Jiangxi Ganfeng Lithium: Is Lithium the New Gold?

Business model

Ganfeng Lithium is deeply engaged in mineral sourcing and puts an emphasis on clean extradition processes and green refining. The company’s core business is to provide high-quality compounds of battery-grade lithium hydroxide (LiOH), battery-grade lithium carbonate (Li2CO3) and various other lithium- and cesium compounds. In addition to that, the firm offers complimentary metal products, lithium metal anodes, battery management systems, industrial power batteries and consumer equipment batteries and also has a battery material recycling business line.

Most companies are focused on a single aspect of lithium exploration, but Ganfeng Lithium is well-diversified in its lithium exploration activities, sourcing lithium from brines and spodumenes resources in Australia, Argentina, Mexico and in China. The company is the largest hard rock lithium producer in China and has become the second-biggest lithium producer in the world after Albemarle Corporation. ^[3]

Ganfeng’s Global Distribution of Resources

Lithium Processing From Brine

Lithium Processing From Spodumene

Ganfeng is engaged in the research, development, and production of non-ferrous mineral products and is also selling magnesium (Mn), boron (B), potassium carbonate (K2CO3), potassium chloride (KCl), potassium hydroxide (KOH) and polycrystalline silicon (polysilicon). The company follows a dedicated corporate sustainable business strategy and publishes a sustainability report each year ^[4]. A board-level “Sustainable Development Committee” is supervising the operation of the sustainable development system of the company’s business segments and provides continuous suggestions to improve the company’s sustainable development performance.

Market Analysis

Market demand for Ganfeng’s lithium has been fundamentally shifting in the last years and is today dominated by rechargeable batteries.

Lithium Demand by Industry

Automotive batteries make up around 70% of all rechargeable battery demand and this trend is forecasted to continue. By 2030 electric batteries are expected to make up 85% of lithium demand.

Lithium Demand from Rechargeable Battery Applications by End-user Sector, 2020-2031 (% Demand)

China has been the third-largest lithium producer in 2019 and 2020, but it is expected that Chile will overtake China in lithium production within the coming years.

Lithium Production (Lithium Carbonate Equivalent)

Lithium Mining and Reserve Quantities

China holds the fourth largest lithium reserves in the world and produces the third largest amount of lithium in the world, but Australia and Chile have more lithium reserves and higher yearly exploitation rates. Australia’s lithium production is currently the most potent in the world ^[5]. Lithium is by no means a resource that is critical when it comes to its absolute availability.

The cause for a lithium supply problem in the short term is the slow extraction process from salt lake-brines, which make up >80% of the world’s economically available lithium resources, and the lack of an efficient recycling process that feeds used lithium back into the value chain. As of today, China’s lithium companies rely heavily on imported raw materials to produce lithium products. If China does not accelerate the development of domestic lithium resources, its lithium refineries and processors will not be able to establish supply security in the future and remain competitive ^[6].

Competition

Ganfeng is the second strongest lithium mining company worldwide. Albermarle leads the market with 1% more market share than Ganfeng and SQM have the third biggest market share with 14%. The market is highly fractioned, with 34% market share occupied by small players.

Lithium Mining Companies by Market Share

Ganfeng’s Corporate History

Ganfeng’s Leadership

Founder

Liangbin Li – Founder, Chairman & President

Dr. Liangbin Li is Ganfeng’s founder, chairman and president. He is Independent Director at Anhui Guofeng Plastic Industry Co., Ltd and Anhui Tongfeng Electronics Co., Ltd. and on the Board of Directors at Anhui Guofeng Plastic Industry Co., Ltd., China Nonferrous Metals Industry Association and Qinghai Liangcheng Mining Co. Ltd.. He had previously founded Galan Lithium Ltd. and he worked at scientific research institute of Jiangxi Lithium Plant.

Board Members

Xiaoshen  Wang – Vice Chairman & Executive Director

Mr. Wang joined Ganfeng in 2006 and was appointed Vice Chairman of the Board of Directors in 2010. He is chairman of the Ganfeng’s Sustainable Development Committee. He worked at China National Nonferrous Metals Industrial Xinjiang Co., Ltd., Xinjiang Lithium Salts Plant and is mainly responsible for the lithium business. He obtained a bachelor’s degree from North China University of Technology and an EMBA from the China Europe International Business School.

Management

Manying Yang – Chief Financial Officer & Vice President

Ms. Yang received an MBA from Jiangxi University of Finance & Economics.

