrick Pan), we note the share prices of companies in the LiB supply chain are highly subject to Tesla’s latest technological developments. For instance, the share prices of lithium plays have detached from lithium prices since late 2019 and became more correlated to Tesla’s development progress. Such a trend is specifically pronounced for Ganfeng A, which is the largest lithium hydroxide supplier for Tesla. To put it into perspective, Ganfeng has seen a 115% YTD uplift in its share price despite reporting a 98% YoY decline in 1Q20 net profit, and guiding for a 32-53% YoY decline in 1H20E net profit.

Tianqi and Ganfeng-A: share-price movements (CNY) (CNY/t) 90 Pre-Tesla Bonanza Tesla Bonanza 200,000 80 Another peak on 70 Protracted downtrend in share price alongside Spike on Ganfeng's Tesla's growth close ties with Tesla 150,000 60 lithium price weakness 50 100,000 40 30 20 50,000 10 0 0 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Tianqi-A Ganfeng-A BQ lithium carbonate spot (RHS)

Source: FactSet, Daiwa

Moreover, the share-price sentiment for companies without direct links to Tesla over LiB is also significantly affected by the Tesla factor. The share prices of cobalt miners and refiners (including CMOC under our coverage) have also been significantly affected by the EV industry’s moves towards no-cobalt batteries, particularly when Tesla was involved in such developments. For instance, the share prices of cobalt names listed on both the A- share and H-share markets slipped by some 25-40% within a few days of Reuters reporting on 18 February 2020 that Tesla was in talks to use CATL’s cobalt-free batteries in China-made cars. Meanwhile, the companies with ultra-capacitor business exposure also saw a short-lived 10-15% share-price spike back in late-February this year after Chinese media outlet Egsea reported that Tesla’s new battery is “a combination of DBE and ultra- capacitor while the concrete content will be released during the Battery Day” (Egsea, 22 February 2020 [Chinese-language article).

Cobalt names: YTD share prices Ultra-capacitor names: YTD share price

140 Reuters reports that Tesla is in discussions with 200 CATL about using a cobalt-free battery Egsea reported that Tesla's new battery will be a 120 combination of dry battery technology and ultra-capacitor.

100 150

80 100 60

50 40 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Hanrui Cobalt (300618 CH) Huayou Cobalt (603799 CH) Capchem (300037 CH) Sieyuan Electric (002028 CH) CMOC-H (3993 HK) CMOC-A (603993 CH) Anhui Taier (002347 CH) Source: Bloomberg Source: Bloomberg Note: Rebased to 100 as of 2 January 2020 Note: Rebased to 100 as of 2 January 2020

Asia ex-Japan Battery Materials: 11 September 2020

Single-crystal cathode: a crystal clear future path

Among different technological pathways, we see the development of single-crystal cathode, which is compatible with existing LiB manufacturing infrastructure, as highly likely to be announced during the upcoming Battery Day.

Polycrystal cathode a Conventional polycrystalline cathode sets the limit for the upper cut-off voltage a major overhang for high- battery cell can withstand. A simple way to increase the energy density of a LiB is to voltage usage increase the voltage which gives access to higher specific capacity from the cathode. Yet, a conventional poly-crystal cathode is made of agglomerates of individual grains, in which micro cracks form during cycling due to the anisotropic volume change of grains, while the high voltage exacerbates the situation, leading to disintegration of cathode materials and capacity loss caused by unwanted solid electrolyte interphase (SEI) layer formation.

Electron micrograph of polycrystalline NCA cathode Inter- (left) & intra- (right) granular cracks of NMC cathode

Source: IOP Publishing Source: IOP Publishing

Single-crystal cathode Single-crystal NMC532 “should be able to power an electric vehicle for over 1m likely a feature of Tesla’s miles”, according to Jeff Dahn’s team. In April 2019, Musk first revealed that Tesla was in-house Roadrunner building a battery pack explicitly for 1m miles of operation. We believe Musk’s comment cell and the research finding are more than just mere coincidences. At the same time in 2019, Jeff Dahn’s research team submitted research findings for a 3-year experiment that showed single-crystal NMC532/graphite cells can have 97% capacity retention at 20°C under normal voltage (3.0-4.1V) after 5,300 cycles (IOP Publishing, 6 September 2019), vs. the NCA battery currently used by Tesla Model 3 which enables c.1,500 cycles (Twitter, 13 April 2019). Besides, the cell with single-crystal NMC532 can also withstand high voltage of 4.3V with >90% capacity retention after 4,000 cycles at a deep 0-100% discharge. Jeff Dahn’s team concluded that “cells of this type (single-crystal NMC532) should be able to power an electric vehicle for over 1.6m km (1m miles) and last at least two decades in grid energy storage.” Moreover, Jeff Dahn’s team found in a subsequent research paper that cells with same or lower cobalt-content (single-crystal NMC622 and NMC811) have performances comparable to that of the million-mile single-crystal NMC532/graphite cells previously tested (IOP Publishing, 10 January 2020).

Single-crystal NMC532 cell long-term cycling data Single-crystal NMC532/622/811 cells long-term cycling data

Source: IOP Publishing Source: IOP Publishing Note: Purple dotted line represents performance of cell with single-crystal NMC532 in which Note: Single-crystal NMC532 & NMC622 registered >90% capacity retention after 4,000 cycles Jeff Dahn’s team describes as “million-mile battery” while single-crystal NMC811 saw capacity retention comparable to that of NMC532

Asia ex-Japan Battery Materials: 11 September 2020

Tesla has also patented the method for synthesising NCA cathode and developed technology to provide single-crystal NMC622 cathode. In April 2020, a patent filed by Tesla back in February 2019 was released, outlining a 2-step lithiation method to produce impurity-free single-crystal NCA (Google Patents, 23 April 2020) – the type of battery that Tesla has been using in its electric vehicles. Given the technology for manufacturing single-crystal cathode was developed in 2014, we believe the single-crystal cathode, be it NMC532, NMC622, NMC811 or NCA, will likely be one of the key features of Tesla’s home- made cell to be manufactured in Fremont, California.

Positive watchlist – Ecopro BM, Ganfeng Ecopro BM – another single-crystal cathode supplier globally Single-crystal cathode Ecopro BM is one of the world’s leading cathode materials suppliers with its specialty in requires excessive 10- high-nickel cathode. It only supplies NCA (with >80% nickel) and NMC811 for EV batteries, 20% LiOH usage per while we estimate its market share in global high-nickel cathode active materials was battery c.20% in 1H20. Apart from the Tesla supply chain, we believe Tesla’s likely release of new technology would shed light on possible beneficiaries with a real possibility of others adopting the new leading technology (eg, single crystal). Ecopro BM is also well prepared for the other direction of cathode development with its NCMX technology, where it can increase the nickel proportion to the >90% level, by adding aluminium and other materials to its current NMC composite. As per different demand from different customers, Ecopro BM is undergoing qualification testing for either single-crystal and NCMX or both, with different customers. Given its strategic partnerships with major customers (Samsung SDI and SK Innovation), Ecopro BM has already confirmed a capacity expansion plan of up to 89ktpa by 2022E (3x from 29ktpa in2019), and we see potential for it to revise up its plan upon customers’ faster-than-expected adoption of the new materials mix.

Advantages of single-crystal cathodes

Source: Ecopro BM

Ganfeng – key beneficiary of higher per battery lithium hydroxide usage Single-crystal cathode To enable the formation of single-crystal cathode material, a high sintering temperature requires excessive 10- (950-970°C vs. conventional polycrystalline method at 700-800°C) is required to facilitate 20% LiOH usage per particle growth. However, a high sintering temperature also means larger lithium loss due battery to vaporization of lithium oxide, and excess lithium compounds have to be doped to compensate for the loss. While the conventional polycrystalline NMC/NCA method requires only 2% excessive lithium hydroxide (or a lithium/other metal [Li:OM] ratio of 1.02), Li:OM ratios for single-crystal NMC532 and NMC622 sintering are 1.2 and 1.1, respectively,

Asia ex-Japan Battery Materials: 11 September 2020

according to Tesla’s patent (Google Patents, 23 April 2020). As the largest BQ lithium hydroxide supplier for Tesla, Ganfeng Lithium stands to benefit greatly from Tesla’s development, in our view. Ganfeng Lithium can benefit from incremental BQ lithium hydroxide demand hike if Tesla decides to set up in-house cell manufacturing line while the adoption of single-crystal cathode will further boost per battery lithium hydroxide by c.10- 20%.

We believe Ganfeng and Tesla will almost certainly renew their supplier contract, due by end-2020, in 2H20E with higher off-take procurement volume. Another BQ lithium hydroxide supplier for Tesla, Albemarle (ALB US, not rated), announced during its 1H20 analyst briefing the temporary shut-down of its Kings Mountain lithium hydroxide facility in the US and suspension of its capex plan for the development of its Kemerton lithium hydroxide facility in Australia (S&P Global Platts, 6 August 2020). Together with the delay in authentication of Ganfeng’s lithium hydroxide facility in Jiangxi, there will likely be an expanding gap in lithium hydroxide demand-supply given Tesla’s rising production. Given Tesla’s practice of sourcing lithium only from Australia (Twitter, 24 July 2020), Tesla is unlikely to procure BQ lithium hydroxide from Livent (LITH US, not rated), which uses brine feedstock from Argentina. As such, we see Tesla extending and enlarging its long- term procurement contract with Ganfeng as the most reasonable way to safeguard a sufficient supply of lithium hydroxide in the future. As discussed in our previous flash (Flash, 19 June 2020), we believe renewal of the contract with Tesla would be a major positive for Ganfeng’s valuation and long-term profitability since it would ensure solid demand for Ganfeng’s new 50ktpa lithium hydroxide capacity in Jiangxi, to be completed by 4Q20E.

Asia ex-Japan Battery Materials: 11 September 2020

Advanced electrolyte additives

The development of advanced electrolyte additives has always been one of the key focuses of Jeff Dahn’s research team. Since January 2019 when Tesla’s patent on novel battery systems based on two-additive electrolyte systems (Google Patents, 31 January 2019) was published, Tesla has been filing patents for different new additives as well as combinations of additives for enhancement of battery performance. While introducing different types of novel additives in this section, we refrain from making direct comparisons, as additives that fare worse under binary blends may see outperformance under ternary or quaternary blend settings and vice versa; and we see Tesla not necessarily sticking with a two-additive electrolyte system.

New electrolyte Dual-additive electrolyte systems with new electrolyte additives are one of the additives, including DTD research focuses of Jeff Dahn’s team. In the patent published in January 2019, Jeff and LFO, enable greater Dahn’s team introduced a dual-additive electrolyte system constructed by the combination capacity retention of conventional electrolyte additives (vinylene carbonate [VC], fluoro ethylene carbonate [FEC], prop-1-ene-1,3-sultone [PES]) with a novel additive 1,3,2-dioxathiolane-2,2-dioxide (DTD) (Google Patents, 31 January 2019). The team found that the addition of DTD enables better capacity retention and lower voltage hysteresis compared with batteries with only conventional electrolyte additives, thus helping extend the battery cycle life. In February 2019, Tesla filed a patent for another additive called lithium difluorophosphate

(LFO, LiPO2F2) which also enables better capacity retention (Google Patents, 7 February 2019). It is noteworthy that DTD and LFO are exactly the two novel additives used by Jeff Dahn’s team for developing the million-mile single-crystal NMC532 as well as subsequent development of million-mile single-crystal NMC622 and NMC811.

Additives used in the electrolytes Single-crystal NMC532/622/811 cells long-term cycling data

Source: IOP Publishing Source: IOP Publishing Note: VC+DTD for SC532, FEC+LFO for SC622, LFO for SC811

Other additives also Other additives are also being studied for the suppression of gas formation and under development by extension of the battery cycle life. On 19 September, Tesla filed patents for 2 additives, Tesla to supplement DTD 1,2,6-oxodithiane-2,2,6,6-tetraoxide (ODTO) and 2-furanone (FN), which both successfully or LFO suppress gas formation in a cell, while the former also has a notable impact on suppression of voltage hysteresis and extension of the cycle life (Google Patents, 19 September 2020; Google Patents, 19 September 2020). In December 2019, Tesla filed patents for a further 3 additives (MDO/PDO/BS) synthesised at Dalhousie University (Canada), of which MDO and PDO are SEI-forming additives while PDO also shows outperformance in terms of gas formation suppression (Google Patents, 26 December 2019). The team concluded in a corresponding research paper that “The advantage of PDO-based blends is especially great in cells that contained relatively high nickel content NMC622” and, encouragingly, PDO-containing works excellently with aforementioned DTD (in the form of 2%PDO/1%DTD) and LFO (in the form of 2%PDO/1%LFO additive) (IOP Publishing, 19 September 2018). We expect further research on these additives to reveal the results from the interaction between different cells (NMC532, NMC622, NMC811, NCA) and different combination of additives (binary, ternary, quaternary blends).

Asia ex-Japan Battery Materials: 11 September 2020

Cell volume change due to gas production during (a) 4.3V storage for 500hr at 60°C and (b) cell formation to 4.3V

Source: IOP Publishing Note: Bars for PDO (blue) are substantially shorter than those with other additives, indicating much smaller volume expansion and milder gas formation for battery with PDO-containing additives

Positive watchlist – Capchem Capchem – potential electrolyte supplier for Tesla? Capchem has been We find Capchem has been supplying high purity (>98%) LFO to Tesla’s battery research providing high purity team led by Jeff Dahn. We see this supply arrangement as a vote of confidence by Tesla’s LFO to Tesla’s battery research team in the quality of lithium salts produced by Capchem. We see LFO playing an research team important role in Tesla’s battery development given research conducted by Jeff Dahn’s team found that LFO-containing additives work the best for single-crystal NMC622 and NMC811 cells. Given Tesla will likely build its own cell production line, we see a real chance of Capchem entering into a supplier contract with Tesla, given: 1) Capchem's existing collaboration with Tesla, 2) Capchem’s expertise in manufacturing fluorine- based lithium salts (like LFO, LiFSI), 3) Capchem’s wide-ranging additive offerings, and 4) Capchem’s acquisition of BASF’s US and Europe electrolyte businesses back in 2018, which clears out market competition. Moreover, given Capchem currently supplies electrolytes to top-notch battery makers, including Panasonic, LG Chem and CATL, which are battery suppliers of Tesla, we do not rule out the possibility that Capchem’s LiB electrolyte products will enter into Tesla’s supply chain.

Tesla: publications related to LFO Date Title Author Link LFO Supplier(s)

19-Jun-20 Synthesis and evaluation of difluorophosphate salt electrolyte additives for lithium-ion batteries Jeff Dahn's Team IOP Publishing Capchem

26-Dec-19 Dioxazolones and nitrile sulfites as electrolyte additives for lithium-ion batteries Tesla Motors Canada ULC Google Patents Capchem

7-Feb-19 Novel battery systems based on lithium difluorophosphate Tesla Motors Canada ULC Google Patents Capchem, Tinci

Source: Google Patents, IOP Publishing

Asia ex-Japan Battery Materials: 11 September 2020

Low cobalt a certainty; no cobalt a possibility

According to a recent Reuters report (Reuters, 30 July 2020), the NCA battery produced by Panasonic and currently adopted by Tesla has only a 5% cobalt content. Given Tesla stated previously in its 2019 Impact Report that its “ultimate goal” was to “eliminate cobalt completely from our cells” (see our Memo, 16 June 2020 or Tesla, 2020), we believe it is highly likely Tesla’s Roadrunner cell will stick with a high-nickel/low-cobalt feature to strike a proper balance between performance and cost. We also do not rule out the possibility of Tesla teasing a cobalt-free nickel-based battery during its coming Battery Day.

Chemical mix by cathode type Likely focus of Tesla's "Roadrunner" cell 100% 9% 10% 5% 18% 18% 30% 23% 80%

60% 90% 40%

20%

0% LCO NMC111 NMC422 NMC532 NMC622 NMC811 NCA NCA+ LFP LMO Lithium Manganese Nickel Aluminum Iron Phosphate Cobalt

Source: Bloomberg NEF, Daiwa Note: The table only shows conventional chemical mix for cathode, we also do not rule out the possibility that Tesla may instead introduce an unconventional non-LFP cobalt-free cathode, likely to be high-nickel based.

