Core views:

Wanli Stone has created a second growth curve by joining hands with Tailixin Mining to extract lithium from salt-lake brine. Tailixin Mining owns the international leading direct lithium extraction (DLE) technology, which can effectively tackle the problems of difficult lithium extraction and long construction period in China’s salt lakes with high magnesium-lithium ratio. At present, Wanli Resources, a joint venture between the Company and Tailixin Mining, has started several lithium extraction projects in Qinghai, Xinjiang and other places. With the gradual release of the production capacity of lithium extraction business, the Company's profitability will be significantly enhanced, and the DLE technology is also likely to start large-scale replication. We forecast the Company’s EPS in 2022E/23E/24E to be Rmb0.09/0.94/1.72. Considering the valuation level of comparable companies and the advanced DLE technology, we assign 40x 2023E PE to derive a target price of Rmb38 and initiate coverage with a “BUY” rating.

Abstract:

A comprehensive stone supplier in China enters the field of extract lithium from salt lakes. Founded in 1996, Wanli Stone is a comprehensive service provider of high-end stone materials in China with rich project experiences. In Apr 2022, the Company announced the establishment of Wanli Resources as a joint venture with Tailixin Mining. Tailixin Mining has the international leading lithium extraction technology, which can effectively tackle the problems of difficult lithium extraction and long construction period in China’s salt lakes with high magnesium-lithium ratio. In Sep, 2022, Wanli Resources announced the establishment of its subsidiary in Qinghai, which uses adsorption method to extract lithium directly from 50ppm-100ppm salt-lake brine, and builds a production line with an annual output of 5kt of battery-grade lithium carbonate, which is likely to be put into operation in 2Q23. In Nov, 2022, Wanli Resources announced its cooperation with Xinjiang Geological and Mining Investment (Group) company on the development of salt-lake resources. At present, the project of extracting lithium from low-concentration salt-lake brine in Xinjiang has been approved by related authorities as a key research and development project. With the gradual advancement of the Company's lithium extraction business in salt lakes, profitability may be significantly improved in the future.

The imperative trend of DLE. At present, China occupies a dominant position in the global market in lithium salt smelting, cathode material preparation, battery production and vehicle manufacturing. However, in the mining links, China has weak control over lithium resources and relies heavily on imports. IEA data show that China produces less than 20% of the world's lithium. China's lithium mineral resources are dominated by salt-lake brine, but it is difficult to extract the lithium because the salt lakes in Qinghai and Tibet are dominated by high magnesium-lithium ratio, therefore, the expansion of production is limited by brine concentration. DLE technology, compared with previous technologies, has many advantages, such as improving lithium recovery, reducing operating costs and reducing environmental impact of projects. We believe that the maturity of DLE technology means not only the improvement of lithium extraction efficiency, but also the expansion of resources, whether it is low-grade salt lakes, geothermal springs in Tibet, oil and gas fields or electrolytic aluminum solution in Xinjiang. As long as the solution contains lithium resources, lithium can be extracted directly in theory, which will effectively solve the containment situation of lithium resources in China in the future.

The Company joined hands with Tailixin Mining to tap salt lakes in Qinghai and Xinjiang, building the second growth curve. The DLE technology can be simplified into three steps of adsorption, desorption, and precipitation, with an extensive scope of applications and low construction and investment costs. The in-house manganese and titanium adsorbents of Tailixin Mining have good selectivity for lithium, high adsorption capacity (up to 6~30 mg/g), high adsorption efficiency (lithium resource utilization rate of more than 85%), short adsorption and desorption time (within 1 hour) and other advantages, which, together with adsorbent granulation, constitutes the core competitive barrier of the lithium extraction process. Wanli Resources will likely use the project in Golmud to demonstrate the international leading DLE technology and accelerate the commercialization process. On the cost side, we estimate that the production cost of the joint venture's mining rights is similar to that of the South American Salt Lake, which boasts the lowest cost in the world, and the cost of brine purchasing will be lower than that of most other spodumene and mica lithium extraction projects. From the project perspective, in addition to the Qinghai project, the Xinjiang project has gained regulatory approval as a key research and development project, and the production line construction is progressing in an orderly manner.

Potential risks: Slower-than-expected progress of project construction in Qinghai, Xinjiang and other places; DLE technology backwardness; intensified competition in the lithium resources market; less-than-expected demand for stones; risks in macroeconomic activities.

Investment recommendation: Wanli Stone, joining hands with Tailixin Mining to extract lithium from salt-lake brine, has created a second growth curve. Tailixin Mining owns the international leading DLE technology, which can effectively tackle the difficult lithium extraction and long construction period in China’s salt lakes with high magnesium-lithium ratio. At present, Wanli Resources, a joint venture between the Company and Tailixin Mining, has started several lithium extraction projects in Qinghai, Xinjiang and other places. With the gradual release of the production capacity of lithium extraction business, the Company's profitability will be significantly enhanced, and the DLE technology is also likely to start large-scale replication. We forecast that the EPS of the Company in 2022E/23E/24E at Rmb0.09/0.94/1.72. We select Jiuwu Hi-Tech (300631.SZ), Sunresin New Materials (300487.SZ) and Wave Cyber (688718.SH) as comparable companies, which are trading at 32x 2023E PE per Wind consensus estimates. We believe that the Company is worth a certain valuation premium compared with the comps, mainly because: 1) The Company’s DLE technology is advanced. Tetramethylsilane (TMS) adsorbent can be continuously adsorbed and resolved, and the lithium extraction process is widely applicable and has low construction investment costs. Manganese and titanium adsorbents have the advantages of high adsorption capacity (up to 6-30mg/g), short adsorption and desorption time (within one hour), which is much higher than the mainstream adsorbents such as aluminum adsorbents; and 2) The commercialization of the Company's DLE project has been in the forefront of comparable companies. We expect the Golmud project to reach production in 2Q23, and the construction of the Xinjiang project production line is progressing in an orderly manner. Using the PEG valuation method, we conservatively forecast that the annual compound growth rate (CAGR) of the Company's net profit in 2023E-2025E will likely exceed 70% on 0.62x PEG (the average level of comparable comps), corresponding to a PE multiple of 43x. Combining the PE and PEG valuation methods, we assign 40x 2023E PE to derive a target price of Rmb38, and initiate coverage with a “BUY” rating.