Ming Ouyang – Secretary of the Board & Vice President

Ms. Yang received an undergraduate degree from Open University of China. She is also on the board of Ganzhou Teng Yuan Cobalt New Material Co., Ltd ^[7].

This is the section where the rubber meets the road, often as the starting point to making an informed investment decision in the stock market. Qualitative analysis is an important stepping stone into understanding the business, how it operates, and how the company makes money and deals with risk.

The world needs more lithium

There are a number of different uses for lithium. High-performance lithium ion batteries, commonly used in electric vehicles, are projected to see increasing use throughout the years. In conjunction with that, lithium batteries for consumer electronics will play a major part in the future market demand for lithium. Other significant areas in which consumers and businesses of tomorrow will demand significant amounts of lithium are industrial and medical. Today most of this demand has come from developed countries, including the United States, Japan, China and South Korea, but a noteworthy share of demand for lithium could soon also come from emerging markets that have seen rapid economic growth in recent years. Countries such as China and India are now experiencing widespread economic growth and as their economies expand, so will the number of electric vehicles and other products powered by rechargeable lithium-ion batteries ^[8]. In line with this, Ganfeng Lithium has announced plans to build a lithium plant in Jiangxi, China that will have an annual production of 50,000 tonnes of lithium carbonate equivalent and plans to increase its lithium production capacity roughly fivefold to 600,000 tonnes of lithium carbonate equivalent a year ^[9].

Ganfeng has secured mid-term lithium demand, but risks to be cut out in the long run

In 2019, Ganfeng has signed a strategic cooperation memorandum with VW to supply lithium chemical products to VW and its suppliers until 2029. Also, as part of its electromobility expansion, the BMW Group is deepening its existing business relationship with Ganfeng Lithium until 2024. Ganfeng and BMW have signed a 640 million USD 5-year (2019 – 2024) supply contract for the key raw material lithium for the production of battery cells.

BMW Enters Into Lithium Supply Contract With Ganfeng

BMW Enters Into Lithium Supply Contract With Ganfeng

Sustainability is becoming central to German politics and European automotive manufacturers’ corporate strategies and Ganfeng’s sustainability standards and ethically responsible extraction of hard-rock deposits in Australia under strict conditions qualify the firm as a sustainable partner. Ganfeng is currently covering 100% of BMWs lithium hydroxide needs and the Bavarian original equipment manufacturer is expected to need about seven times today’s lithium demand by 2025, but from 2022 onwards BMW plans to start sourcing lithium from Australian mines itself ^[10].

Ganfeng is investing to become increasingly vertically integrated within its domain and differentiates its product offerings

In March 2021 Ganfeng has joined China Minmetals lithium salt lake project for 225 million USD ^[11], in May 2021 the firm has been bidding to acquire Australian lithium development firm Bacanora Lithium, which operates the Sonora lithium project in Mexico ^[12]. In addition to that, Ganfeng will upgrade its technology to use a 120-megawatt photovoltaic system to generate electricity for a lithium extraction plant in Salta province’s Salar de Llullaillaco, where it is already developing a lithium brine project ^[13] and it also has invested in a solar-powered lithium project in Argentina in June 2021 ^[14] to match its sustainable corporate strategy and differentiate from competing mining companies in the market.

The Chinese Government spurs electric vehicle industry growth

Following the removal of the 50% foreign ownership limit on Chinese EV joint ventures in April 2019, the Chinese government took a step further upstream by removing the list of approved battery suppliers, effectively opening the industry to foreign companies. In addition, the Chinese government increased penalties for the manufacture and use of internal combustion engines by raising taxes and implementing new vehicle emission standards in provincial regions to conform with international standards. The widespread government commitment to EV adoption strategies and incentives, combined with ~1,228 GWh of announced battery capacity by 2028, underpins that long-term demand fundamentals for lithium remain strong ^[15].

This is the section that separates the speculators from the professional investors. Here at ChineseAlpha, we pride ourselves on informing you the investor to carve out your own stock market success story and make the best investment decisions of your life.

In the quantitative analysis section, we will discuss the financial statements (income statement, balance sheet, cash flow statement) and valuation metrics. The data is obtained from the latest 5-year annual reports from Capital IQ.

Income Statement

Income Statement Analysis

Despite the pandemic, Ganfeng Lithium still witnessed positive revenue growth. This growth was outpaced by a large COGS growth which resulted in negative gross profit growth. Based on these observations, excluding interest effects, Ganfeng had a poor recent performance. Opposingly, when you factor in interest effects, Ganfeng’s performance was quite impressive, with a 322% increase in pre-tax income between 2019-2020.