Panasonic’s recent move Panasonic’s recent development proves Tesla’s move towards cobalt-free. Although is likely indicative of Panasonic is no longer the exclusive battery supplier of Tesla, we still see it as an indicator Tesla’s quest for a no- of Tesla’s future technological trend, since the two just signed a 3-year deal for Tesla’s cobalt cell Nevada Gigafactory (see SY Chung’s Memo, 8 August 2020 and Memo, 18 June 2020). On 30 July, Yasuaki Takamoto, US EV battery chief at Panasonic, revealed the company’s latest developments in battery technology in an interview with Reuters (Reuters, 30 July 2020). According to Takamoto, Panasonic aims for the commercialisation of a cobalt-free version battery “in two to three years”. Moreover, Panasonic has been on a journey of minimising cobalt content in batteries, and has already cut cobalt content in its NCA battery to below 5%. We expect battery technology largely in line with Panasonic’s direction of travel to be announced during Tesla’s Battery Day.

Tesla Semi, potentially to be launched by end-2020E, heightens the urgency for low- cobalt cathode. The Tesla Semi, a heavy-duty all-electric truck, has always been deemed an impossibility, not only because of its harsh requirement for longevity and battery capacity, but also because of the elevated cost due to the per vehicle cell usage (Electrek, 21 February 2018; CleanTechnica, 27 February 2018). For instance, Bill Gates commented that electric semi-trucks, like the Tesla Semi, and electric jets, will “probably never” happen (Electrek, 6 September 2020). During Tesla’s 4Q19 earnings call, Musk commented, “…that’s part of the reason we haven’t ramped Semi yet, it uses a lot of cells” (Twitter, 10 June 2020). To put it into perspective, the Tesla Semi may require a battery pack with a total capacity of 800-1,000kWh (Electrek, 2 May 2020), vs. the Model 3’s 73kWh (CleanTechnica, 17 June 2020), a 10-13x increase. Yet, Elon Musk indicated earlier this year that the Tesla Semi would enter volume production by end-2020. We believe this is a clear sign that Tesla has resolved the dilemma between battery size and cost concern, and perhaps figured out a solution to drive the battery cost at the pack level down to USD100/kWh. Given the long-haul requirement for the Semi, Musk already suggested that in 2Q20 earning call that cheaper yet lower- density LFP is not an option for the Semi as “every unit of mass that you add in battery pack, you have to subtract in cargo”. As such, reduction in cobalt content appears to be necessary for the Semi to be commercialised.

Asia ex-Japan Battery Materials: 11 September 2020

Cobalt is not needed as Cobalt is not needed at all according to Tesla’s research findings. In February 2019, per Tesla research team Jeff Dahn’s Tesla research team published a research paper in which it claimed that while aluminium, manganese and magnesium are able to suppress phase transitions of NCA cathode at the 5% level, cobalt fails to do so (IOP Publishing, 7 February 2019). In a subsequent research paper, the team concluded that cobalt is not need in NCA cathode at all (Dalhouse University, 11 February 2020).

Tesla: differential capacity as a function of cell voltage

Failure in Phase Transition Suppressed Phase Transition Suppression

Source: IOP Publishing, Daiwa Note: Cobalt is the only tested materials (also aluminium, Manganese, Magnesium) that failed to suppress phase transition of LiB cathode at 5% level.

Tesla: publications related to cobalt addition Date Title Author Link

11-Feb-20 Studies of Ni-rich Positive Electrode Materials for Lithium Ion Batteries Hongyang Li (under Jeff Dahn's supervison) Dalhouse University

26-Dec-19 Impact of Dopants (Al, Mg, Mn, Co) on the Reactivity of LixNiO2 with the Electrolyte of Li-Ion Batteries Jeff Dahn's Team IOP Publishing

7-Feb-19 Is Cobalt Needed in Ni-Rich Positive Electrode Materials for Lithium Ion Batteries? Jeff Dahn's Team IOP Publishing

Source: IOP Publishing, American Chemical Society

Saying farewell to cobalt Moreover, Tesla has developed a cobalt-free battery with core-shell structure that is not an impossibility, “shows comparable capacity retention with commercial-grade NMC811 and higher according to Tesla’s specific capacity”. Interestingly enough, Tesla said on 21 February 2020 via its Chinese battery research team official account on Tiktok, “Please pay attention to Battery Day in April. Cobalt-free does not necessarily mean LFP (请留意四月特斯拉的电池发布会，无钴，不代表一定是磷酸铁锂)” (Egsea, 22 February 2020). Jeff Dahn’s Tesla research team provided further updates on cobalt-free cell in a research paper released in September (IOP Publishing, 3 September 2020). The research team found that cobalt-free core-shell precursor with a

Ni(OH)2 core and a Ni0.8Mn0.2(OH)2 shell shows comparable capacity retention to commercial-grade NMC811 and higher specific capacity. As such, we would not be surprised if Tesla were to announce the successful development of a non-LFP cobalt-free cell at Battery Day.

Tesla: publications related to cobalt-free positive electrode Date Title Author Link

3-Sep-20 Cobalt-Free Core-Shell Structure with High Specific Capacity and Long Cycle Life as an Alternative to Li[Ni0.8Mn0.1Co0.1]O2 Jeff Dahn's Team IOP Publishing

28-May-20 In Situ XRD Studies During Synthesis of Single-Crystal LiNiO2, LiNi0.975Mg0.025O2, and LiNi0.95Al0.05O2 Cathode Materials Jeff Dahn's Team IOP Publishing

21-Nov-19 Cobalt-free Nickel-rich positive electrode materials with a core-shell structure Jeff Dahn's Team American Chemical Society

Source: IOP Publishing, American Chemical Society

Positive watchlist – Ecopro BM Ecopro BM – a frontrunner in core-shell gradient (CSG) technology Ecopro BM only supplies Ecopro BM is not only the first company in the world to be qualified to supply high-nickel high-nickel cathode AMs NMC811 cathodes to auto OEMs and battery makers as it offered the highest-nickel for EVs portion among the current technology, it has also strengthened its coating technology, called the core-shell gradient (CSG), in the production of NMC materials. Under this technology, nickel is placed at the core of the cathode and coated with other materials such as nickel, cobalt or manganese. Management stated that its CSG technology enables a higher cycle life and higher safety standard for lithium-ion batteries. For now, Ecopro BM usually coats nickel-core with NMC-shell, but the same technology is applicable for coating with a cobalt-free NM-shell, which is the combination Tesla has been testing for now. We believe Tesla’s move towards cobalt-free core-shell cathode actually suggests that Ecopro

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BM is moving in the same direction that Telsa, arguably the best EV company in the world, is heading in. We also see Tesla’s potential announcement of the adoption of core-shell technology as positive for Ecopro BM’s share price sentiment-wise.

Ecopro BM: CGS technology

Source: Ecopro BM

Negative watchlist – CMOC CMOC – no glory for the second-largest cobalt producer in the world Share-price sentiment We raise a red flag on China Molybdenum (CMOC), the world’s second-largest cobalt towards CMOC, a cobalt supplier, with mining interests in the Democratic Republic of the Congo (DRC). We believe proxy, will be potentially the share prices of cobalt names listed on the H-share and A-share markets are largely adversely affected by subject to news flow surrounding Tesla. On 18 February 2020, Reuters exclusively Battery Day reported that Tesla was in talks to use CATL’s cobalt-free batteries in its China-made cars (Reuters, 18 February 2020). As a result of this news, the share prices of cobalt companies listed in China all dropped by 10% the day after, while Hong Kong-listed China Molybdenum under our coverage saw its share price correct by c.25% in 4 days. We believe the coming Battery Day will have a similar impact on these cobalt names should Tesla provide any update on its plan to completely get rid of cobalt. Meanwhile, if the long- awaited Roadrunner turns out to be high-nickel NMC/NCA, this would at best be neutral to cobalt names, in our view.

Cobalt names: YTD share prices 140 Reuters reports that Tesla is in discussions with 120 CATL about using a cobalt-free battery

100

40 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Hanrui Cobalt (300618 CH) Huayou Cobalt (603799 CH) CMOC-H (3993 HK) CMOC-A (603993 CH)

Source: Bloomberg; note: Rebased to 100 as of 2 January 2020

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Dry battery electrode (DBE) – “much bigger deal than it may seem”

In February 2019, Tesla, which was cash-strapped at the time, decided to spend USD207m on the acquisition of Maxwell, a specialist in ultra-capacitor production. Given the application of an ultra-capacitor in an EV is still largely confined to regenerative braking, we believe what Tesla is truly looking for is in fact DBE technology. During a podcast in January this year, Musk commented that, “Maxwell has a bunch of technologies that applied in a right way … can have a very big impact”, “That (DBE) is a big deal. Much bigger deal than it may seem” and added, “I have to wait until Battery Day” (Youtube, 9 February 2020). We believe is highly likely that DBE technology will be introduced during Battery Day and it is a matter of how far Tesla can go with adoption of this technology.

DBE enables the In layman’s terms, DBE enables electrode materials to be stuck together using glue complete removal of (ie, solvent). The existing manufacturing process of electrode involves a wet coating solvent from electrode process, which has some fundamental disadvantages including high equipment cost and usage of toxic solvents like N-methyl-2-pyrrolidone (NMP). DBE technology developed by Maxwell solves these major concerns at once through a dry process. With this technology, dry coated cathode/anode materials and a dry fluoride chemical called PTFE (Teflon) are fabricated and mixed together. PTFE works as the binder in the mixture in the replacement of solvent, and enables the formation of a self-supporting/freestanding film before being densified into a finished electrode through a conventional laminating process by calendar. Maxwell had already been using this technology for manufacturing of electrode for ultra- capacitor prior to Tesla’s acquisition.

Maxwell: DBE technology Maxwell: DBE advantages

Source: Maxwell Source: Maxwell

DBE enables higher The benefits of DBE are more than just incremental energy density and cost energy density, lower reduction. According to Maxwell’s presentation published before the acquisition, DBE cost and the adoption of enables thicker electrode, thus facilitating energy density of a battery to exceed 300Wh/kg elemental lithium metal and double the battery life ceteris paribus. At the same time, DBE facilitates cost reduction, on the anode side as a massive coating machine is no longer needed if DBE has been adopted for electrode production. We expect Tesla to shed light on the direct impact of DBE adoption on the company during Battery Day. Yet, we see the importance of DBE extending well beyond that. In the past, pre-lithiation of batteries was almost seen as an impossibility given the high reactivity of lithium metal to polar processing solvents, particularly NMP. Yet, DBE removes this overhang completely by enabling solvent-free electrode to be produced. We provide an in-depth discussion on pre-lithiation in the next section.

Positive watchlist – Capchem Capchem – an electrolyte play with PTFE capacity Only electrolyte Capchem appears well prepared for Tesla’s latest technological advancements, including producer in the world DBE. Although Capchem is most well-recognised as an electrolyte producer, its organic with PTFE capacity fluorine chemicals business is indeed as large as its electrolyte business. Capchem has

Asia ex-Japan Battery Materials: 11 September 2020

been developing 2.4ktpa PTFE capacity, likely coming on line by 2022E or earlier. In past years, Capchem has also developed a range of electrode additives, like carbon nanotube (CNT) conductive paste for cathode. Although capacity remains small compared with established PTFE producers in China, like Zhejiang Juhua (600160 CH, not rated) with 25.7ktpa existing capacity and Haohua Chemical Science (600378 CH, not rated) with 22ktpa existing capacity, we see the core competitiveness of Capchem being its ability to customise PTFE binders for end-users, given it is one of the very few companies in the world with both PTFE and LiB additive production capacity. With Capchem already having established a long-term business partnership with Maxwell and supplying ultra-capacitor electrolyte to it since 2008, we see the possibility of the collaboration between Capchem and Tesla extending beyond the ultra-capacitor business into organic fluorine chemicals and electrolytes.

Capchem: competitive edge in DBE Choice of Anode Choice of Electrolyte Capchem’s Edge

Only electrolyte producer with one- Graphite/Silicon Liquid stop PTFE and additives production

Sole lithium salt supplier of Tesla Lithium Metal Liquid Dry Electrode for lithium metal liquid electrolyte

Marker leader in development of Lithium Metal Solid solid-state electrolyte for capacitor and LiB

Source: Daiwa

Negative watchlist – Putailai Putailai – long-term coating machine demand likely to be curbed by DBE Coating machine DBE technology reduces the demand for electrode coating machines, which is one of demand likely to be Putailai’s core segments, contributing 14% of its revenue as of 2019. Worse still, Putailai is dampened by in discussions with Tesla regarding electrode coating machine equipment sales in China. commercialisation of That said, we believe Putailai’s deal with Tesla should be relatively immune to this DBE technology, given the transaction has already entered the stage of verification of machines. We believe the negative impact from DBE technology will only be confined to sentiment towards companies with coating machine exposure, rather than on their financials in the near term.

Putailai: gross segmental profit breakdown Putailai: double-side slot die coating machine 100%

80% 21% 17% 17% 10% 8% 13% 12% 60%

40%

20%

0% 2016 2017 2018 2019 2020E 2021E 2022E Graphite Anode Graphitization Coating Machine Separator Others

Source: Company, Daiwa forecasts Source: Company

Asia ex-Japan Battery Materials: 11 September 2020

Pre-lithiation technology – which route(s) to take?

Pre-lithiation, or lithium doping, refers to the process of adding excess lithium metal into battery to compensate for capacity loss due to lithium being consumed for SEI formation during the first charge cycle. Pre-lithiation can be conducted on cathode and/or anode, and we see Tesla currently developing technologies for both routes. We believe pre-lithiation of anodes is most likely to be announced during Battery Day and expect Tesla to provide a clearer picture on which one or few of the routes it is going to take moving forward. During 2018, Musk also put it clearly that “lithium anode is the key” for doubling of volumetric energy density (ValueWalk, 8 June 2018).

Hybrid anode with Tesla’s technology for hybrid anode with lithium cycled on graphite was revealed in lithium coating enables April 2020. Back in 2019, Jeff Dahn’s team published a study on the choice of lithium salts higher energy density in electrolytes for anode-free/lithium-metal batteries (Nature Energy, 15 July 2019). On 30 April 2020, another research paper filed by the same team was published on Joule, in which the team revealed the development of a hybrid anode involving plating of an optimised amount of lithium metal on top of graphite. The research team concluded that the hybrid format boasts a volumetric energy density (per L) increase of 25% and a specific energy density (per kg) increase of 20% over conventional lithium-ion cells due to the increased average voltage and decreased stack thickness and weight.

Li-ion/Li metal hybrid cell

Graphite Li-ion Mode Li Metal Mode Li Metal 530 Wh/L 890 Wh/L

Source: Daiwa, Joule

Pre-lithiation of cathode Pre-lithiation of cathodes has also been developed by Tesla at the same time. A enables higher capacity patent namely from Tesla has been published this year (Google Patents, 30 April 2020) on retention after first cycle pre-lithiation of cathode involving addition of a lithium-nickel-copper complex oxide (LNCO) made of lithium hydroxide. By adding 2% LNCO to an NCA cathode, Tesla found in separate experiments that the first cycle charge capacity of cathode saw a 4mAh/g increase in first cycle charge capacity. Without providing the exact ratio for each component in the LNCO mixture, we reckon Tesla may have still been optimizing the formula by the time of patent filing. While we see pre-lithiation of anodes as more likely to be specifically announced during Battery Day, we do not rule out the possibility of Tesla also including cathode pre-lithiation as part of its plan for the million-mile battery.

Coin half cell results Full cell results NCA:LNCO Expected First Cycle Measured First Cycle NCA:LNCO Expected First Cycle Measured First Cycle Weighted Ratio Charge Capacity Charge Capacity Weighted Ratio Charge Capacity Charge Capacity

mAh/gactive mAh/gactive mAh/gactive mAh/gactive 98:0 231 231.6 98:0 228 177 96:2 235 234.8 96:2 232 181

Source: Tesla, Google Patents Source: Tesla, Google Patents

Maxwell had in-house On top of Tesla’s development, Maxwell also developed pre-lithiation technology anode pre-lithiation patented in 2018 prior to the acquisition. Instead of coating anodes with lithium metal, technology prior to Maxwell proposed an alternative method in its patent “Prelithiated Hybridized Energy Tesla’s acquisition Storage Device” in 2018 (Google Patents, 23 August 2018), by mixing anode materials with elemental lithium metal, followed by the addition of PTFE and laminating process with calendar. Maxwell found that this method was able to raise first cycle efficiency of same type of Graphite/SiO from an average of 73.9% to a higher average of 80.4%. More importantly, only stabilized lithium metal powder (SLMP) exclusively produced by Livent

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can function normally with the presence of NMP. Yet, Maxwell’s DBE-enabled pre-lithiation technology allows the use of elemental lithium metal without causing safety issues.

