As lithium carbonate prices continue to decline, the leading company in the industry, Ganfeng Lithium (01772), has gone from profit to loss. The industry as a whole is experiencing losses, and institutional investors have repeatedly reduced their shareholdings for short-term gains. Is there still a future for the sector?

It was learned from the Zhitong Financial APP that the price of lithium carbonate has fallen below 90,000 yuan/ton, a decline of more than 20% this year, compared to a total decline of over 85% from the high. Recently, lithium battery stocks have issued profit warnings one after another. For example, Hong Kong-listed Ganfeng Lithium is expected to suffer a net loss of between 760 million and 1.25 billion yuan from shareholders, while Tianqi Lithium is expected to suffer a net loss of as much as 4.88-5.53 billion yuan. Related stocks in A shares are also generally losing money, such as Chengxin Lithium Group, whose shareholders suffered a net loss of 1.3-1.9 billion yuan.

However, looking at the industry's profitability on a quarterly basis, the situation is improving. For example, Ganfeng Lithium suffered a net loss of 320-810 million yuan in the second quarter, and Tianqi Lithium suffered a net loss of 980-1.63 billion yuan, both of which were narrower than in the first quarter. In fact, due to the impact of product prices, the performance valuation of the lithium battery sector is continuing to decline. The two leading stocks, Ganfeng and Tianqi, have fallen for three consecutive years, with a total valuation shrinkage of more than 80%. This year's decline has exceeded 40%.

So, when will the price of lithium carbonate reach a turning point, and is there an investment opportunity for Ganfeng Lithium?

Severe overcapacity, lithium carbonate prices still exploring the bottom.

Looking at the supply and demand situation of the entire lithium battery industry chain, it can be summed up in one sentence: the supply severely exceeds the demand, making it difficult to achieve supply-demand balance in the short term. The terminal demand for lithium batteries mainly comes from consumer electronics, new energy vehicles, and energy storage, with new energy vehicles accounting for over 65%. After the rise of new energy vehicles in 2020, sales doubled for three years, leading to a wave of investment in lithium mines and the emergence of industry leaders such as Contemporary Amperex Technology and Ganfeng Lithium.

Policy-based industries have significant characteristics, just like the industrial silicon industry chain. The blind expansion of production capacity in the early stages of the lithium battery industry chain has led to serious supply-demand imbalances. In 2023, the average capacity utilization rate in the industry was only 57%, with more than 600 GWh of capacity idle. In the first half of 2024, lithium battery shipments reached 459 GWh, a year-on-year increase of 21%, but the utilization rate of production capacity was still low, and idle capacity had become an invalid investment.

In the output of lithium batteries, power batteries account for 69%, while energy storage batteries account for 25%. Power batteries are mainly used in new energy vehicles, which increased by 32% year-on-year in the first half of the year. Although the capacity of installed batteries has increased, sales growth has slowed down and is far lower than the speed of upstream capacity absorption. The demand for the industry chain is one link after another, and the surplus production capacity of lithium batteries has made the price of lithium carbonate an area of substantial decline.

From a timeline perspective, 2020 was a turning point for lithium carbonate prices. Before 2020, prices fluctuated below 100,000 yuan. With the rapid development of new energy vehicles in 2020, prices rose sharply. In 2022, three years of digging for minerals boosted the price of lithium carbonate to more than 600,000 yuan/ton. After 2022, with the slowing of downstream demand and the surplus of upstream capacity, the fundamentals couldn't support such a bubble-like price and gradually fell back to below 100,000 yuan, returning to its original state.

According to data from Shengyi, on July 26th, the spot price of battery-grade lithium carbonate was offered at 940,000 yuan/ton for ask, a decline of up to 14% from two months ago, while the bid price was even lower, at below 900,000 yuan/ton. According to relevant trading software, the main lithium carbonate futures price has fallen to 850,000 yuan/ton. This year, the price of lithium carbonate has fallen by more than 20%, with a decline of more than 85% compared to the historical high.

In fact, the production cycle of lithium carbonate from exploration to production takes 10-15 years, while the shortest period for upstream cathode material companies to expand capacity is only 6-10 months. The cycle gap leads to dramatic fluctuations in price, turning lithium mines from hotcakes to hot potatoes. And currently, supply already seriously exceeds demand, and downstream demand is slowing, making it difficult to achieve supply-demand balance in the short to medium term. Digesting existing production capacity and inventory is the main task, and prices may be in a long cycle of probing the bottom.

It is worth noting that many battery companies have slowed down their expansion plans and closed some production lines, which may accelerate the time for bottom exploration of lithium carbonate prices. Under the price impact, the survival of the fittest, the industry accelerated clearing, the lithium battery industry chain will be a fierce battle in the next few years, and "the remaining is the king". As a lithium carbonate leader, Ganfeng Lithium should have no problem surviving, but whether it can achieve better development and market share in this wave of elimination competition is still a matter of discussion.

Fully layout of industry chain, risk diversification, and resilient performance.

