Tianqi NP (Rmb)Ganfeng NP (Rmb)
Tianqi vol. (kt LCE)Ganfeng vol. (kt LCE)
Source: Orocobre, Company data, Credit Suisse estimatesSource: Company data, Credit Suisse estimates
Figure 8: Peer valuation comparison table
Mkt Cap 18E EV/18E ROE18E Div18E FCF
CompanyTicker(US$b)PxRatingTPUpside18E19E18E19EEBITDA (x)(%)Yld (%)Yld (%)
Ganfeng002460.SZ6.437.6O50.033%16.813.47.14.913.051%0.9%3.0%
Tianqi002466.SZ8.749.7O60.021%20.815.45.03.810.627%0.5%2.9%
Rongjie002192.SZ0.923.5NCNANA40.228.86.95.7-17%--
Salt Lake000792.SZ4.610.7NCNANA-40.71.41.314.10%0.0%6.1%
SQMSQM.N5.949.2NCNANA27.322.65.75.314.021%2.7%1.8%
FMCFMC.N12.088.9O107.020%93.884.222.318.411.10%0.1%0.6%
ALBALB.N10.493.5NCNANA17.915.82.52.311.614%1.4%-0.3%
OrocobreORE.AX1.05.3NCNANA48.820.92.01.9236.94%0.0%-2.8%
Galaxy ResourcesGXY.AX0.93.1NCNANA11.721.72.01.94.817%0.0%-4.3%
Wtd Avg.50.836.535.08.57.016.217%0.8%1.6%
P/E (x)P/B (x)
Note: Priced as of 25 June 2018. O = Outperform, NC -= Not covered. Source: The BLOOMBERG PROFESSIONALTM service for Not covered companies, company data, Credit Suisse estimates for covered companies
26 June 2018
China Lithium SectorPedal to the metal, lithium demand in fast
lane
Lithium carbonate prices tripled from 2014-16, driven by strong EV sales amid supply
constraints. We expect lithium carbonate prices to hover at these high levels as we
forecast the market to remain in deficit from 2018-20E. China’s well-designed policy could
help boost EV sales and production and lend support to lithium demand. Higher prices do
invite new capacity. However, capacity ramp-up takes time, leaving production increases
to be slower than those for demand. Ganfeng and Tianqi are the major beneficiaries of
high lithium carbonate prices, given their higher-than-industry volume growth and high-
quality mineral resources. We initiate coverage on Ganfeng and Tianqi given the positive
industry outlook, strong volume growth and sustainable high margins.
Well-designed policies to boost EV production, sales
Demand from EVs is the major driver of lithium demand. China's government targets
boosting EV sales to 2 mn units by 2020 (+154% vs 2017, or +36% CAGR to 2020). We
believe this is achievable: under the credit-based system, EV production is required to be
higher than 10% of total auto production. Also, China’s subsidies' exit plan is expected to
push auto makers to produce electric vehicles (EVs) with larger battery sizes. We expect
EV demand for lithium batteries to register a 45% CAGR from 2018E-20E.
New project ramp-ups take time
Our mine-by-mine analysis of spodumene mines and salt lakes domestically and globally
indicates 22/30/27% supply growth for 2018E-20E. Lithium project ramp-ups usually take
two to three years for hard-rock projects, and eight to ten for salt lakes. The process could
also be disrupted by technical difficulties, expertise shortages, among others. During the
past few years, salt lake production ramp-up has always been slower than the companies’
plans, and usually falls short of initial planned scale, due to geological or technical
constraints. We expect new salt lake projects to experience a similar pattern.
Initiate coverage on Ganfeng and Tianqi: High-quality
expansion amid a deficit market
We believe that Ganfeng and Tianqi's production will double in two to three years. Their
high-quality resources give them higher-than-peer margins. In a deficit market, Ganfeng
and Tianqi are the largest beneficiaries. With a positive outlook for lithium carbonate price
and projected ROEs of 20-40%, we derive our TP of Rmb50.0 for Ganfeng (18x 2019E
P/E) and Rmb60.0 for Tianqi (18x 2019E P/E) based on the average P/B and EV/EBITDA
methods, as we believe this captures asset quality and earnings growth. Credit Suisse’s
proprietary HOLT analysis also indicates upside support on our OUTPERFORM call.
Short-term catalysts include strong EV production growth and supply side constraints.
Investment risks
Downside risks to our optimistic outlook for the industry: (1) A deterioration in economic
growth leading to a slowdown in EV demand and less lithium consumption; (2) less
favourable supporting policies which are likely to push lithium demand lower; (3) battery
technology breakthrough could likely could cause demand for lithium shifting to other
materials; (4) safety issues in lithium production or consumption processes could harm the
image of battery technology and jeopardise lithium demand; (5) failure to meet
environment protection rules during lithium production would affect sales volumes and lift
costs; (6) trade disputes might disrupt lithium supply, leading to lower sales volumes; and
(7) tighter liquidity could lift financing costs.
Well-designed EV
policies would help
boost China EV
production and sales,
this would support
lithium demand
New lithium projects
ramp-up takes time,
previous new projects
usually tend to
disappoint
We like Ganfeng and
Tianqi for their low cost
upstream resources
and volume growth
26 June 2018
China Lithium SectorTable of contents
Pedal to the metal, lithium demand in fast lane1
Focus charts and table2
Pedal to the metal, lithium demand in fast lane3
Well-designed policies to boost EV production, sales..........3
New project ramp-ups take time......3
Initiate coverage on Ganfeng and Tianqi: High-quality expansion amid a deficit
market..........3
Investment risks.......3
Well-designed policies to boost EV production, sales6
EV batteries are the key driver for lithium demand..6
EV policies are well designed and likely to boost EV production and sales.7
EV is the global trend, global car makers also on the move to EV..9
Lithium is well-positioned despite battery changes11
Consumer electronics (3C) and industrial demand12
How tolerant are downstream customers.13
How’s EV charging infrastructure developing......14
New project ramp-ups take time15
Supply to register a 27% CAGR from 2018-20E....15
Lithium supply is concentrated, brine the major form.........16
China new supply at small scale, global new supply are mainly hard rock projects
.......17
People tend to overlook the difficulties involved....17
A check from the cost perspective.19
Recycle market to see volume boom as more recyclable materials will retire soon
.......20
Initiate coverage on Ganfeng and Tianqi: High-quality expansion amid deficit
market22
Top-two lithium suppliers’ capacity to double in two years22
High-quality volume resources keep margins high22
Well-positioned for industry’s future development.23
Valuation....24
Where Ganfeng and Tianqi sit in the industry chain
......26
HOLT analysis29
Investment risks32。