Maxwell: first cycle efficiency comparison Cell Electrode Composition Loading Open Circuit Voltage (OCV) Efficiency (units) mg/cm2 V % 1 19.2 2.89 72.8 2 Control Graphite/SiO 19 2.93 75.4 3 19.5 2.90 73.5 4 21.5 2.29 80.0 Example Graphite/SiO/Li Metal 5 21.5 2.24 80.7

Source: Maxwell

Positive watchlist – Ganfeng, Tianqi Ganfeng – largest lithium metal producer in the world Largest lithium metal As the largest lithium hydroxide supplier for Tesla with direct supplier contract likely to be producer in the world renewed in 2H20E, Ganfeng is also the largest lithium metal producer in the world with with product ready for annual production capacity of 1,600tpa and actual production of 1,435t in 2019 (over 50% pre-lithiation lithium metal market share). Moreover, Ganfeng has been producing lithium metal anodes for its self-developed solid-state battery, and provided lithium metal sample to Maxwell previously. With Maxwell’s technology enabling the use of conventional lithium metal rather than SLMP monopolised by Livent, we do not rule out the possibility that Ganfeng’s collaboration with Tesla may extend into the lithium metal segment as well. Meanwhile, the adoption of cathode pre-lithiation technology will also likely drive up per battery usage of lithium hydroxide based on our educated guess.

Tianqi – riding on lithium metal sentiment yet material benefits unlikely Second-largest lithium Although we see it unlikely that debt-constrained Tianqi will enter into a contract with Tesla, metal producer in the we believe it will still benefit from positive sentiment if Tesla’s new technology affirms the world feasibility of greater adoption of lithium metal. It is noteworthy that Tianqi is the second- largest lithium metal supplier with 800tpa capacity as of now, contributing to ¼ of the world’s lithium metal production, based on our estimates.

Lithium compounds: capacity vs. market share Global lithium metal market share in 2019 Market share 30% Ganfeng 2021E Others 25% 12% Albemarle 2019 Livent 20% 8% Albemarle 15% Ganfeng 2019 2021E Ganfeng 10% 53% Tianqi 27% 5%

0% - 20,000 40,000 60,000 80,000 100,000 120,000 Capacity (tLCE) Source: companies, Daiwa forecasts Source: Companies, Daiwa Note: Lithium compounds include both lithium hydroxide and lithium carbonate, expressed in lithium carbonate equivalent (LCE)

Neutral watchlist – POSCO Chem, Putailai POSCO Chemical – likely neutral impact from Tesla’s pre-lithiation technology Non-reliance on Tesla as POSCO Chemical is the only natural graphite supplier in Korea, and supplies to LG Chem, a natural hedge Samsung SDI and SK Innovation. As it supplies for only large-size EV batteries from Korean battery makers, it does not have direct exposure to Tesla. As such, we believe POSCO Chemical’s fundamental growth capability will be barely affected by Tesla’s coming technology, as we assume POSCO Chemical’s growth depends on Korean cell makers’ capacity expansion plans, the majority of which will be for non-Tesla EVs

Asia ex-Japan Battery Materials: 11 September 2020

throughout 2H20-2022. However, if Tesla’s pure lithium metal/anode-free battery emerges as a game-changer, and if its existing customers consider a similar way for next-generation batteries, POSCO Chemical would not be able to escape the negative sentiment towards overall anode players and likely negative effect on its longer-term growth capability.

Putailai – lithium doping could be a “graphite-neutral” technology Lithium doping likely to In our view, perceptions of traditional graphite anode companies have always been capped be a “graphite-neutral” by concerns about the transition from usage of graphite anode to silicon or lithium metal technology as it requires anode. If Tesla announces the adoption of lithium doping technology rather than pure graphite as the base of lithium metal anode, we would see it as a major overhang removal for graphite anode the anode producers given lithium doping allows the co-existence of graphite and lithium metal on the anode side. Yet, if Tesla decides to stick with the route of pure lithium metal/anode-free battery, then Putailai’s business prospects would be severely affected.

Asia ex-Japan Battery Materials: 11 September 2020

Novel dual-salt electrolyte for lithium metal cell

The incompatibility between lithium metal and existing electrolyte chemistry is another headache for adoption of lithium metal anode aside from the presence of solvent. Lithium

hexafluorophosphate (LiPF6) is currently the mainstream lithium salt for electrolyte as it offers the best price-performance mix. Subsequently, the existing chemical architecture of

electrolyte has been built around LiPF6, including development of LiPF6-complementary lithium-based additives like lithium salt – lithium bis(fluorosulfonyl)imide (LiFSI) for thermal

stability and lithium difluorophosphate (LFO, LiPO2F2) as well as non-lithium additives for capacity retention.

Neither LiPF6 nor LiFSI Yet, LiPF6 is not an ideal choice for lithium salt for anode-free/lithium-metal are not ideal for anode- batteries. We believe Tesla has been developing anode-free/lithium-metal anodes and a free/lithium-metal cells dual-lithium salt dedicated for use in this battery. According to research by Jeff Dahn’s

team (Nature Energy, 15 July 2019), a conventional single lithium salt LiPF6 (blue and grey solid lines in the chart below) exhibits an unsatisfactory performance in a battery with anode-free/lithium-metal anodes with “very poor capacity retention” as they fail to suppress the formation of dendrite and isolated metallic lithium inside the battery. In its latest

research, the team also tested LiFSI, another LiPF6-complementary lithium salt, which burst into flames during nail penetration after 50 cycles. With conventional lithium chemistry unfit for anode-free/lithium-metal batteries, the research team found that lithium difluoro(oxalato)borate (LiDFOB, light blue triangle) works the best with an anode- free/lithium-metal battery but the performance remains far from perfect with capacity falling significantly after 60 charging cycles.

Tesla: Electrochemical behaviour of single- and dual-salt electrolytes (stacked energy density vs. cycle life) (Wh/L) 1,400 1,200 1,000 800 600 400 200 0 0 50 100 150 200 1M LiPF6 EC:DEC (Low P) 1M LiPF6 FEC:DEC (Low P) 0.6M LiDFOB 0.6M LiBF4 FEC:DEC (Low P) 0.6M LiDFOB 0.6M LiBF4 FEC:DEC (High P) Source: Nature Energy

Dual salt LiDFOB/LiBF4 Instead, Tesla is developing a novel dual-salt LiDFOB/LiBF4 for anode-free/ lithium- electrolyte under metal batteries. Jeff Dahn’s research team has found that dual-salt LiDFOB/LiBF4 (light development by Tesla green circle) works the best with an anode-free/metal-lithium battery. While the team

highlights that “a tri-salt electrolyte such as LiDFOB+LiBF4+LiPF6 may offer even better capacity retention than either of the dual-salt combinations that were tried here”, subsequent research papers and patents filed by Tesla and Jeff Dahn’s team suggest that

they have decided to focus on a dual-salt LiDFOB/LiBF4 rather than a tri-salt combination for use in an anode-free/lithium-metal battery, including in the most recently published patent (Google Patents, 9 July 2020) and the 2 most recent research papers (Nature

Energy, 15 August 2020; Joule, 17 June 2020). This highlights the possibility of LiPF6 being eliminated altogether if Tesla introduces anode-free/lithium-metal batteries.

Battery Day teaser on We see the likelihood of Tesla providing an update on this next-generation battery this next-gen battery is during Battery Day. While the 200 cycles as disclosed in its latest research paper appear likely although far from ready for commercialisation (Nature Energy, 15 August 2020), we believe Tesla commercialisation in the will nonetheless provide a teaser for this technology during Battery Day. A lithium metal near term is unlikely battery with LiDFOB/LiBF4 appears to be a good fit for Tesla’s next-generation battery, and Jeff Dahn’s team has discussed the possibility of electrified urban aviation enabled by this

Asia ex-Japan Battery Materials: 11 September 2020

new battery technology. Jeff Dahn’s team even concluded that a lithium metal battery with

LiDFOB/LiBF4 can provide 60% higher volumetric energy density with little cost difference per cell, thus helping with significant cost reduction at the pack level. The findings match a recent tweet by Musk, “400Wh/kg *with* high cycle life, produced in volume (not just a lab) is not far. Probably 3 to 4 years” (Twitter, 24 August 2020).

Schematic diagrams and price-performance of NMC532 Li-ion and anode-free cells

Energy density (Wh/L) NMC532 Li-ion Cell 1,200 Stack Cell 984 400 km $$

700 574

$ 680km

NMC532 Li-ion Cell Anode-free Cell Anode-free Cell

Source: Daiwa, Nature Energy

Positive watchlist – Capchem Capchem – collaborating with Tesla on novel dual-salt development Capchem has been Capchem disclosed in April 2020 that aside from the ultra-capacitor business, it was supplying LiDFOB and collaborating with Tesla but that such collaboration had yet to bring any material financial

LiBF4 to Tesla’s battery contribution (Shenzhen Stock Exchange, 13 April 2020). Based on our research on patents research team and the research papers filed by Tesla’s Canada R&D Centre and Tesla’s leading scientist, Jeff Dahn, we find that Capchem has been supplying lithium salts and additives to Tesla’s scientific team for the development of novel electrolyte systems with niche-market lithium

salts, including lithium difluorophosphate (LFO, LiPO2F2) for conventional LiBs, as well as lithium tetrafluoroborate (LiBF4) and lithium difluoro(oxalato) borate (LiDFOB) for the development of electrolytes for use in an anode-free/lithium-metal battery.

As for the development dual-salt LiBF4/LiDFOB, we note that Tesla’s research team has been utilising LiBF4 and LiDFOB provided by Capchem in all of its studies. While BASF (BAS ETR, not rated) also provided LiBF4 to Tesla, Capchem already acquired BASF’s Europe and Americas businesses in 2018. As such, we see a real possibility of Capchem

being a direct supplier of LiBF4 and LiDFOB to Tesla should Tesla commercialise a dual- salt technology and anode-free/lithium-metal battery.

Tesla: publications related to LiBF4/LiDFOB Date Title Author Link LiBF4/LiDFOB Supplier(s)

10-Aug-20 Diagnosing and correcting anode-free cell failure via electrolyte and morphological analysis Jeff Dahn's Team Nature Energy Capchem, BASF 9-Jul-20 Electrolytes with lithium difluoro(oxalato)borate and lithium tetrafluoroborate salts for lithium metal and anode-free cells Tesla Motors Canada ULC Google Patents Capchem, 3M

17-Jun-20 Cycling Lithium Metal on Graphite to Form Hybrid Lithium-Ion/Lithium Metal Cells Jeff Dahn's Team Joule Capchem

15-Jul-19 Long cycle life and dendrite-free lithium morphology in anode-free lithium pouch cells enabled by a dual-salt liquid electrolyte Jeff Dahn's Team Nature Energy Capchem, BASF

Source: Google Patents, IOP Publishing

Asia ex-Japan Battery Materials: 11 September 2020

High-loaded SiC anode – a fatal blow to graphite?

Talk in the market that On 22 August, Tesla released the registration link for its 2020 Annual Meeting of silicon nanowire will be Stockholders and its Battery Day (Tesla.com, 22 August 2020), and the background to the introduced during thumbnail attracted much attention from the Tesla community. The background seems to Battery Day depict some individual nanowires (a nanostructure that has been studied to create batteries with higher performance), according to some media (Electrek, 24 August 2020; Tesmanian, 24 August 2020; Tesmanian, 22 August 2020). The hype over nanowire technology reached its peak in mid-August when Musk replied on Twitter to a tweet relating to Amprius Technologies and suggested that “400 Wh/kg *with* high cycle life, produced in volume (not just a lab) is not far. Probably 3 to 4 years.” (Tesmanian, 24 August 2020). Based on market talk, such high energy density (60% above the current 2,170 cell) can only be achieved through nanowire technology.

Tesla: 2020 Annual Meeting of Stockholders and Battery Day Structure of SiNW thumbnail

Source: Tesla Source: ScienceDirect

Yet Musk denounced the Elon Musk denied Tesla’s relationship with Amprius in a recent tweet. On 27 August, possibility of a pure Musk replied to an inquiry on Twitter and clarified that Tesla had “Nothing” to do with silicon anode Amprius (Twitter, 27 August 2020) and suggested that the thumbnail was just showing some “folded-over current collectors at the top/bottom of the cell”. More importantly, Musk explained that “Adding silicon to carbon anode makes sense. We already do. Question is just what ratio of silicon to carbon & what shape? Silicon expands like crazy during discharge & comes apart, so cycle life is usually bad.” This suggests that both 1) micro- cracking and 2) volume expansion are overhangs to adoption of pure silicon anode. As such, even though nanowire can suppress micro-cracking, volume expansion is still a key overhang to be cleared which also leads to unwanted excessive solid electrolyte interphase (SEI) formation and capacity loss.

Illustration of silicon volume expansion Material Density Intermetallic Capacity Volume Expansion (unit) g/cm3 mAh/g mAh/cm3 % Carbon 2.25 LiC6 372 837 12 Silicon 2.33 Li22Si5 4,200 9,786 320

Charge

Discharge

Si Si Li Li22Si5 Source: Chinese Academy of Science

Asia ex-Japan Battery Materials: 11 September 2020

High-loaded SiC anode Tesla’s long-time quest for silicon doping remains intact. While Musk’s reply to the may still be introduced tweet on 27 August suggested that pure silicon anode is unlikely based on existing despite a pure silicon technology, we do not rule out the possibility of Tesla introducing silicon-carbon (SiC) anode being unlikely anode with a more optimised SiC ratio (>10% Si content for higher energy density yet manageable volume expansion) during Battery Day. To further improve the energy density of its batteries, Tesla has been working on the adoption of silicon in batteries for years. Tesla was the first OEM to introduce silicon-doped cells for EVs. Earlier this year, there was also talk in the market about Tesla quietly acquiring a battery high-loading silicon anode start-up called SilLion (TeslaRati, 14 February 2020).

Negative watchlist – POSCO Chem, Putailai POSCO Chemical – preparing for synthetic graphite, but not for SiNW Limited preparedness We believe the introduction of SiNW would negatively affect the fundamentals of traditional for silicon anode carbon-base anode suppliers. POSCO Chemical recently announced that it is preparing for synthetic graphite, targeting mass production from 2023, expanding its portfolio from natural to synthetic graphite. Based on POSCO group’s steel business, POSCO Chemical is one of the traditional carbon-base anode suppliers, but silicon anode is not in its interests at the current time. Therefore, POSCO Chemical would also be negatively affected by the wave of pure-silicon anode if it becomes a reality.

Putailai – pure silicon anode may strike a fatal blow to Putailai Pure silicon anode may We see adoption of pure silicon anode as a major risk to Putailai. While Putailai looks well strike a fatal blow to prepared for the adoption of silicon-carbon anode, in our view, it has limited preparedness graphite makers in in the area of pure-silicon given Putailai’s status as the largest synthetic graphite producer China, including Putailai in the world. We believe the introduction of SiNW anode could strike a fatal blow to all anode producers in China, given their dedicated focus on graphite-based anode, and Putailai would be no exception.

Putailai: SiC anode products Company Product D50 particle size Tapped density BET Capacity 1st cycle efficiency (unit) μ m g/cm3 m2/g mAh/g % Jiangxi Zichen S/C-380mAh/g 17-19 0.85-0.95 1.4-1.6 375-385 90-92 Jiangxi Zichen S/C-400mAh/g 15-17 0.85-0.95 1.5-1.7 395-405 89-91 Jiangxi Zichen S/C-420mAh/g 14-16 0.75-0.85 1.7-1.9 415-425 87-89 Jiangxi Zichen S/C-450mAh/g 17-19 0.75-0.85 1.9-2.1 440-460 86-88 Jiangxi Zichen S/C-600mAh/g 12-14 0.65-0.75 2.9-3.1 590-610 83-85 Jiangxi Zichen S/C-950mAh/g 15-17 0.65-0.75 2.9-3.1 590-610 83-85 Jiangxi Zichen S/C-950mAh/g 15-17 0.65-0.75 2.9-3.1 590-610 83-85

Source: Companies, Daiwa

Asia ex-Japan Battery Materials: 11 September 2020

Hybrid battery-capacitor cathode – best of both worlds

When Tesla acquired Maxwell, the largest ultra-capacitor producer in the world, in 2019, the market was anticipating Tesla to improve battery performance by incorporating useful capacitor technology. While the cross-over of these technologies can also be found the powertrain, pack, and physical cell architecture levels, we focus on the discourse of cell chemistry in this report, which is most relevant to our covered material names. Our research found that a hybrid battery-capacitor cathode has been developed by Maxwell, enabling high energy density and pulse power, which could probably be adopted by Tesla according to Maxwell’s patent filed in 2018.

