4Q23 slowdown won’t change above-market growth prospects
WHAT’S NEW
Constructively optimistic. We have formed a constructively optimistic view after our call with the company, where it updated us on its 4Q23 operating performance. We gauged that the company’s sales of lithium battery cathode precursor material growth rate would reach a low double digit in 2023, despite the market experiencing a slight slowdown in 4Q23. Its overall growth could remain above its peers’ average, in our view. CNGR would disclose more details on its operating data upon approaching the annual results briefing. CNGR’s lithium battery cathode precursor material sales
Increasing high-end product sales. From our observations, ternary precursor remains the company’s main revenue contributor, with its high-spec Ni90 product sales growing 30% y-o-y and accounting for over 35% of total revenue for the full year 2023. More importantly, given that the selling price of its overseas customers have locked in under term contract arrangement, which represents over two-thirds of its total sales, we expect the company’s revenue mixture could support a steady improvement in its margin outlook.
Solid new projects pipeline. Going forward, we think CNGR’s capacity utilisation could further increase in 2024 in anticipation of the gradual recovery of downstream production. At the same time, CNGR would have new precursor capacity of 60,000 tonnes coming onstream in each of the next two years, bringing the total capacity to 440,000 tonnes by 2025. We estimate these new projects will lead to sales volume growth of >20% CAGR during 2023-2025.
Raising self-supply of nickel. In the meantime, we believe CNGR’s quick responses to new market trends should enable a smooth execution of its projects. In addition to the local market being the main focus of its development plans, Indonesia is also on the cards. It announced that it is co-investing in a nickel refining joint venture with POSCO Future M, which could diversify its input material sources – it aims to reach 50%/60% of self-supply of nickel by 2025/2026 respectively – and give rise to new development opportunities.
Improving free cashflow. Based on our preliminary calculation of a capex budget of RMB6bn p.a. in the next two years, the company’s net gearing ratio is likely to remain steady at the 30%-34% level towards 2025. As the commencement of production in new projects would enhance its cash flow, we believe CNGR could strike a good balance between expansion and leverage, and thus reverse into a positive free cash-flow position in 2024.
Earnings revision. We have revised our capacity utilisation and sales assumptions to 85% for this and next year, to reflect a more prudent ramp-up of its new projects. As such, we have revised down our earnings by 8% for FY23F and 18% for FY24F. Post revision, our earnings CAGR (2023-2025) is c.34%.
BUY and TP RMB68. We maintain BUY on the counter in view of solid growth prospects. We lowered our TP to RMB68, based on an unchanged target multiple of 10.0x FY24F EV EBITDA.