Income and Revenue

Ganfeng Lithium reported a net income of 148.5 million USD in 2020. This is a major improvement in 2019 due to gains on the fair value of financial assets such as equities and due to strong demand for battery-grade lithium ^[16]. Trailing a prior 2 years of drastically declining revenue growth, year to year revenue growth has improved by 2% from 2019 to 2020, despite the COVID-19 breakout. This positive rate of growth is a good indicator that the growth trend is going to remain positive.

We must ask ourselves, however, how much of this increase is due to an increase in sales volume, an increase in the price of goods sold or exchange rate, If sales volume decreased and the price of goods sold increased, then the positive growth observed is not as attractive as first thought. A good income statement would show that the prices were maintained, or decreased, alongside sale volume increasing as an ideal driver of this revenue growth. As lithium-ion battery back prices have decreased to 137 USD/kWh from 2019 to 2020 ^[17], we may dismiss the former notion. It is evident that sales volume has increased alongside decreasing prices which is a very attractive feature ^[18].

Cost of Goods Sold

Between 2019 and 2020, a positive cost of goods sold (COGS) growth of 8.13% was observed. It is important to analyze whether any COGS growth was expected and to do this we must compare COGS growth to sales growth. Sales increased only 4.74%, however, COGS grew by almost double that. This is a bad indicator as COGS should generally grow, at most, in line with sales but ideally at a slower pace (as observed in 2017 & 2018). One can observe a decreasing trend in COGS growth over the last 5-years, which may be as a result of economies of scale and technological improvement driving prices down across the industry resulting in lithium-ion battery cell prices falling from 290 USD/kWh to 110 USD/kWh between 2014 and 2020 (Benchmark. 2020). COGS growth has significantly decreased since 2019, which is a good indicator for the improving resilience of Ganfeng Lithium. Although there has been a positive COGS growth, the rate of growth has been decreasing consistently and this, coupled with the industry’s trending decrease in prices, may indicate that we are steadily approaching the point where COGS growth becomes negative for the firm ^[19].

Revenue and Profit

Comparing revenue to profit, gross income growth is negative at -6.25%, which is significantly less than and in the opposite direction to revenue growth. It means, despite revenue increasing, gross profit has decreased. However, comparing it to pre-tax income we see it far exceeds revenue growth. Although only a 4.74% increase in revenue between 2019 and 2020, one can observe a 322% increase in pre-tax income over the same period. This may be as a result of the -220.67% change in unusual expenses between 2019 and 2020 which had a large positive effect on pre-tax income.

Interest and Expenses

Analyzing interest, a good income statement features an interest expense which is a low proportion, within the single-digit percentage pointsof operating income or EBIT. In 2020 interest expense held a significant 39.66% of EBIT (operating income). One can observe a 30.19% (8.9 million USD) increase in interest expense from 2019-2020. Ganfeng is paying more to its debtors in 2020 than in previous years and has adopted a more leveraged capital structure than before. Ganfeng’s investments in the past years (2019 acquisition of a 22.5% project interest in Mexican Sonora Lithium, 2017 investment in Pilbara Minerals, 2017 investment in Lithium Americas and construction of the first generation of solid-state lithium battery R&D pilot production line) have contributed to this structural shift.

In the non-operating section, some significant changes, between 2019-2020 were; other operating expenses, non-operating income, and interest expense growing by 282%, 73% & 30%, respectively.

Balance Sheet

Income Statement Analysis

Looking at the Income Statement and Balance Sheet together, the strength of a company can be evaluated by three key areas: liquidity, financial strengths and how well the business is being managed.

Liquidity

First, we are going to look at how well the company can pay from existing assets for ongoing expenses, including payroll, inventory and investments in capital equipment. The first ratios we are going to look at are called working capital ratio and the quick ratio.

The working capital ratio measures a company’s ability to pay obligations within a year.

The working capital ratio of Ganfeng Lithium has improved over the last five years from 1.75 in 2016, to 2.07 in 2017, to 1.62 in 2018, to 1.77 in 2019 and to 2.15 in 2020. A working capital ratio of 2.0 or higher is an indicator of the company having sufficient liquidity and a sign of health.

The quick ratio excludes some of the current assets that cannot easily be turned into cash, such as inventory and represents liquidity that is immediate. A ratio of 1.0 or higher indicates adequate liquidity to operate.