Maxwell has already Hybrid battery/capacitor cathode can theoretically have both high energy density developed a hybrid and pulsed power. According to “Prelithiated Hybridized Energy Storage Device” in 2018 battery-capacitor (Google Patents, 23 August 2018), Maxwell suggested that “Hybridized electrodes can cathode produce higher energy density energy storage devices, similar to a battery, which can also deliver higher pulse power, similar to a capacitor”. The hybrid cathode is produced by mixing a capacitor cathode (carbon in different forms, eg, graphene, nanotubes) and battery cathodes (NMC, NCA, LFP) at a ratio of between 9:1 and 1:9.

Chinese media suggests Earlier this year, Chinese media outlet Egsea reported that Tesla’s new battery is a Tesla will introduce a combination of dry battery technology and ultra-capacitor. On 22 February 2020, a battery which is a person familiar with Tesla interviewed by Egsea suggested that Tesla’s new battery is “a combination of DBE and combination of DBE and ultra-capacitor while the concrete content will be released during ultra-capacitor Battery Day” (Egsea, 22 February 2020), which is in line with the invention described in Maxwell’s 2018 Patent. Bewilderingly, Elon Musk commented in January this year that “with the advent of high energy LiB, a capacitor is not the right path” and “it (an ultra- capacitor) is unnecessary” (Youtube, 9 February 2020). Yet, it is uncertain whether Musk was referring to an ultra-capacitor being unnecessary at the cell, pack, or powertrain level, or all together. We do not rule out the possibility that Tesla has found a way to incorporate the desirable properties of the ultra-capacitor into its own battery, and thus that separate ultra-capacitor usage in EVs will no longer be needed.

Positive watchlist – Capchem Capchem – riding on capacitor exposure Capchem likely to While the exact chemistry of a cell with a hybrid battery-capacitor cathode remains unclear, benefit sentiment-wise we believe any involvement of an ultra-capacitor announced during Tesla’s Battery Day given its exposure to would be positive for the share price of Capchem with its supercapacitor chemicals capacitor electrolyte business exposure, and given A-share investors’ appetite for “positive momentum” stocks chemicals (see SOE reforms: a new chapter, 10 June 2020 from Daiwa’s China strategist, Patrick Pan). It is noteworthy that on 24 February, several A-share stocks with ultra-capacitors, including Capchem, rose by 10% due solely to Egsea’s report on Tesla’s new battery.

Ultra-capacitor names: YTD share price 230 210 190 Egsea reported that Tesla's new battery will be 170 a combination of dry battery technology and ultra-capacitor. 150 130 110 90 70 50 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Capchem (300037 CH) Sieyuan Electric (002028 CH) Anhui Taier (002347 CH)

Source: Bloomberg; Note: Rebased to 100 as of 2 January 2020

Asia ex-Japan Battery Materials: 11 September 2020

Solid-state battery – an unlikely end game

The conventional wisdom in the LiB industry is that a liquid electrolyte must be replaced by a solid-state electrolyte for lithium-metal/anode-free battery for stable cycling and flat dendrite-free lithium morphologies. As such a lot of people have been expecting Tesla to introduce a solid-state battery someday, with solid electrolyte alongside solid electrodes, for a next-generation LiB with a significant boost in energy density. Yet, the introduction of a solid-state electrolyte would likely turn the electrolyte manufacturing supply chain upside down. While Asian players like Toyota and Samsung SDI have been actively developing solid-state batteries, we see it unlikely to be the case for Tesla.

Schematic diagrams of Li-ion battery and all-solid-state battery

Source: Bloomberg

Two key disadvantages In Tesla’s research paper, two key disadvantages of solid-state electrolyte (SSE) of SSE batteries remain batteries were highlighted. In a research paper published last year (Nature Energy, 15 unresolved July 2019), Tesla’s Jeff Dahn research team claimed that solid-state electrode was an unlikely and undesirable choice for lithium metal/anode/free cell. First, it was found that solid-state electrolytes cannot completely eliminate dendrites from a cell. Second, Dahn’s team questioned “how compatible these technologies will be with existing lithium-ion manufacturing infrastructure, in which billions of dollars have been invested”. With the promising performance of 80% capacity retention after 200 charging cycles for a lithium- metal/anode-free battery with a dual-lithium salt liquid electrolyte system developed by the team, we believe Tesla will stick with developing liquid electrolytes, which in Tesla’s words are “(enabling) existing manufacturing equipment to be used to rapidly commercialise high- energy-density cells”.

Tesla: normalised discharge capacity vs. cycle number for anode-free cells

1.2

1.0 80% capacity retention after 200 cycles

0.8

0.6

0.4

0.2

0.0 0 50 100 150 200 2M LiDFOB 1.4M LiBF4 high P 20C 2M LiDFOB 1.4M LiBF4 high P 40C 0.6M LiDFOB 0.6M LiBF4 high P 40C 0.6M LiDFOB 0.6M LiBF4 low P 40C Source: Nature Energy Note: Blue line represents that anode-free cells with liquid LiDFOB/LiBF4 electrolyte achieved 80% capacity retention after 200 cycles under high pressure formation process at 20°C.

Asia ex-Japan Battery Materials: 11 September 2020

Positive watchlist – Ganfeng Ganfeng is a first mover While we see a low possibility of Tesla announcing a solid-state battery, we believe in the development of Ganfeng would nonetheless benefit from Tesla’s introduction of a solid-state battery SSE batteries sentiment-wise. Aside from the production of lithium feedstock (lithium hydroxide and lithium carbonate), Ganfeng is also developing solid-state batteries and solid electrolyte powders. We believe Ganfeng stands to benefit momentum-wise should Tesla introduce a solid-state battery, given Ganfeng is one of the very few companies in China with solid electrolyte production know-how. That said, we see no sign of Ganfeng’s collaboration with Tesla extending into the area of solid-state battery as of now.

Ganfeng: solid electrolyte powders Ganfeng: compact solid electrolyte sheet

Source: Company Source: Company

Neutral watchlist – Capchem Benefit from SSE Currently, Capchem already produces solid-state capacitor segment chemicals and is a exposure on the hand leading producer of ethylene dioxythiophene (EDOT) as well as a wide range of oxidizing but suffer from lower agents for novel solid-state capacitors with better safety and no risk of explosion, unlike liquid electrolyte conventional aluminium electrolytic capacitors with liquid electrolytes. At the same time, demand on the other Capchem has also been developing chemicals for solid-state electrolytes, but has not hand disclosed its process due to commercial secrecy. Tesla’s introduction of a solid-state battery would have mixed implications for Capchem if it happens. On the one hand, Capchem is a market leader in the commercialisation of solid-state capacitor electrolytes and research of solid-state LiB electrolytes. On the other hand, Capchem is after all a liquid electrolyte producer, and would be negatively affected by the introduction of a solid- state electrolyte.

Solid-state capacitor supply chain

Cathode Foil EDOT Solid Electrolyte Oxidizing Agents Solid-state Capacitor Anode Foil

Electrolytic Paper

Aluminum Can

Source: Daiwa Note: Gold highlighted boxes represent products of Capchem

Korea Materials 11 September 2020

(247540 KS) Ecopro BM Ecopro BM

Target price: KRW210,000 (from KRW210,000) Share price (10 Sep): KRW148,000 | Up/downside: +41.9%

Strongest cathode player in Korea Henny Jung (82) 2 787 9182  Promising growth outlook throughout 2020-22E [email protected]  High-nickel technology/vertical integration are its key advantages SK Kim (82) 2 787 9173  Reiterating our Buy (1) call, with an unchanged TP of KRW210,000 [email protected]

What's new: We recommend Ecopro BM as our top pick in the Asia xJ EV Forecast revisions (%) Battery Materials sector, with its competitive advantages in: 1) high-nickel Year to 31 Dec 20E 21E 22E technology, and 2) vertical integration, and also with its promising growth Revenue change - - - Net profit change - - - outlook along with key customers’ capacity expansion plans. Core EPS (FD) change - - - Source: Daiwa forecasts What's the impact: Promising outlook supported by customers’ capacity expansion plans. Ecopro BM’s largest customers in the EV Share price performance battery segment are SK Innovation (096770 KS, KRW158,000, Buy [1]) and (KRW) (%) Samsung SDI (006400 KS, KRW430,000, Buy [1]). While SK Innovation 165,000 260 plans to expand its global EV battery capacity to 62Gwh by 2022 (from 133,750 215 4.7Gwh in 2019), Ecopro BM is expanding its high-nickel NCM cathode 102,500 170 71,250 125 materials production line, CAM5, targeting capacity of 33,000tpa by 2022. 40,000 80 On the other hand, the company has also established a JV with Samsung Sep-19 Dec-19 Mar-20 Jun-20 Sep-20

SDI to supply NCA materials for SDI’s Gen-5 batteries, for which SDI will Ecopro BM (LHS) Relative to KOSPI (RHS) start mass production from 2H20 to mid-2020. By adding 30,000tpa at this JV by 2022E, Ecopro BM would have 56,000tpa capacity of NCA in total by 12-month range 45,150-162,400 the end of 2022E. Market cap (USDbn) 2.62 3m avg daily turnover (USDm) 64.47 Shares outstanding (m) 21 Well prepared for next-generation technologies. In its 2Q20 results Major shareholder Ecopro (55.0%) conference call, Ecopro BM said it had completed development of single- crystal and NCMX cathode technology and is now undergoing qualification Financial summary (KRW) testing with a number of customers. We assume Tesla will include single- Year to 31 Dec 20E 21E 22E crystal as one of its future battery technologies, which implies Ecopro BM’s Revenue (bn) 884 1,417 2,052 preparedness for this technology could be a share-price catalyst. Operating profit (bn) 65 114 157 Net profit (bn) 46 88 123 Core EPS (fully-diluted) 2,231 4,309 5,991 Vertical integration another competitive advantage. Ecopro BM has EPS change (%) 32.5 93.1 39.0 internalised 100% of the precursors for its high-nickel cathodes, which Daiwa vs Cons. EPS (%) 7.7 14.2 3.8 account for over 50% of its raw-materials costs. Management plans to PER (x) 66.3 34.3 24.7 Dividend yield (%) 0.1 0.2 0.3 ramp up the company’s precursor capacity along with its capacity DPS 200 300 400 expansion going forward, to keep its vertical integration a step ahead of its PBR (x) 7.8 6.4 5.2 competitors’. The Ecopro Group also has a longer-term plan for a battery EV/EBITDA (x) 35.0 22.7 17.4 ROE (%) 12.1 20.6 23.3 recycling business, targeting around 2030, when it should be able to source Source: FactSet, Daiwa forecasts recycled key raw materials (eg, lithium) at low prices.

What we recommend: We reiterate our Buy (1) rating on Ecopro BM and 12-month TP of KRW210,000. Our TP is based on a target PER of 64x (implying a PEG of 1.0x, with its EPS CAGR of 64% over 2020-22E), applied to our average 2020-21E EPS. Key downside risk: key customers losing ground in the global EV market due to drastic technological changes for which they are not ready.

How we differ: Our 2020-22E EPS are 4-14% above consensus likely due to our higher assumption for its NCM materials supply to SK Innovation.

See important disclosures, including any required research certifications, beginning on page 53

Ecopro BM (247540 KS): 11 September 2020

Financial summary Key assumptions Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E NCA capacity (year-end) n.a. 8,520.0 11,000.0 14,000.0 26,000.0 36,000.0 36,000.0 56,000.0 NCM capacity (year-end) n.a. n.a. 140.0 1,500.0 3,000.0 13,000.0 23,000.0 33,000.0 EV% of total sales (%) n.a. n.a. n.a. 19.5 22.4 42.6 57.7 65.1

Profit and loss (KRWbn) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E NCA n.a. 113 235 425 450 450 525 636 CSG (NCM) n.a. 0 0 115 138 377 817 1,337 Other Revenue n.a. (13) (163) 50 28 57 74 79 Total Revenue n.a. 100 72 589 616 884 1,417 2,052 Other income n.a. 9 12 22 29 30 35 37 COGS n.a. (82) (61) (510) (543) (771) (1,235) (1,789) SG&A n.a. (8) (7) (29) (36) (49) (68) (106) Other op.expenses n.a. (9) (12) (22) (29) (30) (35) (37) Operating profit n.a. 9 4 50 37 65 114 157 Net-interest inc./(exp.) n.a. (2) (1) (6) (4) (4) (6) (6) Assoc/forex/extraord./others n.a. (1) 12 (1) (5) (2) 8 14 Pre-tax profit n.a. 6 15 43 28 58 116 165 Tax n.a. 1 (2) (6) 6 (12) (28) (42) Min. int./pref. div./others n.a. 0 0 0 0 0 0 0 Net profit (reported) n.a. 7 13 37 34 46 88 123 Net profit (adjusted) n.a. 7 26 37 34 46 88 123 EPS (reported)(KRW) n.a. 335 656 1,800 1,684 2,231 4,309 5,991 EPS (adjusted)(KRW) n.a. 335 1,272 1,800 1,684 2,231 4,309 5,991 EPS (adjusted fully-diluted)(KRW) n.a. 335 1,272 1,800 1,684 2,231 4,309 5,991 DPS (KRW) n.a. 0 0 0 150 200 300 400 EBIT n.a. 9 4 50 37 65 114 157 EBITDA n.a. 18 16 73 66 95 148 195

Cash flow (KRWbn) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit before tax n.a. 6 15 43 28 58 116 165 Depreciation and amortisation n.a. 9 12 22 29 30 35 37 Tax paid n.a. 1 (2) (6) 6 (12) (28) (42) Change in working capital n.a. (43) 2 (35) (67) (42) (117) (109) Other operational CF items n.a. 17 (22) (0) 16 6 (5) (9) Cash flow from operations n.a. (10) 5 24 13 40 1 43 Capex n.a. (49) 0 (73) (182) (84) (97) (88) Net (acquisitions)/disposals n.a. 0 0 0 0 0 0 0 Other investing CF items n.a. (1) (44) (0) (113) (33) (5) (5) Cash flow from investing n.a. (50) (44) (73) (294) (117) (102) (93) Change in debt n.a. 81 25 65 18 50 77 5 Net share issues/(repurchases) n.a. 93 1 10 183 0 0 0 Dividends paid n.a. 0 0 0 0 (3) (4) (6) Other financing CF items n.a. (108) 18 (30) (20) (26) (18) (15) Cash flow from financing n.a. 65 43 45 180 20 55 (16) Forex effect/others n.a. 0 0 0 0 0 0 0 Change in cash n.a. 6 4 (4) (102) (57) (46) (66) Free cash flow n.a. (58) 5 (49) (169) (44) (96) (45) Source: FactSet, Daiwa forecasts

Ecopro BM (247540 KS): 11 September 2020

Financial summary continued … Balance sheet (KRWbn) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Cash & short-term investment n.a. 6 14 10 20 27 43 40 Inventory n.a. 48 63 139 159 202 318 429 Accounts receivable n.a. 25 0 52 59 81 126 176 Other current assets n.a. 4 41 12 7 21 22 22 Total current assets n.a. 83 118 212 246 332 509 667 Fixed assets n.a. 127 159 233 377 395 427 448 Goodwill & intangibles n.a. 15 15 14 14 12 11 10 Other non-current assets n.a. 3 4 6 14 15 16 16 Total assets n.a. 229 296 464 650 754 963 1,141 Short-term debt n.a. 49 65 80 56 86 106 101 Accounts payable n.a. 10 0 59 25 42 63 95 Other current liabilities n.a. 25 63 67 57 77 102 122 Total current liabilities n.a. 84 128 206 138 205 270 317 Long-term debt n.a. 32 40 90 132 152 209 219 Other non-current liabilities n.a. 15 13 8 10 11 14 20 Total liabilities n.a. 130 181 304 280 367 493 555 Share capital n.a. 8 8 8 10 10 10 10 Reserves/R.E./others n.a. 92 107 152 360 377 459 575 Shareholders' equity n.a. 99 115 161 370 387 470 585 Minority interests n.a. 0 0 0 0 0 0 1 Total equity & liabilities n.a. 229 296 464 650 754 963 1,141 EV n.a. 3,178 3,194 3,263 3,271 3,313 3,375 3,383 Net debt/(cash) n.a. 75 92 160 168 210 272 279 BVPS (KRW) n.a. 4,873 5,651 7,874 18,156 18,984 23,036 28,677

Key ratios (%) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Sales (YoY) n.a. n.a. (27.9) 718.8 4.6 43.5 60.3 44.8 EBITDA (YoY) n.a. n.a. (12.5) 350.4 (9.0) 42.8 56.9 31.0 Operating profit (YoY) n.a. n.a. (58.5) 1,191.1 (26.3) 74.2 76.0 38.3 Net profit (YoY) n.a. n.a. 279.3 41.6 (6.4) 32.5 93.1 39.0 Core EPS (fully-diluted) (YoY) n.a. n.a. 279.3 41.6 (6.4) 32.5 93.1 39.0 Gross-profit margin n.a. 17.9 15.1 13.5 11.9 12.8 12.8 12.8 EBITDA margin n.a. 18.5 22.5 12.3 10.8 10.7 10.5 9.5 Operating-profit margin n.a. 9.4 5.4 8.5 6.0 7.3 8.0 7.7 Net profit margin n.a. 6.9 36.2 6.3 5.6 5.2 6.2 6.0 ROAE n.a. n.a. 24.3 26.7 13.0 12.1 20.6 23.3 ROAA n.a. n.a. 9.9 9.7 6.2 6.5 10.3 11.7 ROCE n.a. n.a. 1.9 18.2 8.3 10.9 16.1 18.6 ROIC n.a. 6.0 1.8 16.4 10.5 8.9 12.9 14.6 Net debt to equity n.a. 75.4 79.6 100.0 45.4 54.3 57.8 47.8 Effective tax rate n.a. (12.3) 10.2 14.1 (21.7) 21.4 24.3 25.5 Accounts receivable (days) n.a. n.a. 64.2 16.0 32.9 29.1 26.8 26.9 Current ratio (x) n.a. 1.0 0.9 1.0 1.8 1.6 1.9 2.1 Net interest cover (x) n.a. 4.0 2.8 7.9 9.8 15.5 20.5 24.2 Net dividend payout n.a. 0.0 0.0 0.0 8.9 9.0 7.0 6.7 Free cash flow yield n.a. n.a. 0.2 n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

Ecopro BM is a leading Korean cathode materials supplier. The company supplies nickel cobalt aluminium (NCA) and nickel cobalt manganese (NCM) chemistry for IT, non-IT, and EV battery cathodes. Ecopro BM was spun off from Ecopro to focus on EV battery materials and was listed in March 2019.