According to the Futubull Finance APP, Ganfeng Lithium has comprehensively laid out the lithium battery industry chain, with business covering upstream lithium resource development, midstream lithium salt deep processing and metal lithium smelting, downstream lithium battery production and retired lithium battery comprehensive recycling and utilization, making it one of the manufacturers with the most complete supply of lithium series products. The full-area layout of the industry chain diversifies the price risk, making the company more resilient than other peers in terms of performance.

At the upstream resource end, Ganfeng has laid out lithium spodumene, brine, lithium mica and lithium clay through acquisition, with a total controlled resource volume of 79.59 million tons LCE and an equity resource volume of 48.14 million tons LCE, ranking first in the domestic industry. In the midstream lithium salt processing end, it has multiple production bases, including the Jiangxi Fengcheng project under construction, with a total capacity of over 0.2 million tons, and the lithium product output of the company is 0.1043 million tons in 2023, with the capacity utilization rate at the industry average level; in the downstream battery end, it has a 13GWh lithium battery project in Xinyu, and planned capacities totalling 45GWh in Dongguan, Chongqing Liangjiang New Area, Inner Mongolia Chifengchuan Dairy Industry Development Zone, and Hubei Xiangyang Dongjin New Area, accelerating lithium battery sector layout.

It is worth mentioning that although high-quality lithium resources create stable and low-cost raw material sources to bring more flexibility to Ganfeng's profits, the company has acquired many lithium mines in the early stage, currently owning 15 lithium resource equity, including Goulamina Lithium Spodumene Mine and Mariana Salt Lake, which are still under construction. Goulamina project is expected to be put into operation in 2024. As a result, under severe overcapacity, more overseas markets are needed to digest the output, which is expected to greatly lower the capacity utilization rate.

Lithium battery industry chain companies need to be prepared for long-term bottom exploration of price, during which losses are common. The key is to see whose capital is strong and whose product strength is stronger to survive the industry winter. As of March 2024, Ganfeng had cash on hand of 9.086 billion yuan, and short-term and long-term borrowings of 6.494 billion yuan and 16.639 billion yuan, respectively. Under the circumstance that operating activities do not generate cash inflows, debt pressure is still relatively high. Compared with peers, such as Tianqi, whose financial situation is relatively relaxed, with cash and equivalents of 9.287 billion yuan and short-term and long-term borrowings of 0.335 billion yuan and 9.268 billion yuan, respectively. However, based on the forecasted pre-loss for the first half of this year, the full-year loss will greatly consume the company's cash resources, and the company's single business and long-term exploration of lithium carbonate prices mean making good preparations for continued huge losses. In this respect, Ganfeng has advantages, as the lithium battery business will weaken the risk of lithium salt prices.

Compared with peers, many investment banks are not optimistic about the industry predicament. However, some investment banks still hold an optimistic attitude. For example, Haitong Securities issued a research report stating that although the profitability of the lithium battery industry is under pressure due to supply exceeding demand in 2023-2024, the lithium battery industry will still be a relatively rare high-growth track in the future, and with the slowdown of production capacity, the profitability of the industry chain may improve, suggesting to focus on the investment opportunities of the industry chain.

The turning point of the industry is "uncertain", be cautious about undervalued traps.

The turning point of the lithium battery industry chain still needs to confirm the bottom of the price, but in terms of direction, energy transformation still needs to be strictly implemented, the penetration rate of new energy vehicles continues to increase, reaching 35.2% in the first half of 2024, and according to the forecasts of major institutions, there is still much room to reach 50%. This part can gradually digest the existing lithium battery industry chain production capacity, and electrochemical energy storage is developing rapidly, gradually occupying the mainstream and promoting a balanced supply and demand of lithium batteries.

Market clearance is a lengthy process, and participants not only have to endure the dilemma of low capacity utilization for years but also face the risk of being eliminated under price wars. The Ministry of Industry and Information Technology issued the "Regulatory Conditions for the Lithium-ion Battery Industry (2024 edition)", which requires that for newly built capacity, lithium-ion battery companies must have a capacity utilization rate of no less than 50% in the previous year and higher requirements on their production processes and product performance, restraining the disorderly expansion of lithium battery capacity from the policy level and accelerating market elimination.

Most investment banks are not optimistic about the industry predicament, such as Lyon downgrading the company's target price from HKD 26.7 to HKD 18.4, but still higher than the current price (HKD 16.86). The company's current market value in Hong Kong is HKD 34 billion, with a PB ratio of 0.6 times, which is very low in valuation. Some institutional investors have been continuously trading to lower their costs, such as Citi, which has reduced and increased its holdings twice in the past two months.

As an industry leader, Ganfeng Lithium has recently been downgraded by investment banks, such as Lyon lowering the company's target price from HKD 26.7 to HKD 18.4, but still higher than the current price (HKD 16.86). The company's current market value in Hong Kong is HKD 34 billion, and the PB ratio is 0.6 times, which is very low in valuation. Some institutional investors have been continuously trading to lower their costs, such as Citi, which has reduced and increased its holdings twice in the past two months.

The lithium battery industry chain still has a high level of uncertainty in the short to medium term, and any rebound may be a trap. Before the turning point of the industry comes, investors should be cautious and guard against undervalued traps.