Despite the stock price steadily declining, the current difficulties don't seem to 'defeat' Jiangsu Lopal Tech. (603906.SH).

Zhongtong Finance App noted that recently, Jiangsu Lopal Tech submitted an application to the Hong Kong Stock Exchange for overseas public offering of stocks (H shares) and listing on the main board of Hong Kong stocks. Prior to this, as a familiar face in the capital markets, Jiangsu Lopal Tech had already successfully listed on the Shanghai Stock Exchange in 2017.

It is worth mentioning that unlike the current majority of the company's revenue being derived from lithium iron phosphate cathode material, in the early years Jiangsu Lopal Tech's business was mainly focused on automotive environmentally friendly fine chemicals, including lubricants and engine coolant. It was only in the third year after being listed that Jiangsu Lopal Tech began to venture into the lithium iron phosphate cathode material business.

Time has passed, and although Jiangsu Lopal Tech has grown to become a leading manufacturer of lithium iron phosphate cathode material, the company's performance volatility is quite prominent. Taking the company's latest financial data as an example, in the first half of this year, Jiangsu Lopal Tech achieved an income of 3.814 billion yuan (RMB, same below), a sharp 36.5% year-on-year decrease; while the net income was -0.811 billion yuan, deeply mired in losses. With the performance fading, at the same time, the A-share stock price of Jiangsu Lopal Tech has been declining continuously, with a cumulative decrease of nearly 50% this year, almost 'halved'.

Six years after its listing on the A-share market, Jiangsu Lopal Tech has turned its attention to the Hong Kong stock market. So, can Jiangsu Lopal Tech realize its new capital dream in Hong Kong? What about the company's growth prospects?

Main business facing challenges in the cycle performance

Jiangsu Lopal Tech's operating history can be traced back to 2003, when the company was initially providing the market with lubricants and engine coolant. Subsequently, as the business developed, Jiangsu Lopal Tech established a certain level of competitiveness in multiple segmented markets in the lithium iron phosphate cathode material and automotive environmentally friendly fine chemicals industry.

In terms of performance, in recent years Jiangsu Lopal Tech has been on a 'roller coaster ride'. Data shows that during the period from 2020 to 2022, Jiangsu Lopal Tech's income was 1.915 billion yuan, 4.054 billion yuan, and 14.072 billion yuan respectively (RMB, in hundred million yuan), with net profits of 0.24 billion yuan, 0.433 billion yuan, and 1.03 billion yuan. The core financial data has surged forward.

However, the performance of Jiangsu Lopal Tech. took a sudden turn in 2023. In the first half of this year, the company's revenue and net income were 3.814 billion yuan and -0.811 billion yuan, respectively, while in the same period last year they were 6.01 billion yuan and 0.613 billion yuan, respectively.

The performance of Jiangsu Lopal Tech. has experienced drastic ups and downs, mainly attributed to the company's recent expansion into the field of lithium iron phosphate cathode materials. From 2020 to 2022, revenue from this business for Jiangsu Lopal Tech. amounted to 0 yuan, 1.877 billion yuan, and 12.242 billion yuan, respectively.

Looking back, the origin of Jiangsu Lopal Tech.'s success in the lithium iron phosphate cathode material field can be traced back to June 2021 when the company acquired Tianjin Beternano and Jiangsu Beternano, allowing it to firmly establish its presence in this area. Benefiting from the rapid growth of downstream new energy vehicles and energy storage industries, as well as the significant increase in prices of major raw materials including lithium iron phosphate, the company's lithium iron phosphate cathode material business flourished.

As the clock struck 2023, due to changes in the supply and demand situation in the lithium iron phosphate cathode material industry, revenue generated by Jiangsu Lopal Tech. from this business also saw a steep decline. In the first half of this year, revenue contribution from lithium iron phosphate cathode material was only 2.852 billion yuan, plunging by over forty percent compared to the previous year, dragging down the overall performance of Jiangsu Lopal Tech., exemplifying the saying "as one rises, another falls".

In contrast, the revenue fluctuations for Jiangsu Lopal Tech.'s automotive eco-friendly fine chemicals remain much more stable. During the reporting period, revenue from this division was 1.846 billion yuan, 2.119 billion yuan, 1.763 billion yuan, and 0.938 billion yuan, respectively. Additionally, a small portion of Jiangsu Lopal Tech.'s revenue is contributed by other businesses, with annual revenue hovering around sixty million yuan.

In terms of profitability, due to the significant cyclical nature of the main product lithium iron phosphate cathode material, Jiangsu Lopal Tech.'s profit trend has also shown high volatility in recent years. During the reporting period, the company's gross profit was 0.589 billion yuan, 1.08 billion yuan, 2.433 billion yuan, and -0.241 billion yuan, with corresponding gross margins of 30.8%, 26.6%, 17.3%, and -6.3%, showing a declining trend.

Concerns Remain About Reversal of Industry Supply and Demand Dynamics

If the performance turnaround in the first half of this year has already dampened the spirits of Jiangsu Lopal Tech.'s investors, then looking ahead at the prospects of the company's core product lithium iron phosphate cathode material, the future may still not be optimistic.

From the perspective of the upstream and downstream relationships, the upstream of lithium iron phosphate cathode materials mainly consists of raw materials such as lithium sources, iron sources, and phosphorus sources, which are then used downstream for the preparation of lithium-ion batteries, ultimately applied in new energy automobiles, energy storage, and other fields. In recent years, driven by the increasing demand in various end-use sectors such as new energy vehicles, communication base stations, and electrical energy storage, the demand for lithium iron phosphate materials has rapidly increased.

However, compared to the rapidly growing downstream demand, the speed of expansion in the lithium iron phosphate cathode materials industry is also impressive. Currently, in terms of the industry structure, global sales of lithium iron phosphate cathode materials reached 1.1 million tons in 2022. Among them, the top five manufacturers account for about 70.5% of the entire market, indicating a very high industry concentration.

Although the top manufacturers have already captured a large portion of the market, perhaps stimulated by the high profits in previous years, lithium iron phosphate cathode material companies are still tirelessly expanding their production capacity at the current stage. According to calculations by third-party institutions, by 2023, the top five enterprises will basically be able to meet industry demand. This means that the current supply and demand situation in the industry has reversed. Translating to the price perspective, the price of lithium iron phosphate cathode materials has plummeted from about 0.125 million yuan per ton in 2022 to 0.094 million yuan per ton in the first half of this year.

While the main business is entering a downward cycle, jiangsu lopal tech. still aims to achieve dual listings in the "A+H" markets. However, to impress investors in the Hong Kong stock market, jiangsu lopal tech. may need to first reverse the current performance decline.