Ecopro BM (247540 KS): 11 September 2020

Ecopro BM: capacity expansion plan by material type Ecopro BM: revenue breakdown (ton/year) 100% 100,000 22.4% 80% 19.4% 80,000 42.6% 33,000 57.7% 60% 65.7% 60,000 23,000 40% 40,000 13,000 72.1% 73.1% 3,000 56,000 50.9% 20% 20,000 36,000 36,000 37.0% 30.5% 26,000 14,000 0 0% 2018 2019 2020E 2021E 2022E 2018 2019 2020E 2021E 2022E NCA NCM Non-IT EV ESS Others

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts Note: Capacity as of year-end

Advantages of single-crystal cathodes

Source: Ecopro BM

Ecopro BM: vertical integration Ecopro: affiliates for vertical integration

Ecopro BM • Ecopro BM(precursor) • Ecopro BM(cathode) • Ecopro GEM(precursor) • Ecopro Innovation(LiOH - scrap) 086520 KS

Precursor manufacturing process Cathode manufacturing process (Lithium synthesis  Cathode)

Upstream Metal(Nickel, Cobalt) + Other raw Precursor + Lithium 100% 48% 54% 100% 92% materials (Ammonia, Caustic soda) Coating + Heat Treatment

 Raw material  Back-End Cathode 247540 KS recycling  Precursor First Plastic working Raw material Input Material  Lithium conversion process High Purity process Secondary Battery Precursor for Cathode Materials for Lithium Manufacture Oxygen/Nitrogen for Recycling Cathode Materials Secondary Battery for Cathode Materials Cathode Materials

LCO and the existing NCM

High- Nickel Based CHINA 7.4% 100%

Joint Venture Internalization rate 10% Self-production (without back-end process) Precursor for Competitor NCA Specialized Cathode Materials Production Source: Company, Daiwa Source: Company, Daiwa

China Materials 11 September 2020

(1772 HK) Ganfeng Lithium Ganfeng Lithium

Target price: HKD51.00 (from HKD46.50) Share price (10 Sep): HKD36.10 | Up/downside: +41.3%

A long-term buy on solid demand from Tesla Dennis Ip, CFA (852) 2848 4068  Lithium-positive techs to be announced directly benefiting Ganfeng [email protected]  Expansion delay by lithium majors can induce LiOH shortage by 2021E Leo Ho (852) 2848 4469  Reaffirm Buy (1) call; lifting TP to HKD51 after switching to DCF valuation [email protected]

What's new: Ganfeng is our top H-share battery materials pick. We expect Forecast revisions (%) multiple technologies to be rolled out at Tesla’s Battery Day to boost per- Year to 31 Dec 20E 21E 22E battery lithium usage. We reaffirm our Buy (1) rating and lift our TP to HKD51 Revenue change 0.9 19.6 22.7 after switching to DCF to reflect the company’s long-term growth prospects. Net profit change (0.6) 3.7 7.6 Core EPS (FD) change (2.3) 2.0 5.8 What's the impact: Lithium-positive technologies likely to be adopted. Source: Daiwa forecasts The two key technologies that are likely to be introduced by Tesla are lithium- Share price performance positive, which will likely directly benefit Ganfeng, in our view. 1) Single- crystal cathode technology will require 10-20% higher per battery lithium (HKD) (% ) 55 550 hydroxide (LiOH) content to compensate for lithium loss due to vaporisation 43 425 under high sintering temperature. 2) Anode pre-lithiation will create future 30 300 demand for lithium metal. To put it into perspective, Ganfeng is the largest 18 175 5 50 LiOH supplier for Tesla, sole LiOH provider for Giga Shanghai, and the Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 largest lithium metal producer in the world, with a c.50% market share. Ganfeng Li (LHS) Relative to HSI (RHS) Ganfeng entered into a contract in 2018 with Tesla to supply 20% of its BQ LiOH output pa for 2018-20, and the contract can be renewed after 3 years upon mutual consent. We see the contract renewal as highly likely given 12-month range 9.48-50.90 Market cap (USDbn) 6.02 Tesla’s dependency on Ganfeng; c.1/3 of Ganfeng’s BQ LiOH in 1H20 was 3m avg daily turnover (USDm) 18.60 consumed by Tesla, based on our checks, exceeding the 20%-contractual Shares outstanding (m) 1,293 mark. We would see the renewal of the contract based on the existing terms Major shareholder Li Liangbin (20.5%) as a major positive for Ganfeng, since it implies a more than doubling of supply to Tesla in the future against the backdrop of Ganfeng’s BQ LiOH Financial summary (CNY) capacity expansion from 31ktpa in 2019 to 81ktpa by end-2020. Year to 31 Dec 20E 21E 22E Revenue (m) 5,485 8,636 11,656 Operating profit (m) 587 2,194 3,907 Top-grade LiOH shortage is likely. While global nameplate LiOH capacity Net profit (m) 583 1,594 2,546 is still pointing to a prevailing surplus, we see emerging signs of a shortage Core EPS (fully-diluted) 0.444 1.213 1.937 EPS change (%) (16.3) 173.2 59.7 for top-tier BQ LiOH, as flagged previously (Flash, 19 June 2020). It is Daiwa vs Cons. EPS (%) (9.7) 9.4 14.5 noteworthy that major OEMs (Tesla, VW and BMW) only take BQ LiOH PER (x) 71.8 26.3 16.4 from a handful of suppliers (Ganfeng, Albemarle, Livent and Tianqi) being Dividend yield (%) 1.0 1.5 1.9 qualified after lengthy (1-2 years) verification process. We note: 1) DPS 0.334 0.475 0.591 PBR (x) 5.0 4.4 3.7 Albemarle: slow-walking Kemerton construction (50ktpa), shutting down of EV/EBITDA (x) 49.0 15.8 9.7 King’s Mountain operations (5ktpa), and seeing setback in verification for ROE (%) 7.1 18.1 25.0 Jiangxi Plant (20ktpa), 2) Livent: halting Bessemer expansion (20ktpa), Source: FactSet, Daiwa forecasts and 3) Tianqi: terminating Kwinana development (48ktpa). With none of these projects being re-initiated in 3Q20E, we see tighter supply for BQ LiOH as likely and thus lift our 2021/22E LiOH ASP to CNY86/95kpt.

What we recommend: We reaffirm our Buy (1) call and raise our 12-month TP to HKD51.0 (from HKD46.5) after switching to DCF-based valuation (from 5.5x PBR) through 2024 to reflect Ganfeng’s long-term growth prospects. We raise our 2021-22E EPS by 2-6% on our higher LiOH ASP assumptions. Downside risk: slower-than-expected capacity growth in China and Argentina.

How we differ: We are upbeat on long-term battery-quality LiOH ASP.

See important disclosures, including any required research certifications, beginning on page 53

Ganfeng Lithium (1772 HK): 11 September 2020

Financial summary Key assumptions Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Lithium Hydroxide (CNY/t) 40,900 104,200 102,700 114,500 92,200 78,370 86,207 94,828 Lithium Carbonate (CNY/t) 43,300 112,000 122,209 93,600 63,300 50,640 53,172 55,831 Lithium Hydroxide Production (tLCE) 3,975 7,021 6,093 12,982 21,015 28,512 49,896 57,024 Lithium Carbonate Production (tLCE) 7,943 10,275 18,298 16,325 23,136 21,125 36,225 57,356 Lithium Metal (CNY/t) 353,000 535,900 647,770 717,800 603,400 494,382 528,090 561,798 Lithium Metal Production (t) 1,341 1,126 1,384 1,519 1,435 1,360 1,440 1,748

Profit and loss (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Lithium Compounds 646 1,735 2,880 3,182 3,485 3,797 6,700 9,320 Lithium Metal 422 493 818 971 667 598 677 874 Other Revenue 277 405 473 737 1,095 1,090 1,259 1,462 Total Revenue 1,344 2,633 4,171 4,890 5,246 5,485 8,636 11,656 Other income 0 0 0 0 0 0 0 0 COGS (1,044) (1,628) (2,496) (3,136) (4,009) (4,180) (5,784) (7,057) SG&A (117) (160) (246) (443) (432) (265) (296) (311) Other op.expenses (49) (528) (154) (290) (566) (453) (362) (380) Operating profit 134 317 1,275 1,021 240 587 2,194 3,907 Net-interest inc./(exp.) (19) (21) (57) (90) (205) (254) (206) (184) Assoc/forex/extraord./others 128 893 1,149 1,139 442 419 429 439 Pre-tax profit 243 1,189 2,367 2,070 477 752 2,416 4,162 Tax (25) (71) (272) (163) (121) (165) (532) (916) Min. int./pref. div./others (0) (1) 0 (1) 5 (3) (291) (700) Net profit (reported) 218 1,117 2,096 1,907 361 583 1,594 2,546 Net profit (adjusted) 199 1,127 1,821 1,822 697 583 1,594 2,546 EPS (reported)(CNY) 0.199 0.991 1.887 1.681 0.279 0.451 1.233 1.970 EPS (adjusted)(CNY) 0.182 0.999 1.639 1.606 0.539 0.451 1.233 1.970 EPS (adjusted fully-diluted)(CNY) 0.182 0.997 1.638 1.579 0.530 0.444 1.213 1.937 DPS (CNY) 0.149 0.097 0.401 0.300 0.300 0.334 0.475 0.591 EBIT 134 317 1,275 1,021 240 587 2,194 3,907 EBITDA 212 406 1,381 1,168 463 844 2,655 4,412

Cash flow (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit before tax 243 1,189 2,367 2,070 477 752 2,416 4,162 Depreciation and amortisation 78 89 106 146 223 257 461 505 Tax paid (25) (71) (272) (163) (121) (165) (532) (916) Change in working capital 0 (131) (538) (1,286) (356) (116) (984) 56 Other operational CF items 70 (417) (1,159) (82) 447 124 67 34 Cash flow from operations 366 658 504 685 669 852 1,428 3,841 Capex (83) (537) (566) (1,139) (613) (800) (1,000) (1,500) Net (acquisitions)/disposals (163) (228) (291) (479) (1,562) (278) 140 150 Other investing CF items (304) (119) 17 (742) (648) 0 0 0 Cash flow from investing (550) (884) (840) (2,360) (2,823) (1,078) (860) (1,350) Change in debt (73) 308 1,882 495 1,322 1,108 (500) (500) Net share issues/(repurchases) 111 0 588 2,916 0 0 0 0 Dividends paid (56) (73) (297) (395) (388) (432) (614) (764) Other financing CF items 2 (4) 164 (296) (693) (254) (206) (184) Cash flow from financing (17) 231 2,337 2,721 241 422 (1,320) (1,448) Forex effect/others 2 1 (4) 7 22 0 0 0 Change in cash (199) 6 1,996 1,053 (1,891) 197 (752) 1,043 Free cash flow 283 121 (62) (454) 57 52 428 2,341 Source: FactSet, Daiwa forecasts

Ganfeng Lithium (1772 HK): 11 September 2020

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Cash & short-term investment 181 198 2,237 3,602 1,700 1,897 1,145 2,188 Inventory 313 534 915 1,905 2,334 2,290 2,852 2,320 Accounts receivable 479 577 945 1,002 914 1,031 1,585 2,127 Other current assets 126 796 470 1,406 769 817 1,037 1,212 Total current assets 1,099 2,105 4,568 7,915 5,717 6,035 6,619 7,846 Fixed assets 744 1,166 1,620 2,620 3,008 5,567 6,122 7,132 Goodwill & intangibles 374 159 245 280 381 365 349 334 Other non-current assets 380 852 1,566 2,825 5,107 3,514 3,514 3,514 Total assets 2,597 4,282 7,999 13,639 14,213 15,482 16,604 18,827 Short-term debt 179 539 1,211 1,356 1,969 1,469 1,219 969 Accounts payable 168 298 300 679 559 573 792 928 Other current liabilities 137 354 1,304 1,797 731 724 855 960 Total current liabilities 483 1,191 2,814 3,832 3,259 2,765 2,866 2,857 Long-term debt 106 56 351 706 2,124 1,671 1,469 3,117 Other non-current liabilities 55 71 790 1,005 420 2,271 2,222 324 Total liabilities 644 1,318 3,956 5,544 5,803 6,706 6,557 6,298 Share capital 378 753 947 1,521 1,498 1,709 1,709 1,709 Reserves/R.E./others 1,574 2,209 3,090 6,521 6,857 7,009 7,989 9,771 Shareholders' equity 1,952 2,962 4,037 8,042 8,355 8,718 9,698 11,480 Minority interests 1 2 6 54 55 58 349 1,049 Total equity & liabilities 2,597 4,282 7,999 13,639 14,213 15,482 16,604 18,827 EV 41,116 41,210 39,767 37,892 42,814 41,367 41,958 43,012 Net debt/(cash) 104 397 (675) (1,540) 2,393 1,243 1,543 1,897 BVPS (CNY) 5.167 3.935 5.165 5.959 6.305 6.422 7.181 8.560

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 4.6 57.4 35.0 EBITDA (YoY) n.a. 91.3 240.3 (15.5) (60.4) 82.4 214.5 66.2 Operating profit (YoY) n.a. 136.3 302.2 (19.9) (76.5) 144.9 273.6 78.1 Net profit (YoY) n.a. 466.6 61.6 0.1 (61.7) (16.3) 173.2 59.7 Core EPS (fully-diluted) (YoY) n.a. 449.0 64.4 (3.6) (66.4) (16.3) 173.2 59.7 Gross-profit margin 22.3 38.2 40.2 35.9 23.6 23.8 33.0 39.5 EBITDA margin 15.8 15.4 33.1 23.9 8.8 15.4 30.7 37.9 Operating-profit margin 10.0 12.0 30.6 20.9 4.6 10.7 25.4 33.5 Net profit margin 14.8 42.8 43.6 37.3 13.3 10.6 18.5 21.8 ROAE n.a. 45.9 53.6 31.2 8.7 7.1 18.1 25.0 ROAA n.a. 32.8 29.6 16.8 5.0 3.9 9.9 14.4 ROCE n.a. 10.9 27.8 13.0 2.1 4.8 17.8 26.6 ROIC n.a. 11.0 33.6 19.0 2.1 4.4 15.8 23.4 Net debt to equity 5.3 13.4 n.a. n.a. 28.6 14.3 15.9 16.5 Effective tax rate 10.3 6.0 11.5 7.9 25.4 22.0 22.0 22.0 Accounts receivable (days) n.a. 73.2 66.6 72.7 66.6 64.7 55.3 58.1 Current ratio (x) 2.3 1.8 1.6 2.1 1.8 2.2 2.3 2.7 Net interest cover (x) 7.2 15.1 22.4 11.3 1.2 2.3 10.6 21.3 Net dividend payout 74.9 9.8 21.2 17.8 107.5 74.0 38.5 30.0 Free cash flow yield 0.7 0.3 n.a. n.a. 0.1 0.1 1.0 5.7 Source: FactSet, Daiwa forecasts

Company profile

Ganfeng Lithium is the world's second-largest and China's largest lithium compounds producer. The company has a diversified product portfolio, offering more than 40 lithium compounds and metal products. As at end-2019, it had annual designed production capacity of 40.5k tonnes of lithium carbonate and 31k tonnes of lithium hydroxide.

