What's new
Huayou Cobalt (Huayou) announced on December 1 that Huayue Nickle Cobalt (Indonesia), with annual capacity of 60,000t nickel and 7,800t cobalt produced via wet-process smelting of laterite-nickel ores, recently completed trial production. The trial products have passed the firm’s performance test.
Comments
Huayue project’s successfully coming online marks the beginning of Huayou’s expansion into nickel production. We see visible upside in output. Management thinks it may take half a year for the Huayue project to achieve full capacity, which if it occurs in 2H22 would boost Huayue’s output to 30,000t by 2022. In addition, wet-process projects generally cost less due to additional income from cobalt byproducts and low energy consumption, securing medium-to-long-term advantage.
Integrated expansion to unleash growth potential; strategic cooperation to better retain downstream clients. Huayou currently has capacity for 0.1mnt/yr precursors, production of which requires 50,000t of nickel. Prior to Huayue project commencing operations, the firm only has 10,000t/yr nickel sulfate smelting capacity, but once on stream we estimate Huayou’s attributable nickel self-supply ratio will rise from 0% to 68% (6*57%/5). We believe the consequent increase in self-production ratio will also enhance per tonne earnings of precursor business thanks to cost reduction. Huayou has entered strategic cooperation with downstream clients to strengthen its competitive advantage. It recently signed an agreement with Ronbay, promising to supply 180,000-415,0000t ternary precursors to the latter over 2022-2025. It also signed an agreement with Easpring to supply precursors per its procurement plan (up to 300,000-350,000t). The maximum supply volumes are both based on the prerequisite that Huayou should provide competitive metal pricing and precursor processing fees. Assuming both clients place the maximum-volume orders (765,000t in total), we estimate Huayou would annual supply around 190,000t precursors for Ronbay and Easpring over 2022-2025, demonstrating solid competitive advantage.
Another Indonesian project coming online, proving solid sector leadership. The Indonesian wet-process nickel project started operation as scheduled at end-2021 despite its high complexity and the negative impact from the COVID-19 pandemic. We think this proves Huayou’s strong production capabilities, international management and business coordination. It also marks the firm’s another successful venture in Indonesia, laying a solid foundation for capacity and market expansion in Indonesia.
Valuation and recommendation
We believe that the Huayue project coming online as scheduled will ensure the supply of nickel, an important raw material of high-nickel ternary precursors, and support the ramp-up of ternary precursor production. We expect a potential re-rating of companies along the ternary lithium-ion battery (LiB) value chain, whose valuations came under pressured after lithium iron phosphate batteries surpassed ternary LiB as the most installed LiB. We maintain our 2021 and 2022 earnings forecasts. The stock is trading at 47.9x 2021e and 33.1x 2022e P/E. We maintain OUTPERFORM, and raise our TP 8.8% to Rmb172.00, implying43.2x 2022e P/E, offering 30.5% upside.
Risks
Lower-than-expected production and sales of alternative fuel vehicles; sharper-than-expected decline in metal prices; disappointing batch production of projects.