Ganfeng Lithium Alert:Strong volume growth expected,Buy reiterated

FY16 results in line with both DBe and market consensus.

    Ganfeng Lithium released FY16 annual results after market close on 11 April.

    The Company reported revenues of RMB2.84bn, up 110% YoY; achieving100% DBe and 97% Bloomberg consensus. The Company also deliveredstrong FY16 NPAT of RMB464m with 271% surge YoY, reaching 98% DBe and92% consensus estimates. Ganfeng Lithium announced cash dividend ofRMB0.1 per share.

    New largest Chinese convertor in 2019 expected.

    Ganfeng’s FY16 overall earnings results were in line with our expectation.

    However, it seems the volume of off-take agreement with Albemarle washigher than our expectation while the off-take agreement ASP and unit COGSwere lower than expected. We believe the off-take agreement impact willgradually fade away when new raw material supply from Mt Marion, its JV inAustralia, start to increase delivery in 2017. We expect Ganfeng to be thelargest Chinese convertor in 2019 with strong volume expansion from c.

    27ktpa as of 2016 year end to c.64ktpa in 2019.

    Limited dilution impact from issuing CB.

    Ganfeng announced to issue no larger than RMB950m convertible bond beforethe end of 2017 to finance three projects previously announced. The threeprojects are 15ktpa lithium carbonate project, 20ktpa lithium hydroxide projectand 0.6Gwh lithium battery project. Though the interest rate of the CB has notbeen decided, the conversion price is settled as the average stock trading price20 days before the conversion date. Assuming conversion price at RMB43 pershare, Ganfeng expected total number of shares outstanding would increasefrom 729m to 751m as of 2018 year end, implying c. 3% dilution effect. Thehigher the conversion price is, the less the dilution effect.

    Issuing US$500m bond to expand overseas business.

    Ganfeng also planned to issue a 3yr US denominated bond with no larger thanUS$500m in Hong Kong in the next 12 months. Considering the amount of thisbond is huge and use of proceeds is to support overseas business, we believean asset acquisition is possible. The details of this US bond remain to be seen.

    Strong volume growth expected, Buy reiterated.

    We like Ganfeng on its volume growth in 2017-2019. Please see our ChinaLithium Industry report, “Downgrading Tianqi on demanding valuation”,published on April 10th, 2017. In addition, new raw material supply from MtMarion should help to decrease cost and improve per tonne gross profitsignificantly. We expect Ganfeng’s bottom line should grow at a CAGR of 65%in the next three years. Buy reiterated.