Ganfeng Lithium (1772 HK): 11 September 2020

Ganfeng: DCF calculation Ganfeng: DCF sensitivity Target gearing (debt/capital) (%) 35% Discount NPV of FCF Enterprise Value Equity Value Equity Value Per Market risk premium (%) 10.0% Rate (CNYm) (CNYm) (CNYm) Share (HKD) Risk-free rate (%) 3.5% 7.5% 5,888 128,653 127,411 108.9 Cost of debt (%) 4.5% 8.0% 5,786 106,033 104,791 89.6 Cost of equity (%) 13.6% 8.5% 5,687 89,900 88,658 75.8 9.0% 5,590 77,819 76,576 65.5 WACC (%) 9.7% 9.5% 5,495 68,436 67,193 57.4

10.0% 5,402 60,941 59,699 51.0 Terminal Value 10.5% 5,310 54,820 53,577 45.8 Terminal Growth Rate 5.00% 11.0% 5,221 49,727 48,484 41.4 Terminal WACC 10.00% 11.5% 5,134 45,425 44,183 37.8 Estimated Terminal Free Cash Flow 4,183 12.0% 5,048 41,746 40,503 34.6 12.5% 4,965 38,563 37,320 31.9 NPV of Terminal Value (as at 31 Dec 2026) 83,735 NPV of Terminal Value (as at 10 Sep 2020) 55,540 DCF Valuation

NPV of Forecasts (CNYm) 5,402 NPV of Terminal Value (CNYm) 55,540 Enterprise Value (CNYm) 60,941 Less: Net Debt (end-2020E) (1,243) Equity Value (CNYm) 69,699 No. Shares (m) 1,293 FX (HKD/CNY) 1.11 Per Share Equity Value HKD51.0

Source: Daiwa estimates and forecasts Source: Daiwa estimates and forecasts

Ganfeng: DCF valuation (in CNYm) 2020 2021 2022 2023 2024 Terminal Valuation Date 10-Sep-20 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23 31-Dec-24 31-Dec-24 Next Balance Date 31-Dec-20 First Year Cash Flow Adjustment 0.31

Free Cash Flow EBITDA 844 2,655 4,412 5,552 6,935 Less: Cash Tax Payable on EBIT (129) (483) (860) (1,093) (1,381) Plus: Decrease in Working Capital (116) (984) 56 (915) (870) Less: Capital Expenditure (1,207) (1,000) (1,500) (1,500) (700) Free Cash Flow (608) 188 2,108 2,044 3,984 4,183

Free Cash Flow for Valuation Purposes (608) 188 2,108 2,044 3,984 4,183

WACC 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

NPV of Free Cash Flow (591) 166 1,692 1,492 2,642 55,540

Cumulative NPV of Free Cash Flow % of Forecast Value -11% -8% 23% 51% 100%

Source: Daiwa estimates and forecasts

Global lithium hydroxide capacity (t) 500,000

400,000

300,000

200,000

100,000

0 2019 2020E 2021E 2022E 2023E 2024E Ganfeng Tianqi Albemarle Livent SQM Weihua Yahua Tianyi Sichuan Chemical General Lithium Others

Source: Daiwa estimates

Ganfeng Lithium (1772 HK): 11 September 2020

Ganfeng Lithium: key 4M20 data ASP Sales Revenue Gross Profit Product Date Order (t) Sales (t) (CNY/t) (CNYm) (CNYm) GPM Lithium Hydroxide Jan-20 2,710.50 1,165.01 67,700 78.83 62.05 13.07% Feb-20 2,616.50 1,387.10 86,700 120.31 Mar-20 2,605.50 3,711.56 74,200 275.54

Apr-20 3,643.00 2,421.41 71,200 172.33

Lithium Carbonate Jan-20 1,169.00 843.53 50,800 42.85 (10.44) -7.15% Feb-20 732.00 637.00 44,200 28.17 Mar-20 2,004.10 1,666.79 45,000 74.98

Apr-20 1,033.29 2,399.28 38,500 92.31

Lithium Metal Jan-20 81.00 423,300 34.29 24.96 17.98% Feb-20 84.25 480,100 40.45 Mar-20 137.33 466,800 64.10

Apr-20 117.78 509,300 59.99 Source: Company

China: lithium carbonate prices (CNY/t) 200,000

175,000

150,000

125,000

100,000

75,000 Lepedolite cash cost Spodumene cash cost 50,000 Brine cash cost 25,000 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Battery Grade Industrial Grade Tianqi cash cost

Source: Bloomberg, Daiwa

Global lithium compounds market share in 2019 Asia: lithium compounds prices (CNY/t) 200,000

Albemarle Others 21% 150,000 27%

100,000 Ganfeng Lithium Orocobre 17% 50,000 4% Tianqi Livent Lithium SQM 0 6% 12% 13% 2016 2017 2018 2019 2020 2021 2022 Lithium Hydroxide Lithium Carbonate Lithium Hydroxide (forecast) Lithium Carbonate (forecast) Source: Companies, Daiwa Source: Bloomberg, Daiwa

Global lithium metal market share in 2019 Lithium metal price (China 99.9%) (CNY/t) 1,000,000 Others 12% 900,000 Livent 8% 800,000

Ganfeng 700,000 53% Tianqi 27% 600,000

500,000

400,000 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Source: Companies, Daiwa Source: Bloomberg

Ganfeng Lithium (1772 HK): 11 September 2020

Ganfeng: capex intensity for global lithium projects Australian spodumene cash cost curve Ganfeng Xinyu (USD/t) Ganfeng Ningdu 600 Jiangte Yahua Shandong Ruifu 400 Gen Lithium-Jiujiang Tianqi Kwinana Phase II 200 WES/SQM Kwinana ALB Kemerton Phase I Piedmont 0 Tianqi Kwinana Phase I 0 500,000 1,000,000 1,500,000 2,000,000 (LCE) Greenbushes Pilgangoora (Pilbara) Pilgangoora (Altura) 0 5,000 10,000 15,000 20,000 25,000 Wodgina Mt. Cattlin Mt. Marion (USD/t LCE) Bald Hill Spot Price Source: Ganfeng Source: Companies, Daiwa

Tianqi vs. Ganfeng: lithium compounds gross profit Tianqi vs. Ganfeng: lithium compounds gross profit comparison comparison (2018) (2019) (CNY) (CNY) 65.3% 80,000 70% 60,000 60% 48.5% 70,000 60% 50,000 50% 60,000 50% 40,000 40% 50,000 36.1% 40% 40,000 30,000 23.9% 30% 30% 30,000 20,000 20% 20,000 20% 10,000 10% 10,000 10% 0 0% 0 0% Ganfeng Lithium Tianqi Lithium Ganfeng Lithium Tianqi Lithium Gross Profit per tonne GPM (RHS) Gross Profit per tone GPM (RHS) Source: Companies Source: Companies

Global lithium supply in 2019 Australia: lithium mine production Produced (t) 2017 2018 2019 2020E Greenbushes 646,470 724,043 764,571 800,000 Mt. Marion 197,300 418,711 436,000 550,000 Mt. Cattlin 155,679 156,689 191,570 150,000 Others Pilgangoora (Pilbara) - 58,874 174,952 80,000 23% Greenbushes Pilgangoora (Altura) - 33,173 164,694 160,000 27% Salar de Olaroz Bald Hill - 68,546 155,000 - 3% Wodgina - - 250,000 - Salar del Total 999,449 1,460,036 2,136,787 1,740,000 Hombre Muerto Mt. Marion Market Share of Greenbushes 65% 50% 36% 46%

5% Salar de 14% Mt. Cattlin Atacama 6% 22%

Source: Roskill, Company, Daiwa Source: Companies, Daiwa forecasts Note: Bald Hill and Wodgina have halted operation since 2H19 due to cost concerns

Cauchari-Olaroz: operating cost curve Cauchari-Olaroz: brine resources (USD/tpa ICE) Cauchari-Olaroz (LAC/Ganfeng) 10,000 Olaroz (Orocobre) 9,000 Cauchari (Advantage Lithium) 8,000 Pastos Grandes (Millennial Lithium) 7,000 Sal de Vida (Galaxy Lithium) 6,000 3Q (Neo Lithium) 5,000 Maricunga (Lithium Power) 4,000 3,000 Pozuelos (Pluspetrol) 2,000 Mariana (Ganfeng) 1,000 Sal de los Angeles 0 Pastos Grandes (Pluspetrol) - 100 200 300 400 500 600 Cauchari-Olaroz 0 5 10 15 20 25 (kt ICE) (mt LCE)

Source: Lithium Americas, Daiwa Source: Lithium Americas, Daiwa Note: Grey = other brine projects; black = other hard-rock projects

Korea Materials 11 September 2020

(003670 KS) POSCO Chemical POSCO C hemical

Target price: KRW96,000 (from KRW96,000) Share price (10 Sep): KRW88,100 | Up/downside: +9.0%

A Korean cathode and anode materials supplier Henny Jung (82) 2 787 9182  Specialist in high-nickel cathodes, with NCMA technology for the future [email protected]  Expansion into synthetic graphite is positive for long-term growth SK Kim (82) 2 787 9173  Reaffirm our Outperform (2) call; with an unchanged TP of KRW96,000 [email protected]

What's new: POSCO Chemical is currently the only company to supply Forecast revisions (%) both cathode and anode materials (natural graphite) in Korea. It started Year to 31 Dec 20E 21E 22E with POSCO group’s steel-related business, which still accounted for 59% Revenue change - - - Net profit change - - - of revenue in 2019. But we expect the proportion of steel-related business Core EPS (FD) change - - - to decline to 33% in 2022E, transforming POSCO Chemical into one of Source: Daiwa forecasts Korea’s leading battery materials suppliers. Its proportion of cathode and anode materials was just 7%/8% of total revenue for 2019, respectively, but Share price performance we expect this portion to increase to 42%/15% for 2022E. (KRW) (% ) 100,000 165 What's the impact: Well-prepared for next-generation cathode 82,500 144 materials. On 5 August, POSCO Chemical announced an investment plan 65,000 123 47,500 101 to increase its capacity of NCMA cathode materials, targeting to complete 30,000 80 the expansion by 2022. Meanwhile, key customer LG Chemical (051910 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 KS, KRW713,000, Buy [1]) said on 4 August that it would bring forward its POSCO Chem (LHS) Relative to KOSPI (RHS) NCMA battery production to 2021 (from 2022) at Ultium Cells, its JV with GM. We expect LG Chem to use internally produced NCMA for the first- 12-month range 33,100-98,000 year production in 2021E with POSCO Chemical starting to supply from Market cap (USDbn) 4.52 2022. Although POSCO Chemical is a latecomer to cathode materials, we 3m avg daily turnover (USDm) 60.24 see scope for it to become a competitive cathode player by gaining market Shares outstanding (m) 61 Major shareholder POSCO (61.3%) share in LG Chem, focusing on high-nickel cathode. POSCO Chemical plans to expand its cathode active material (AM) capacity to 69,000tpa by Financial summary (KRW) 2022E (40,000 NCM + 29,000 NCMA). Year to 31 Dec 20E 21E 22E Revenue (bn) 1,623 2,149 2,819 Expansion into synthetic graphite. POSCO Chemical is the only anode Operating profit (bn) 72 132 177 materials supplier that delivers to all 3 Korean battery makers. Currently, Net profit (bn) 49 117 153 Core EPS (fully-diluted) 796 1,922 2,515 the company only manufactures natural graphite. But on 30 March it EPS change (%) (51.9) 141.4 30.8 announced it was investing in the construction of a factory to produce Daiwa vs Cons. EPS (%) (4.5) (1.3) 5.3 synthetic graphite. We forecast the company’s natural graphite capacity to PER (x) 110.6 45.8 35.0 Dividend yield (%) 0.5 0.5 0.6 increase to 80,000tpa for 2021E, with synthetic graphite capacity of DPS 400 400 500 8,000tpa for the same year. With the market tendency toward synthetic PBR (x) 5.2 4.8 4.3 graphite, it seems POSCO Chemical has responded to this trend. If the EV/EBITDA (x) 42.7 28.7 23.2 company succeeds in producing synthetic graphite, it would complete its ROE (%) 4.8 10.9 12.9 resilient product portfolio in the long term. Source: FactSet, Daiwa forecasts

What we recommend: We reaffirm our Outperform (2) call and 12-month TP of KRW96,000. While we apply a PEG of 1.0x for main peer Ecopro BM (247540 KS, KRW148,000, Buy [1]), we apply 0.9x for POSCO Chemical given the likely earnings dilution from its underperforming steel-related business. As we forecast its EPS to expand at a 2020-22 CAGR of 77.7%, we assign a target PER of 70x (77.7*0.9) and apply it to our average 2020- 21E EPS to derive our TP. Downside risk: market share loss at LG Chem.

How we differ: Our 2020-21E EPS are 1.3-4.5% lower than the Bloomberg consensus, likely as we are more conservative on its EV battery business.

See important disclosures, including any required research certifications, beginning on page 53

POSCO Chemical (003670 KS): 11 September 2020

Financial summary Key assumptions Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E

EV battery materials % of total revenue 0.7 2.1 3.2 6.6 14.8 32.5 46.6 56.8

Anode materials capacity (tpa) n.a. n.a. n.a. 24,000 24,000 49,000 72,000 85,000 Cathode materials capacity (tpa) n.a. n.a. n.a. 9,000 12,750 40,000 40,000 62,000

Profit and loss (KRWbn) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Refractory 237 214 239 284 269 241 266 284 Maintenance and Construction 146 140 145 160 159 161 173 195 Other Revenue 838 763 813 939 1,057 1,221 1,709 2,341 Total Revenue 1,221 1,118 1,197 1,384 1,484 1,623 2,149 2,819 Other income 15 14 14 16 44 59 72 83 COGS (1,109) (977) (1,042) (1,218) (1,317) (1,449) (1,911) (2,513) SG&A (56) (55) (52) (60) (77) (101) (106) (130) Other op.expenses (15) (14) (14) (16) (44) (59) (72) (83) Operating profit 56 85 104 106 90 72 132 177 Net-interest inc./(exp.) 1 1 2 1 (2) (7) (9) (12) Assoc/forex/extraord./others (11) (22) 33 69 25 (10) 25 29 Pre-tax profit 46 65 138 177 113 56 147 194 Tax (14) (20) (22) (44) (12) (7) (29) (41) Min. int./pref. div./others 2 (1) (0) (1) (0) (0) (0) (0) Net profit (reported) 35 44 116 132 101 49 117 153 Net profit (adjusted) 35 44 129 132 101 49 117 153 EPS (reported)(KRW) 567 716 1,905 2,167 1,657 796 1,922 2,515 EPS (adjusted)(KRW) 567 716 2,111 2,167 1,657 796 1,922 2,515 EPS (adjusted fully-diluted)(KRW) 567 716 2,111 2,167 1,657 796 1,922 2,515 DPS (KRW) 200 300 350 400 400 400 400 500 EBIT 56 85 104 106 90 72 132 177 EBITDA 71 100 118 123 134 132 204 260

Cash flow (KRWbn) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit before tax 46 65 138 177 113 56 147 194 Depreciation and amortisation 15 14 14 16 44 59 72 83 Tax paid (14) (20) (22) (44) (12) (7) (29) (41) Change in working capital 84 (89) (23) 39 (22) (5) (126) (106) Other operational CF items (69) 115 (52) (103) (60) 42 (24) (32) Cash flow from operations 62 85 56 85 63 144 40 98 Capex (29) (23) (59) (101) (309) (249) (200) (200) Net (acquisitions)/disposals 1 1 2 0 0 0 0 0 Other investing CF items 86 (84) 11 62 17 (63) (54) (60) Cash flow from investing 59 (106) (46) (39) (291) (312) (254) (259) Change in debt (5) (9) (9) (7) 396 418 3 127 Net share issues/(repurchases) 0 (3) 0 0 172 0 0 0 Dividends paid (12) (18) (18) (21) (24) (24) (24) (24) Other financing CF items 0 9 3 (2) (226) 3 (3) (0) Cash flow from financing (17) (22) (23) (29) 318 397 (24) 102 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 103 (44) (14) 16 90 229 (238) (60) Free cash flow 33 62 (4) (16) (246) (105) (160) (102) Source: FactSet, Daiwa forecasts

