Wulong Power wins big order to boost full-year performance

It is reported that according to the recent announcement of Wulong Power (0378.HK), the company's indirect wholly-owned subsidiary Wulong Power (Chongqing) has just signed a cooperation order agreement, entrusting Wulong Power (Chongqing) to produce the positive electrode material of lithium-ion batteries - ternary products. This order has been executed since March and will be executed until the end of 2018. The company said that the board of directors believes that this order will bring a stable source of income to the company.

According to the announcement, Wulong Power (Chongqing) will use four production lines to produce cathode materials for this order - ternary products: including two production lines with a total capacity of 210 tons/month and two production lines under testing with a total capacity of 240 tons/month. The company expects that these four production lines will be fully operational this year to supply this order. According to a rough calculation based on the announced capacity: the four production lines will achieve a shipment volume of about 4,000 tons to 4,500 tons in 2018. If estimated at the current price of 230,000 yuan/ton for ternary cathode materials, it will bring the company sales of 920 million yuan to 1.04 billion yuan in output value. At the same time, if estimated at the average gross profit margin of the cathode material industry of 15%, the order will generate a gross profit of 160 million yuan, which will significantly increase the performance of the parent company Wulong Power in 2018.

2018 is a critical year for the entire power battery industry as market norms and industrial structure gradually take shape, and it is also a turning point for economic transformation and industry development. However, for market participants, it is a year full of variables. Since 2017, when new energy vehicle subsidies were linked to energy density, the ternary route has gradually become the mainstream of the market, and the specific capacity of power batteries has begun to soar. With the deepening of industry trends, the specific capacity competition among companies has begun to become the key to winning the market. Under this background stimulation, most domestic battery cell companies have been prompted to transform from the initial iron-lithium route to the ternary route.

According to the survey statistics of SPIR, since 2018, more than 80% of the power battery companies that originally focused on iron-lithium batteries have begun to shift to ternary batteries, such as BYD, CATL, Guoxuan, Watma, Guoneng, etc., which has greatly boosted the market demand for positive electrode materials. On the other hand, under the current global shortage of cobalt resources, the overall price of ternary materials showed a sharp increase in the first quarter, from 170,000 yuan/ton in the first quarter of 2017 to the current 230,000 yuan/ton, and the price increase has exceeded 40% year-on-year.

Figure 1 Average price trend of ternary materials market from 2017Q1 to 2018Q1 (10,000 yuan/ton)

In 2018, as the price of cobalt metal soared, the prices of ternary materials and lithium cobalt oxide also rose along with it, and the performance of companies engaged in related materials also increased significantly, especially for domestic listed companies, whose net profits also showed a significant increase. This industry has entered a favorable period.

Figure 2: Q1 2018 performance report of Dangsheng and GEM

Driven by the rise in cobalt metal prices, the prices of ternary materials and lithium cobalt oxide have risen. China's A-share listed companies in positive electrode materials, GEM and Dangsheng Technology, saw a significant increase in their overall performance in the first quarter of 2018, with net profits both increasing by more than 40% year-on-year.

In terms of output, according to SPIR data, China's output of lithium battery positive electrode materials was 210,000 tons in 2017, a year-on-year increase of 30%. Among them, lithium nickel cobalt manganese (aluminum) oxide became the material with the fastest growth rate, mainly driven by the continued demand for power batteries for new energy vehicles. At the same time, under the stimulation of subsidy policies linked to battery energy density, the market demand for ternary materials has increased significantly, and its annual output reached 86,000 tons, a year-on-year increase of 59%.

Figure 3 Output and forecast of different types of cathode materials in China from 2014 to 2018 (10,000 tons)

SIPR predicts that China's output of lithium battery cathode materials will exceed 250,000 tons in 2018, among which ternary materials will still be the most in-demand product in the market. The main reasons are:

1) New energy vehicle power batteries are subject to policy influences, requiring energy density to continue to increase, but currently only ternary materials can meet the requirements of mature cathode materials in the market;

2) Since the end of 2017, power battery companies that originally used lithium iron materials have begun to transform to ternary materials in large quantities, such as BYD, CATL, Guoxuan, etc.

3) The capacity construction of high-nickel ternary material enterprises has been completed, and digital enterprises will gradually adopt ternary materials to replace lithium cobalt oxide in order to save costs;

4) The production capacity of cylindrical battery companies continues to expand, and high-capacity battery cells are gradually gaining popularity in the market, especially in the passenger car market, where the proportion of ternary material batteries is increasing.

Looking at the output value of ternary materials alone, SPIR data shows that China's output value of ternary materials reached 17.5 billion yuan in 2017, a year-on-year increase of 119%. It is expected that in 2018, with the acceleration of new energy power batteries and digital ternary replacement of cobalt, the demand for ternary materials will be driven, and considering the price increase, the total output value of ternary materials in China is expected to exceed 30 billion yuan.

Figure 4 China’s ternary materials market size and forecast from 2014 to 2018

It is worth noting that during the period of vigorous development of new energy vehicle power batteries, the market demand for positive electrode ternary materials is also strong. FDG Power is likely to usher in a new outbreak point, and its annual performance is expected to double. It has great advantages in materials, costs, products, etc.

From the perspective of the industrial chain, Wulong Power is committed to developing the upstream battery cathode material business. In October 2015, Wulong Group acquired Aiskai (Chongqing) Lithium Battery Materials Co., Ltd. under SK Group. It is now called "Wulong Power (Chongqing) Lithium Battery Materials Co., Ltd.". It mainly produces nickel-cobalt-manganese (NCM) lithium-ion battery cathode materials suitable for electric vehicles, energy storage systems and telecommunications equipment. According to public data, Wulong Power (Chongqing) will be able to increase its production capacity to 9,600 tons per year through expansion in the future. Based on the future production capacity of 9,600 tons, 80% capacity utilization rate and the average market price of 230,000 yuan/ton, the company may achieve an output of 7,600 tons/year of ternary material products in the future, corresponding to an output value of more than 1.75 billion yuan in revenue. The domestic market share and output value account for 6.14% and 5.5% respectively. Moreover, this figure will further increase as the production line is fully operational. The rapid growth of Wulong Power's market share and profits will be worth looking forward to.

According to public information: Wulon Power's main businesses include: 1) research and development, production and sales of lithium-ion batteries and related products; 2) research and development, manufacturing and sales of positive electrode materials for lithium-ion batteries; and 3) direct investment.