Financial Strengths

Secondly, we evaluate the company’s financial strength through 3 parts. We analyze (1) debt-to-equity ratios, (2) interest coverage, (3) return of equity/return on assets.

(1) When evaluating company strength using debt to equity ratios, the smaller the ratio, the better, as a company is financially stronger the less debt it has compared to equity.

567.83 million USD of long-term debt is divided by shareholders equity of 1,636.58 million USD and we get a debt to equity ratio 1 of .35, which is excellent.

When we look at total debt, we’ve got the short-term debt (the current portion of long-term debt) at 100.7 million USD and we add that to the 567.83 million USD of long-term debt and divide that by the same total equity to calculate. This time the ratio is higher—it’s 0.41—but it’s still well below 1.0, so the financial strength of this company looks solid.

(2) It is important in evaluating financial health to look at the company’s current operating profit versus the amount of interest it has to pay its debt holders.

We want the ratio to be above 1 to indicate that operating profit is more than interest expense, and usually, something at 5 to 7 is considered very healthy. Ganfeng has relatively high interest expenses in relation to its operating profit, but its interest coverage ratio is still acceptable.

(3) Return on total equity and return on assets measure the company’s earnings on the equity that the shareholders have invested and the profit on all capital invested in the business, which was used to acquire assets, respectively.

The return on equity is good at 9.07%. In today’s market with low inflation and high risk, people are very happy with that 9.07% return. The return on assets ratio eliminates the impact of the source of financing, regardless if it is debt or equity and measures management efficiency. 4.41% is a good return for unleveraged investments.

Business Management

Thirdly, we evaluate how well the business is being managed through 2 parts. We analyze (1) inventory turnover and (2) accounts receivable days outstanding/ accounts receivable days outstanding.

(1) Inventory turnover shows how well Ganfeng is managing its inventory. We look at the number of days that something is in inventory. We divide 365 days by costs of goods sold over ending inventory and receive 198 days. This means that it takes on average 198 days to sell all inventory.

This is a relatively low inventory turnover and indicates that the company is working with considerable buffer stock.

(2) Accounts receivable days outstanding measures how well management turns sales into cash and represents how long it takes to collect on sales. We take the Accounts Receivable balance at the end of the period and divide it by sales for the past year and then multiply that by 365 days.

It takes an average of 125 days to collect on its sales. It takes quietlong for the company to collect its bills, but the late bill collection practices are not an outlier for the company and therefore do not create a hot-button issue.

Accounts Payable Days Outstanding is an indication of how fast the company pays its bills. To calculate it we take the accounts payable balance and divide it by the cost of goods sold and then multiply that by 365 days.

It shows that their days payables outstanding was 57 days. This is relatively high for a days payable outstanding and means that it takes a company more time to pay their bills and creditors. Generally, having a high DPO is advantageous, because it means that the company has extra cash on hand that could be used for short-term investments.

Ganfeng pays its creditors later but has problems collecting timely payments. These two metrics balance out to a certain degree, but investors should watch the >120 days accounts receivable ratio closely ^[20].

Statement of Cash Flows

Cash Flow Analysis

The net operating cash flow has been positive over the last five years and therefore the company has been consistently making and not losing money. On the one hand, we can see that Ganfeng has been investing 177 million USD back in its own business, but on the other hand, last year’s acquisitions have been high at around 10% of its net income. Money spent on acquisitions is money the company has not been reinvesting in its own business. As long as the amount reinvested in the company is a multiple of the amount that is invested in other companies, this is not a red flag yet, but investors should keep an eye on Ganfeng’s future investment activities.

Since the 2020 net cash provided by operating activities is higher than the sum of the 2020 net cash used for investing activities and the 2020 net cash used for financing activities, we are left with a 2020 net positive change in the cash position of the company. In 2019, in contrast, we had a negative change in the cash position of the company. This can be attributed to the low net financing cash flow this year and the circumstances of the Corona pandemic. It is good to invest in companies that are increasing their cash position as it makes the firms more resilient to change and crisis, but we do not have to consider this a red flag as the company has left operating throughout 2020 and we witness a positive trend, which this is a good sign for investors.

It is also problematic that Ganfeng currently has a negative free cash flow and therefore no available money to buy back stocks and invest back in the business.

Overall, we can say that Ganfeng’s statement of cash flows gives mixed signals, but we have had a positive net income over the last 5 years and while the net income has not been steadily increasing, it has remained resilient and has been able to bounce back despite the impacts of the Corona pandemic. ^[21]

Discounted Cash Flow Analysis

Financial Forecast 2020-2022

On the one hand, Ganfeng’s P/E ratio has steadily improved through the years and is projected to get closer to a healthy ratio of 15x – 20x, but on the other hand, over the next years, it will still be too high compared to the industry average.