POSCO Chemical (003670 KS): 11 September 2020

Financial summary continued … Balance sheet (KRWbn) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Cash & short-term investment 161 118 104 120 210 440 202 145 Inventory 71 56 99 109 188 168 248 309 Accounts receivable 139 144 176 181 209 220 297 386 Other current assets 16 102 89 30 42 49 49 49 Total current assets 387 421 468 440 650 878 796 889 Fixed assets 145 137 183 264 755 1,018 1,218 1,405 Goodwill & intangibles 9 7 6 7 15 20 25 29 Other non-current assets 177 160 179 237 310 257 260 266 Total assets 718 724 836 948 1,730 2,173 2,299 2,589 Short-term debt 0 0 0 0 0 0 0 120 Accounts payable 69 62 107 90 94 105 138 182 Other current liabilities 64 59 52 63 156 138 136 135 Total current liabilities 133 121 159 153 251 244 274 437 Long-term debt 41 31 23 16 412 830 834 840 Other non-current liabilities 6 2 2 21 61 56 56 56 Total liabilities 179 155 184 189 724 1,130 1,163 1,333 Share capital 30 30 30 30 30 30 30 30 Reserves/R.E./others 501 533 615 720 967 1,003 1,095 1,215 Shareholders' equity 530 563 644 750 998 1,033 1,126 1,246 Minority interests 8 7 8 9 9 10 10 10 Total equity & liabilities 718 724 836 948 1,730 2,173 2,299 2,589 EV 5,150 5,203 5,183 5,090 5,392 5,621 5,856 6,035 Net debt/(cash) (120) (87) (81) (105) 202 391 632 815 BVPS (KRW) 8,694 9,224 10,567 12,291 16,356 16,943 18,462 20,424

Key ratios (%) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Sales (YoY) (10.9) (8.5) 7.1 15.6 7.2 9.4 32.4 31.2 EBITDA (YoY) (35.4) 41.5 18.4 3.8 9.1 (1.5) 54.7 27.5 Operating profit (YoY) (41.0) 52.4 21.8 2.2 (15.5) (19.3) 81.5 34.3 Net profit (YoY) (52.4) 26.4 194.7 2.6 (23.5) (51.9) 141.4 30.8 Core EPS (fully-diluted) (YoY) (52.4) 26.4 194.7 2.6 (23.5) (51.9) 141.4 30.8 Gross-profit margin 9.2 12.6 13.0 12.0 11.2 10.7 11.1 10.9 EBITDA margin 5.8 8.9 9.9 8.9 9.0 8.1 9.5 9.2 Operating-profit margin 4.6 7.6 8.7 7.7 6.1 4.5 6.1 6.3 Net profit margin 2.8 3.9 10.8 9.6 6.8 3.0 5.5 5.4 ROAE 6.7 8.0 21.3 19.0 11.6 4.8 10.9 12.9 ROAA 4.8 6.1 16.5 14.8 7.5 2.5 5.2 6.3 ROCE 9.8 14.5 16.3 14.7 8.2 4.4 6.8 8.4 ROIC 8.5 13.0 16.6 13.1 8.6 4.8 6.6 7.3 Net debt to equity n.a. n.a. n.a. n.a. 20.3 37.8 56.1 65.4 Effective tax rate 30.4 31.2 15.6 24.8 10.4 12.6 20.0 21.0 Accounts receivable (days) 45.3 46.2 48.9 47.1 47.9 48.3 43.9 44.2 Current ratio (x) 2.9 3.5 2.9 2.9 2.6 3.6 2.9 2.0 Net interest cover (x) n.a. n.a. n.a. n.a. 54.3 10.9 14.0 15.4 Net dividend payout 35.3 41.9 18.4 18.5 24.1 50.2 20.8 19.9 Free cash flow yield 0.6 1.2 n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

POSCO Chemical, a subsidiary of steel-making giant POSCO, manufactures steelmaking materials and secondary battery materials. The company has 2 major business segments: steel-related businesses, which include the production of materials such as refractory and lime chemical, as well as the construction and maintenance of furnaces; and battery materials, which engages in the production and sale of anode and cathode materials.

POSCO Chemical (003670 KS): 11 September 2020

POSCO Chemical: revenue breakdown (2019) POSCO Chemical: revenue breakdown (2022E)

Cathode Others Others Refractory Refractory 7% 3% 2% 10% Furnace 18% Anode Maintenance 8% 7% Construction 2% Furnace Cathode Maintenance 42% 11% Quicklime 12% Chemical Construction 26% 4% Anode 15% Chemical Quicklime 10% 23% Source: Company Source: Daiwa forecasts

POSCO Chemical: anode capacity expansion plan (tonnes, POSCO Chemical: anode revenue forecasts year-end) 120,000 (KRWbn) 450 70% 100,000 8,000 400 60% 350 80,000 50% 300 60,000 250 40% 90,000 200 30% 40,000 80,000 150 20% 50,000 20,000 44,000 100 50 10% 0 0 0% 2019 2020E 2021E 2022E 2019 2020E 2021E 2022E Natural graphite Synthetic graphite Anode revenue YoY growth (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

POSCO Chemical: cathode capacity expansion plan (tonnes, POSCO Chemical: cathode AM revenue forecasts year-end) 80,000 (KRWbn) 69,000 1,400 300% 70,000 1,200 60,000 250% 1,000 50,000 200% 40,000 40,000 800 40,000 150% 600 30,000 100% 400 15,000 20,000 200 50% 10,000 0 0% 2019 2020E 2021E 2022E 0 2019 2020E 2021E 2022E Cathode revenue YoY growth (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

POSCO Chemical: earnings outlook by division (KRW bn) 1Q20 2Q20 3Q20E 4Q20E 2019 2020E 2021E 2022E Total revenue 387.5 340.2 422.7 472.2 1,483.8 1,622.7 2,148.6 2,819.5 Refractory 61.8 52.5 61.4 65.1 268.5 240.7 266.2 284.1 Furnace Maintenance 43.3 37.0 39.6 40.8 158.5 160.7 173.3 194.7 Construction 24.4 18.6 16.0 16.0 54.1 75.0 71.0 71.0 Quicklime 82.7 67.0 77.1 80.9 348.3 307.7 319.0 330.7 Chemical 77.5 59.0 62.5 65.7 386.0 264.7 268.3 287.0 Anode 41.0 40.7 51.8 60.4 120.6 193.9 281.5 413.0 Cathode 46.0 53.8 102.6 131.5 98.4 334.0 720.6 1,188.5 Others 10.8 11.6 11.7 11.8 49.3 46.0 48.6 50.5 Operating profit 16.0 4.1 22.7 29.8 89.9 72.5 131.6 176.8 Operating margin 4.1% 1.2% 5.4% 6.3% 6.1% 4.5% 6.1% 6.3%

Source: Company, Daiwa forecasts

China Materials 11 September 2020

(3993 HK) China Molybdenum China M ol ybdenum

Target price: HKD2.90 (from HKD3.40) Share price (10 Sep): HKD2.98 | Up/downside: -2.7%

Downgrading: not a good time to be a cobalt miner Leo Ho (852) 2848 4469  Tesla’s introduction of low/no cobalt cathode would be a major negative [email protected]  CMOC management is “closely monitoring” Tesla’s Battery Day Dennis Ip, CFA (852) 2848 4068  Downgrading to Hold (3); cutting TP to HKD2.90 (from HKD3.40) [email protected]

What's new: We see the potential introduction of low/no-cobalt cathode as Forecast revisions (%) a major negative for CMOC, the world’s second-largest cobalt miner, given Year to 31 Dec 20E 21E 22E high sensitivity of share price of cobalt names to such cell technology. We Revenue change - - - Net profit change - - - downgrade CMOC to Hold (3) and trim our TP to HKD2.90 (from HKD3.40). Core EPS (FD) change - - - Source: Daiwa forecasts What's the impact: No cobalt is possible… While the market anticipates the introduction of an NCA/NMC battery during Battery Day, we see a trace Share price performance of possibility of Tesla introducing a cobalt-free cell instead. Earlier, Tesla (HKD) (%) had posted via its Chinese Tiktok official account, “Please pay attention to 4.1 155 Battery Day. Cobalt-free does not necessarily mean LFP (请留意四月特斯 3.6 139 拉的电池发布会，无钴，不代表一定是磷酸铁锂)”. In 2019, its battery 3.1 123 2.5 106 research team under Jeff Dahn published a research paper claiming that 2.0 90 unlike aluminium (Al), manganese (Mn) or magnesium (Mg), cobalt (Co) Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 fails to suppress phase transitions of NCA cathode at the 5% level. Tesla China Moly (LHS) Relative to HSI (RHS) has also been working on a cobalt-free battery with only nickel plus Mg or Mn or Al. Moreover, Tesla’s team recent further concluded that cobalt-free 12-month range 2.00-4.07 cell with core-shell structure “shows comparable capacity retention with Market cap (USDbn) 8.30 commercial-grade NMC811 and higher specific capacity”. Thus, we do not 3m avg daily turnover (USDm) 17.70 Shares outstanding (m) 21,599 rule out the possibility of Tesla introducing a cobalt-free non-LFP battery. Major shareholder Cathay Fortune Corporation (24.7%) Yet, if Tesla’s “million mile” battery turns out to be a high nickel NMC532 or NMC622, we believe the announcement would boost sentiment towards Financial summary (CNY) CMOC, as it would signify the crucial role of cobalt in Li-ion batteries. Year to 31 Dec 20E 21E 22E Revenue (m) 127,310 133,736 133,801 Tesla’s tech important to cobalt makers. On 18 February, it was reported Operating profit (m) 5,039 5,722 5,571 Net profit (m) 2,665 2,994 3,022 that Tesla was in talks to use CATL’s cobalt-free LFP cells in China-made Core EPS (fully-diluted) 0.123 0.139 0.140 cars (Reuters, 18 February 2020). Due to this news, the share prices of EPS change (%) 83.6 12.3 1.0 cobalt companies listed in China all retreated by 10% the day after, while Daiwa vs Cons. EPS (%) 32.8 16.0 51.6 CMOC’s share price fell by c.25% in 4 days. Tesla’s no-cobalt development PER (x) 21.3 19.0 18.8 Dividend yield (%) 2.4 2.7 2.8 also suppressed cobalt prices, per CMOC (Memo, 15 July 2020). In a 1H20 DPS 0.064 0.072 0.073 briefing, CMOC’s management shared that it had been following Battery PBR (x) 1.3 1.3 1.3 Day “very closely” (Memo, 31 August 2020), yet pointed out that Tesla had EV/EBITDA (x) 10.3 8.9 7.7 ROE (%) 5.8 6.4 6.2 just entered into cobalt procurement with Glencore (Memo, 16 June 2020). Source: FactSet, Daiwa forecasts Given market concerns about Tesla’s potential introduction of cobalt-free cells, we see CMOC’s share price likely being capped before Battery Day.

What we recommend: We downgrade our rating from Outperform (2) to Hold (3), given heightened risks to CMOC related to developments at Tesla. We cut our 12-month TP to HKD2.90 (from HKD3.40), now based on a PBR of 1.3x (from 1.5x) applied to our average 2020-21E BVPS. Upside/ downside risks: disruptive technology in favour of/against cobalt use.

How we differ: On top of near-term supply/demand dynamics, we also see technological trends as material to battery-related mineral prices.

See important disclosures, including any required research certifications, beginning on page 53

China Molybdenum (3993 HK): 11 September 2020

Financial summary Key assumptions Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E LME copper spot price (USD/ tonne) 5,494 4,863 6,166 6,521 6,005 6,200 6,000 6,000 LME cobalt spot price (USD/ tonne) 28,477 25,529 55,583 72,958 34,000 34,000 37,000 37,000 Copper sales volume (tonne) 39,964 59,798 248,756 200,240 206,547 201,500 219,000 219,000 Cobalt sales volume (tonne) 0 1,574 16,419 18,747 16,098 17,000 17,000 17,000

Profit and loss (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Molybdenum and tungsten 2,421 2,816 3,772 4,749 4,505 3,712 4,068 4,124 Copper and cobalt 0 1,296 13,845 14,374 8,332 10,196 10,910 10,910 Other Revenue 1,776 2,838 6,531 6,840 55,839 113,401 118,758 118,766 Total Revenue 4,197 6,950 24,148 25,963 68,677 127,310 133,736 133,801 Other income 0 0 0 0 0 0 0 0 COGS (2,622) (4,624) (15,212) (16,180) (65,606) (120,104) (125,756) (125,895) SG&A (362) (696) (1,272) (1,030) (1,324) (1,074) (1,107) (1,115) Other op.expenses (323) (339) (446) (1,273) (1,081) (1,092) (1,150) (1,220) Operating profit 890 1,290 7,217 7,479 665 5,039 5,722 5,571 Net-interest inc./(exp.) 37 (212) (669) (625) (1,052) (1,538) (1,674) (1,461) Assoc/forex/extraord./others (244) 119 (1,166) 135 2,745 524 529 529 Pre-tax profit 683 1,197 5,382 6,990 2,358 4,024 4,576 4,638 Tax 20 (171) (1,786) (1,840) (593) (1,006) (1,144) (1,160) Min. int./pref. div./others 58 (21) (868) (514) 91 (241) (327) (345) Net profit (reported) 761 1,005 2,728 4,636 1,857 2,777 3,105 3,134 Net profit (adjusted) 745 915 3,125 4,560 1,452 2,665 2,994 3,022 EPS (reported)(CNY) 0.048 0.060 0.143 0.215 0.086 0.129 0.144 0.145 EPS (adjusted)(CNY) 0.047 0.054 0.164 0.211 0.067 0.123 0.139 0.140 EPS (adjusted fully-diluted)(CNY) 0.047 0.054 0.164 0.211 0.067 0.123 0.139 0.140 DPS (CNY) 0.025 0.035 0.076 0.110 0.043 0.064 0.072 0.073 EBIT 890 1,290 7,217 7,479 665 5,039 5,722 5,571 EBITDA 1,635 2,450 11,848 11,422 4,795 9,382 10,230 10,260

Cash flow (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit before tax 683 1,197 5,382 6,990 2,358 4,024 4,576 4,638 Depreciation and amortisation 745 1,160 4,631 3,942 4,130 4,343 4,508 4,689 Tax paid 20 (171) (1,786) (1,840) (593) (1,006) (1,144) (1,160) Change in working capital 468 (3,319) (2,280) (2,127) (11,780) (3,417) 2,625 7,922 Other operational CF items (557) 4,047 2,483 2,469 7,589 1,338 1,474 1,261 Cash flow from operations 1,359 2,915 8,429 9,435 1,705 5,282 12,039 17,352 Capex (593) (854) (1,066) (2,807) (2,719) (2,000) (3,000) (2,500) Net (acquisitions)/disposals (12,110) (29,492) (4,807) (4,809) (7,140) 0 0 0 Other investing CF items 12,538 2,698 1,765 5,219 7,179 795 702 740 Cash flow from investing (166) (27,648) (4,109) (2,397) (2,679) (1,205) (2,298) (1,760) Change in debt 3,004 24,243 (478) (1,428) 720 (3,000) (5,000) 0 Net share issues/(repurchases) 0 0 17,859 0 0 0 0 0 Dividends paid (838) (444) (713) (983) (2,221) (1,389) (1,553) (1,568) Other financing CF items (92) 192 (9,295) (1,435) (8,746) (2,133) (2,176) (2,001) Cash flow from financing 2,074 23,991 7,372 (3,846) (10,247) (6,522) (8,729) (3,569) Forex effect/others 89 181 (330) 268 373 0 0 0 Change in cash 3,357 (562) 11,361 3,459 (10,848) (2,445) 1,012 12,023 Free cash flow (11,357) (27,460) 2,528 1,775 (8,178) 3,282 9,039 14,852 Source: FactSet, Daiwa forecasts

