Hezong Technology: Continuously extending to the upstream of the industrial chain to cope with fierce competition from iron phosphate

On April 18, Beijing Hezong Technology Co., Ltd. (hereinafter referred to as Hezong Technology) held the fourth extraordinary general meeting of shareholders in 2022 to review and vote on the "Proposal on the estimated comprehensive credit line applied by the company and its subsidiaries to financial institutions and the estimated guarantee line provided by the company to its subsidiaries" and the "Proposal on the overseas investment of the sub-subsidiary". Aijiwei participated in this shareholders' meeting as an institutional shareholder and voted in favor of the above proposals.

Increase investment in production capacity and improve the layout of the industrial chain

Currently, Hezong Technology's main business is divided into two major business segments: power and lithium battery materials. The power distribution equipment business and power engineering design consulting business belong to the power segment, and the lithium battery positive electrode precursor materials business belongs to the lithium battery materials segment.

Keenly observing the continued rapid development of the new energy vehicle industry and the increasing demand for the application of lithium battery energy storage technology in 5G base stations and new energy power stations, Hezong Technology has continued to increase its layout in the lithium battery materials business in recent years and has reaped rich rewards.

Hunan Yacheng, a wholly-owned subsidiary of Hezong Technology, mainly produces cathode precursor products such as iron phosphate and cobalt tetroxide. The current production capacity of iron phosphate has reached 60,000 tons. According to the 2021 performance forecast released by Hezong Technology on January 24, Hunan Yacheng New Materials Co., Ltd. built an annual production capacity of 30,000 tons of iron phosphate during the reporting period and released its performance in the fourth quarter of 2021. The output, sales, operating income and profit of iron phosphate all increased significantly year-on-year. It is estimated that Hunan Yacheng's annual iron phosphate sales in 2021 will be 34,500 tons, of which 11,400 tons will be sold in the fourth quarter of 2021.

It is understood that Hunan Yacheng's 60,000 tons/year iron phosphate production line is basically in full production and sales. Currently, Hunan Yacheng's iron phosphate sales in January and February were 9,285 tons, a year-on-year increase of 154%. At the same time, due to the rapid growth in demand for lithium iron phosphate, the gross profit margin of iron phosphate products has also increased significantly year-on-year.

The two proposals reviewed by the temporary shareholders' meeting are both designed to expand production capacity and improve the layout of the industrial chain. Among them, the "Proposal on the estimated application of the company and its subsidiaries for comprehensive credit lines from financial institutions and the estimated guarantee line provided by the company to its subsidiaries" intends to provide a total of 1.5 billion yuan in guarantee lines for Tianjin Hezong Technology Co., Ltd. and its holding subsidiary Hunan Yacheng in 2022. The "Proposal on the Outward Investment of Subsidiaries" proposes to use the holding subsidiary Guizhou Yayou as the main body of the investment project to build an integrated battery-grade iron phosphate project with an annual output of 300,000 tons (including a full iron phosphate industry chain project for acid production from phosphate rock and pyrite) in the Basic Industrial Park of Weng'an Economic Development Zone. The project covers an area of ​​1,120 mu and is planned to be built in two phases. The first phase of the project plans to build a battery-grade iron phosphate project with an annual output of 100,000 tons, and the second phase of the project plans to build a battery-grade iron phosphate project with an annual output of 200,000 tons and supporting acid production from phosphate rock and pyrite. The total investment scale is about 2.7 billion yuan.

Riding the Wind

Driven by the goal of "carbon neutrality", the new energy vehicle market has accelerated its expansion, and the energy storage market has also shown a trend of increasing volume to varying degrees, which has led to a substantial growth in the lithium battery industry chain. The positive electrode materials that account for more than 30% of the cost of lithium batteries have developed particularly rapidly. Different countries and even different manufacturers have different choices for positive electrode materials. Chinese manufacturers prefer the development of iron phosphate, which has also led to its astonishing growth rate.

Liu Zegang, chairman of Hezong Technology, believes that the actual growth of the industry has far exceeded expectations, based on two aspects. "First, from the perspective of the automotive industry, it was previously believed that the penetration rate of electric vehicles would reach 25% in 2025, but by the end of 2021, the penetration rate of electric vehicles was close to 20%. At the same time, in terms of energy storage, related projects are being built on a large scale across the country, and its future development is far beyond expectations."

The unexpected development will inevitably increase the degree of competition in the market. Relevant investment institutions pointed out that with the expansion of cathode material suppliers and the gradual commissioning of new production capacity, the main focus in the next few years will be on cost competition, and the degree of competition will intensify.

In order to cope with the fierce competition, Hezong Technology has continuously increased its investment and continued to expand upstream in the industrial chain. In the "Proposal on the Overseas Investment of the Subsidiary", the company mentioned two necessities of the construction project. One is that increasing production capacity will help reduce the production cost of iron phosphate in Hunan Yacheng, and the other is that the downstream demand for the company's products has increased rapidly, and the current production capacity can no longer meet the needs of existing customers. The implementation of the new project will further expand the company's production scale, realize the business integration and synergy of the company's lithium battery precursor material segment, and enhance the company's market competitiveness and sustainable development capabilities.

"Construction projects are not only about the layout of the industrial chain, but also about achieving improvements in technology and production processes," Liu Zegang emphasized.

At present, Hezong Technology's iron phosphate production capacity market share ranks first in the market. With sufficient raw material guarantees and outstanding cost advantages, it has established long-term and stable cooperative relationships with important customers in the industry. As the global new energy industry continues to grow, Hezong Technology's active industrial layout strategy will lay an important foundation for its leading and stable market position.