The firm has a strong performance track record and is expected to have a very strong growth potential in the next couple of years, while its financial health is average compared to its peers. One fundamental question is how much of Ganfeng’s growth potential is already priced into the stock. The discounted cash flow analysis indicates that the company is not undervalued and should not be bought unless the stock price drops to a value of at least $18.46.

Traditionally, large Chinese producers of lithium carbonate focused on the domestic market on account of its accelerating growth and a costly 16-17% VAT and export tax. Now Chinese suppliers have also targeted the largest ex-China battery markets of South Korea and Japan offers competitive pricing to encourage sales while supplying Europe with both battery and technical grades. Chilean producers still have a solid long-standing market share in ex-Chinese markets and constitute a strong competition.

In recent years, seaborne and Chinese domestic chemical prices have converged as reduced demand in China and macroeconomic factors have begun to impact global lithium and battery supply chain markets. Domestic lithium prices in China have been declining as Chinese battery supply chain demand has weakened in response to stricter Chinese EV policies that promote higher battery energy density and range. In addition to these market-related factors, a slowdown in Chinese economic growth and escalating trade tensions with the U.S. have heightened concerns about a current account deficit due to trade imbalances ^[22].

Moreover, Canadian competitor Medaro Mining Corp. has made remarkable progress in 2021 to revolutionize its lithium production. It has equipped its exploitation locations with novel machinery that makes mining of more remote resources economically viable ^[23]. Ganfeng needs to keep up its R&D effort to not fall behind its American competitors’ technology in the next years and needs to match the arm’s race.

Another concern is that automotive companies plan to start mining raw materials themselves and provide them to their battery producers directly. This would cut out mining companies like Ganfeng. To counteract this threat and keep growing in the future. Ganfeng needs to reinvent itself or provide additional services.

Gangfeng Lithium Co. Ltd is a fast-growing raw lithium supplier company in a fast-growing industry and we find the company to be unique in more ways than one way. Most companies are focused on a single aspect of lithium exploration, but Ganfeng Lithium is well-diversified in its lithium exploration activities. The company is the largest hard rock lithium producer in China and has become the second-biggest lithium producer in the world after Albemarle Corporation. It is expected that in 2025, even with a major increase in brine production, the market will still be about 50/50 between hard rock and brine ^[24] and thus leave Ganfeng in an advantageous position within the next years.

More advanced battery performance chemistries favor nickel-based cathodes and have resulted in a faster hydroxide supply response than demand. Chinese battery manufacturers have been slow to commercialize advanced nickel-based lithium hydroxide formats and consequently, Chinese battery manufacturers have shifted their focus to the production of LFP or other earlier generation nickel-based cathodes, which allow for more carbonate use. Despite these challenges, China’s new energy vehicle industry remains a priority for the country and several supportive government strategies were initiated during 2019 and 2020.

Ganfeng should be able to maintain its market share of 17% in the medium run as its core business will stay relevant as long as the EV market keeps expanding exponentially and its expansion investments will help make up lost business due to the upcoming direct sourcing operations from automakers. Investments have been poorly timed and new lithium mines will take years to bring online. Lithium prices will continue to rally as lithium production struggles to keep up with the massive demand for EVs. Lithium carbonate prices have gained 67% so far in 2021 and 224% in the past 12 months. This lithium supply crunch is expected to slow down the short-term supply of the lithium compound and improve pricing for Ganfeng. The firm has some decent credibility as it counts leading EV makers such as Tesla. Inc., Volkswagen AG and BMW AG among its customers ^[25]. When thinking about investing in Ganfeng, one has to take into consideration that the fair market value of the firm is not represented in the stock. A lot of the growth potential is already priced into the current share price and we cannot expect the share price to continue growing at the current year’s rate. If you own Ganfeng stocks, you should hold on to them as Ganfeng’s future is bright. If you do not own Ganfeng stocks yet, you should buy the stock as soon as it dips below $18 again. The company aligns well with the Chinese government’s five-year plan and we are convinced the stock is a good pick to diversify away from market disruption risk from upcoming government regulation and an essential pick for investors who aim to build a Chinese sustainability stock portfolio. With all the factors taken into consideration, Jiangxi Ganfeng Lithium Co. Ltd gets a conditional buy recommendation.