China Molybdenum (3993 HK): 11 September 2020

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Cash & short-term investment 8,982 8,420 19,781 23,241 12,392 9,948 10,959 22,983 Inventory 593 5,083 5,705 6,616 20,731 28,968 25,840 17,591 Accounts receivable 744 1,462 2,130 1,635 1,511 1,618 1,947 2,074 Other current assets 5,413 4,838 11,417 7,672 19,544 19,544 19,544 19,544 Total current assets 15,732 19,803 39,034 39,164 54,178 60,078 58,290 62,192 Fixed assets 4,974 27,968 25,185 25,514 26,826 26,418 26,846 26,591 Goodwill & intangibles 3,836 24,501 21,536 20,931 20,447 18,512 16,577 14,642 Other non-current assets 6,339 15,874 12,058 15,606 15,411 15,411 15,411 15,411 Total assets 30,881 88,147 97,813 101,216 116,862 120,420 117,124 118,836 Short-term debt 5,925 9,666 6,347 7,649 23,506 23,006 22,506 22,506 Accounts payable 237 742 24 1,119 1,945 6,749 6,549 6,349 Other current liabilities 2,607 5,574 7,132 7,211 9,125 9,248 9,274 9,274 Total current liabilities 8,769 15,982 13,503 15,979 34,575 39,003 38,329 38,129 Long-term debt 3,942 25,377 24,107 22,264 21,440 18,940 14,440 14,440 Other non-current liabilities 353 12,451 14,318 13,376 11,351 11,351 11,351 11,351 Total liabilities 13,064 53,810 51,928 51,618 67,367 69,295 64,120 63,921 Share capital 3,377 3,377 4,320 4,320 4,320 4,320 4,320 4,320 Reserves/R.E./others 13,976 15,361 33,813 36,629 36,483 37,871 39,423 40,990 Shareholders' equity 17,353 18,738 38,133 40,949 40,803 42,191 43,743 45,310 Minority interests 463 15,599 7,752 8,649 8,693 8,934 9,261 9,606 Total equity & liabilities 30,881 88,147 97,813 101,216 116,862 120,420 117,124 118,836 EV 56,941 97,884 73,659 69,203 96,982 96,668 90,983 79,304 Net debt/(cash) 884 26,622 10,672 6,671 32,553 31,998 25,986 13,963 BVPS (CNY) 1.028 1.110 1.765 1.896 1.889 1.953 2.025 2.098

Key ratios (%) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Sales (YoY) (37.0) 65.6 247.5 7.5 164.5 85.4 5.0 0.0 EBITDA (YoY) (39.5) 49.9 383.6 (3.6) (58.0) 95.6 9.0 0.3 Operating profit (YoY) (53.0) 44.9 459.4 3.6 (91.1) 657.2 13.6 (2.6) Net profit (YoY) (45.1) 22.8 241.6 45.9 (68.2) 83.6 12.3 1.0 Core EPS (fully-diluted) (YoY) (82.6) 16.4 202.9 28.7 (68.2) 83.6 12.3 1.0 Gross-profit margin 37.5 33.5 37.0 37.7 4.5 5.7 6.0 5.9 EBITDA margin 39.0 35.3 49.1 44.0 7.0 7.4 7.6 7.7 Operating-profit margin 21.2 18.6 29.9 28.8 1.0 4.0 4.3 4.2 Net profit margin 17.8 13.2 12.9 17.6 2.1 2.1 2.2 2.3 ROAE 4.2 3.6 10.0 10.6 2.7 5.8 6.4 6.2 ROAA 2.5 1.5 3.4 4.6 1.3 2.2 2.5 2.6 ROCE 3.3 2.7 9.9 9.6 0.8 5.4 6.3 6.1 ROIC 4.2 2.8 8.2 9.8 0.7 4.6 5.3 5.7 Net debt to equity 6.4 71.6 23.0 13.1 63.7 60.6 47.1 23.6 Effective tax rate (3.0) 14.3 33.2 26.3 25.1 25.0 25.0 25.0 Accounts receivable (days) 69.4 57.9 27.1 26.5 8.4 4.5 4.9 5.5 Current ratio (x) 1.8 1.2 2.9 2.5 1.6 1.5 1.5 1.6 Net interest cover (x) n.a. 6.1 10.8 12.0 0.6 3.3 3.4 3.8 Net dividend payout 55.5 59.2 60.2 51.3 50.0 50.0 50.0 50.0 Free cash flow yield n.a. n.a. 4.4 3.1 n.a. 5.8 15.9 26.1 Source: FactSet, Daiwa forecasts

Company profile

China Molybdenum (China Moly) is the second-largest cobalt and niobium producer, one of the largest tungsten producers, and the fifth-largest molybdenum producer in the world. In 1H20, copper and cobalt business contributes to 47% and 12% of its revenue and gross profit (ex-IXM trading business) respectively.

China Molybdenum (3993 HK): 11 September 2020

Cobalt names: YTD share prices 140 Reuters reports that Tesla is in discussions with 120 CATL about using a cobalt-free battery

100

40 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Hanrui Cobalt (300618 CH) Huayou Cobalt (603799 CH) CMOC-H (3993 HK) CMOC-A (603993 CH)

Source: Bloomberg, Daiwa Note: Rebased to 100 as of 2 January 2020

Chemical mix by cathode type Likely focus of Tesla's "Roadrunner" cell 100% 9% 10% 5% 18% 18% 30% 23% 80%

60% 90% 40%

20%

0% LCO NMC111 NMC422 NMC532 NMC622 NMC811 NCA NCA+ LFP LMO Lithium Manganese Nickel Aluminum Iron Phosphate Cobalt

Source: Bloomberg, NEF, Daiwa Note: The table only shows the conventional chemical mix for cathode; we also do not rule out the possibility that Tesla may instead introduce an unconventional non-LFP cobalt-free cathode, likely be high-nickel based.

Tesla: differential capacity as a function of cell voltage

Failure in Phase Transition Suppressed Phase Transition Suppression

Source: IOP Publishing, Daiwa Note: Cobalt is the only tested material (also aluminium, manganese, magnesium) that failed to suppress the phase transition of LiB cathode at the 5% level.

Tesla: publications related to cobalt-free positive electrode Date Title Author Link

3-Sep-20 Cobalt-Free Core-Shell Structure with High Specific Capacity and Long Cycle Life as an Alternative to Li[Ni0.8Mn0.1Co0.1]O2 Jeff Dahn's Team IOP Publishing

28-May-20 In Situ XRD Studies During Synthesis of Single-Crystal LiNiO2, LiNi0.975Mg0.025O2, and LiNi0.95Al0.05O2 Cathode Materials Jeff Dahn's Team IOP Publishing

21-Nov-19 Cobalt-free Nickel-rich positive electrode materials with a core-shell structure Jeff Dahn's Team American Chemical Society

Source: IOP Publishing, American Chemical Society

Tesla: publications related to cobalt additions Date Title Author Link

11-Feb-20 Studies of Ni-rich Positive Electrode Materials for Lithium Ion Batteries Hongyang Li (under Jeff Dahn's supervision) Dalhouse University

26-Dec-19 Impact of Dopants (Al, Mg, Mn, Co) on the Reactivity of LixNiO2 with the Electrolyte of Li-Ion Batteries Jeff Dahn's Team IOP Publishing

7-Feb-19 Is Cobalt Needed in Ni-Rich Positive Electrode Materials for Lithium Ion Batteries? Jeff Dahn's Team IOP Publishing

Source: IOP Publishing, American Chemical Society

Asia ex-Japan Battery Materials: 11 September 2020

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Machinery Mike OH (82) 2 787 9179 [email protected] Co-head of Asia Pacific Research John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Defence); REITs, Utilities; Steel JH LEE (82) 2 787 9838 [email protected] Co-head of Asia Pacific Research Craig CORK (852) 2848 4463 [email protected] Consumer/Retail – Cosmetics; Healthcare Henny JUNG (82) 2 787 9182 [email protected] Regional Head of Asia Pacific Product Management Kevin LAI (852) 2848 4926 [email protected] EV Battery and Battery Materials; IT/Electronics (Small/Mid Cap) Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Eileen LIN (852) 2773 8736 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games SK KIM (82) 2 787 9173 [email protected] Macro Economics (Regional) Li XIONG (852) 2773 8829 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Minjoo KANG (82) 2 787 9176 [email protected] Strategy (Hong Kong/China) Patrick PAN (852) 2773 8805 [email protected] Media

Strategy (China-A) Kelvin LAU (852) 2848 4467 [email protected] TAIWAN Head of Automobiles; Transportation and Industrials (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Fiona LIANG (852) 2532 4341 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional) Industrials (Hong Kong/China) Frank FANG (886) 2 8758 6257 [email protected] Evelyn ZHANG (852) 2848 4970 [email protected] Banking; Diversified financials; Insurance Automobiles and Components (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Frank YIP (852) 2773 8842 [email protected] IT/Technology Hardware (Automation and PC Hardware) Transportation (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Leon QI (852) 2532 4381 [email protected] IT/Technology Hardware (Handsets and Components) Regional Head of Financials, FinTech and HealthTech; Banking; Diversified financials; Insurance (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Small/Mid Cap Kevin JIANG (852) 2532 4383 [email protected] Anita LI (886) 2 8758 6256 [email protected] Banking (China) Small/Mid Cap Susie LIU (852) 2773 8745 [email protected]

Diversified financials (China) INDIA Anson CHAN (852) 2532 4350 [email protected] Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Consumer (Hong Kong/China) Head of India Research; Strategy; Banking/Finance Adrian CHAN (852) 2848 4427 [email protected] Saurabh MEHTA (91) 22 6622 1009 [email protected] Consumer (Hong Kong/China) Capital Goods; Utilities Jonathan HO (852) 2848 4056 [email protected]

Consumer (Hong Kong/China) SINGAPORE Sybil HU (852) 2532 4308 [email protected] David LUM (65) 6228 6740 [email protected] Consumer (China) Banking; Property and REITs Andrew CHUNG (852) 2773 8529 [email protected]

Head of Gaming (Hong Kong/China) PHILIPPINES John CHOI (852) 2773 8730 [email protected] Micaela ABAQUITA (63) 2 737 3021 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Banking; Property Carlton LAI (852) 2532 4349 [email protected] Renzo CANDANO (63) 2 737 3022 [email protected] Small/Mid Cap (Hong Kong/China) Consumer Candis CHAN (852) 2848 4976 [email protected] Gregg ILAG (63) 2 737 3023 [email protected] Internet; Education (Hong Kong/China) Utilities; Energy; Industrial Conglomerates Dennis IP (852) 2848 4068 [email protected]

Head of Hong Kong/China Energy (PURE, Oil and Gas, Coal, EV LiB materials, ESG); Regional Head of Power, Utilities, Renewable and Environment (PURE) Anna LU (852) 2848 4465 [email protected] Power, Utilities, Renewable and Environment (PURE) – IPP, Wind and Nuclear (China) Leo HO (852) 2848 4469 [email protected] Power, Utilities, Renewable and Environment (PURE) – Oil & Gas, EV LiB materials & ESG (China); Utilities (Hong Kong) Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property Cynthia CHAN (852) 2773 8243 [email protected] Property (China) Jack CHAN (852) 2773 8731 [email protected] Custom Products Group Ronald WU (852) 2773 8716 [email protected] Custom Products Group

CHINA Bintuo NI (86) 21 6841-3228 [email protected] Automobiles and Components (Hong Kong/China) Enze DIAO (86) 21 6841 3315 [email protected] IT/Electronics - Hardware (China) Colin YANG (86) 21 6841 3286 [email protected] Power, Utilities, Renewable and Energy (PURE) – Hydro, Solar (China)

Asia ex-Japan Battery Materials: 11 September 2020

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Asia ex-Japan Battery Materials: 11 September 2020

LG Chem: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 24/07/18 450,000 Buy 24/07/19 410,000 Buy 12/02/20 470,000 Buy 29/10/18 500,000 Buy 09/09/19 400,000 Buy 20/07/20 710,000 Buy 30/01/19 470,000 Buy 26/09/19 350,000 Outperform 09/09/20 900,000 Buy

24/04/19 430,000 Buy 20/01/20 380,000 Outperform 900,000 900,000

800,000

700,000 710,000

600,000

500,000 500,000 470,000 470,000 470,000 450,000 430,000 400,000 410,000400,000 380,000 350,000 300,000

200,000

Jul-19 Jul-18 Jul-20

Apr-18 Apr-20 Oct-17 Oct-18 Apr-19 Oct-19

Jan-19 Jun-19 Jun-20 Jan-18 Jun-18 Jan-20

Mar-18 Feb-19 Mar-20 Feb-18 Mar-19 Feb-20

Sep-17 Dec-18 Aug-19 Sep-19 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Nov-19 Dec-19 Aug-20 Sep-20

May-19 May-20 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Samsung SDI: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 18/01/18 260,000 Buy 20/11/18 355,000 Buy 01/10/19 305,000 Buy 17/04/18 252,000 Buy 25/01/19 345,000 Buy 22/11/19 330,000 Buy 20/06/18 273,000 Buy 18/03/19 326,000 Buy 06/02/20 410,000 Buy 30/07/18 281,000 Buy 30/05/19 300,000 Buy 28/05/20 450,000 Buy

12/10/18 320,000 Buy 22/08/19 320,000 Buy 22/07/20 500,000 Buy 500,000 500,000

450,000 450,000

410,000 400,000

355,000 350,000 345,000 330,000 320,000 326,000 320,000 300,000 300,000 305,000 273,000281,000 260,000 250,000 252,000 219,000 200,000 200,000

150,000

Jul-19 Jul-18 Jul-20

Apr-18 Apr-20 Oct-17 Oct-18 Apr-19 Oct-19

Jan-19 Jun-19 Jun-20 Jan-18 Jun-18 Jan-20

Mar-18 Feb-19 Mar-20 Feb-18 Mar-19 Feb-20

Sep-17 Dec-18 Aug-19 Sep-19 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Nov-19 Dec-19 Aug-20 Sep-20

May-19 May-20 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Asia ex-Japan Battery Materials: 11 September 2020

SK Innovation: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating 26/07/19 210,000 Buy 09/03/20 110,000 Outperform

31/10/19 190,000 Buy 09/09/20 190,000 Buy 240,000 235,000 220,000 210,000 200,000 190,000 190,000 180,000 160,000 140,000 120,000 110,000 100,000 80,000 60,000

40,000

Jul-19 Jul-18 Jul-20

Apr-18 Apr-20 Oct-17 Oct-18 Apr-19 Oct-19

Jan-19 Jun-19 Jun-20 Jan-18 Jun-18 Jan-20

Mar-18 Feb-19 Mar-20 Feb-18 Mar-19 Feb-20

Sep-17 Dec-18 Aug-19 Sep-19 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Nov-19 Dec-19 Aug-20 Sep-20

May-19 May-20 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Ecopro BM: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating

16/07/19 70,000 Outperform 26/08/20 0 09/09/20 210,000 Buy

210,000 200,000

180,000

160,000

140,000

120,000

100,000

80,000 70,000 60,000

40,000

Jul-19 Jul-20 Jul-19 Jul-20

Apr-19 Oct-19 Apr-19 Apr-19 Oct-19 Oct-19 Apr-20 Apr-20

Jun-19 Jan-20 Jun-20 Jun-19 Jan-20 Jun-20

Mar-19 Mar-20 Mar-20 Mar-19 Feb-20 Feb-20 Mar-20

Sep-19 Nov-19 Dec-19 Sep-20 Aug-19 Aug-19 Sep-19 Nov-19 Dec-19 Aug-20 Aug-20

May-19 May-20 May-19 May-20

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Asia ex-Japan Battery Materials: 11 September 2020

POSCO Chemical: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating 16/07/19 64,000 Buy 26/08/20 0

31/01/20 66,000 Buy 09/09/20 96,000 Outperform 100,000 96,000 90,000

80,000

70,000 64,000 66,000 60,000

50,000

40,000

30,000

20,000

Jul-19 Jul-18 Jul-20

Apr-18 Apr-20 Oct-17 Oct-18 Apr-19 Oct-19

Jan-19 Jun-19 Jun-20 Jan-18 Jun-18 Jan-20

Mar-18 Feb-19 Mar-20 Feb-18 Mar-19 Feb-20

Sep-17 Dec-18 Aug-19 Sep-19 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Nov-19 Dec-19 Aug-20 Sep-20

May-19 May-20 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Asia ex-Japan Battery Materials: 11 September 2020

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Asia ex-Japan Battery Materials: 11 September 2020

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Asia ex-Japan Battery Materials: 11 September 2020

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* 75.00% Hold** 20.87% Sell*** 4.13% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 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.

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